News

The temperature-controlled transport sector has seemed in constant turmoil for the past few years, much of it driven by a changing customer base and its needs. There have been big changes in the food retail sector, from the huge consolidation resulting from Morrisons' purchase of Safeway to new distribution patterns created by the growth of supermarket-owned high street stores and ongoing consolidation among food producers.

With all these changes it has been hard to discern whether the  sector is contracting or growing. The decision of parent Eimskip to put Innovate Logistics up for sale in June, following persistent rumours about its financial health, suggests a sector where margins are tight and profits hard to come by, especially given that Innovate has some prestigious contracts, including some with Nestlé and Heinz. Views on what has gone wrong at Innovate range from unsustainable rate-cutting to internal structures not robust enough to cope with the group's rapid growth through acquisition.

"Recent market conditions have proved challenging, leading to lower than expected utilisation of warehouse and transportation network assets," Eimskip says. "Lease and financial costs have significantly increased and the losses  in recent months have weakened the company's financial position to such an extent as to affect ongoing operations."

Some operators - including Nick Hay, managing director of Samworth Brothers Distribution, the chilled transport arm of the firm that makes Ginsters Pasties - say it is important to distinguish between the general challenges facing the industry and those faced by specific companies such as Innovate. "There are two or three companies whose ownership has raised expectations and this compels them to do things differently to others in the sector. It's not just about consolidation to reduce capacity but about corporate structure."

Rob Swindells, group sales and marketing director for Nagel-owned Somerset firm Langdons, believes Innovate's demise is an example of a company with great branding but which has been exposed as having a poor business model. "It bought good, well-run companies with good facilities, such as Corby Chilled Distribution, but has clearly struggled to get further synergies [from the acquisitions]."

NFT Distribution, a potential buyer for some of Innovate's business, thinks the worsening economic climate could lead to "a degree" of further consolidation in the market through acquisitions and mergers. However, chief executive David Frankish thinks there is still growth potential in the sector. "We do not see a downturn in retail demand in terms of volumes of products that require delivery and storage. Potentially, the main change will be the types of food that consumers buy at the supermarket - there may be a shift from premium products to more basic type foods as consumers tighten their belts."

But George Brown, managing director of Scottish operator G&S International, is not so sure, predicting that trading conditions in what is already a tough market will actually get tighter. "The credit crunch means that consumers are buying fewer luxury food items. So manufacturers will produce less, which in turn will mean more capacity in the market and the chance for customers to push operators hard on rates," he says.

Legislation changes

Brown says the glut of legislation introduced in the past two years has not helped, as operators get to grips with digital tachographs and the working time directive. "We are looking for understanding from our customers. They want a quality service, but when we tell them facts such as that we replace the fleet every four years to ensure the vehicles are as fuel-efficient as possible, or that our investment in IT allows us to automatically prove compliance with KPIs, all they want to talk about are rates.

"Focusing on rates creates a vicious circle: if they remain depressed, capacity will be reduced and then rates will rocket because demand will exceed supply."

Growing business organically has always been notoriously difficult in the chilled and frozen food sector, partly because efficiencies rely on high levels of integration within the supply chain and sharing of data - making it more difficult to untangle integrated systems when a contract comes up for renewal. Hence the wave of acquisitions in recent years as companies have tried to grow market share - Innovate Logistics stands out as the most acquisitive with its purchases of Corby Chilled, Phil Hanley and Grampian.

John Hutchings, secretary of the Food Storage and Distribution Federation (FSDF), warns that the widely held view among food producers that there is over-capacity in the chilled and frozen storage sector could be misplaced. "Thanks to EC food mountains, there was massive over-capacity for a time, but a lot of that was in older cold stores, which were also in the wrong location. There is now a good balance between capacity and demand. There is a risk, though, that in two or three years' time, demand will outstrip supply because operators having to cope with depressed rates will not want to invest in new warehouses."

While Innovate's demise has fuelled speculation about further consolidation, companies now seem to be focusing on organic growth, either by expanding facilities, offering a greater range of services or, in some cases, adding an ambient operation to the mix.

Expanding into ambient

There are now several companies with an ambient operation in their businesses, including Culina, Fowler Welch and NFT Distribution. The companies say the disciplines involved in managing and moving high-volume, short-shelflife chilled goods are transferable to ambient activities. One example is managing goods on special promotion, where retailers require shelf-ready displays and large volumes of ambient goods to support retail offers such as buy-one-get-one-free.

"The ambient-chilled combined operation forms a key part of our growth strategy going forward. We believe there is a real opportunity to apply time-critical logistics practices to the ambient food sector and thereby make significant efficiencies and customer improvements in the latter," says Frankish. "Developments are mainly driven by customers requiring one logistics operator to manage their total requirement."

Culina Logistics is the new name for the merged operations of temperature-controlled specialist Culina and Baylis, the shared-user ambient transport company. Chief executive Thomas van Mourik says the company is focused on growing organically and expanding its third-party activities. "We intend to pursue opportunities to increase market share in both the ambient and chilled food and drinks logistics services," he says. A new chilled warehouse in Haverhill, Sussex, is due to open in August, and the fleet will soon comprise 250 tractor units and 550 trailers.

Van Mourik cites a "robust infrastructure" as the key to growth and Culina's established radial distribution network and IT systems certainly helped it secure a recent contract with Cadbury Trebor Bassett to distribute its chocolate and confectionery brands on a shared-user radial operation.

Fowler Welch (FWC) is another company that has added ambient distribution - through the purchase of troubled firm RF Fielding - to its Coolchain business. Owner Dart Group says turnover should increase by around £6m this year, thanks to a new ambient distribution contract, plus growth in supermarket distribution. It "continues to expect considerable growth for FWC in both chilled and non-chilled warehousing and distribution in 2008" despite the market conditions.

Samworth Brothers Distribution has expanded its facilities to attract more third-party customers, but is not planning a move into ambient. "We are staying focused on chill, because our expertise is in managing the flexibility in delivery volume that chill operations demand," says Nick Hay. The company has invested £6m in increasing capacity at its Leicester site by 50% and in opening a new 32,292ft2 chilled site in Bristol. "What drives us is the desire to offer a competitive, high-quality service. We won't chase work on a rate basis." The fleet of just under 100 articulated vehicles collectively covers more than 14 million miles each year.

Hutchings says the hike in diesel prices is having a major inflationary effect on the sector. "It is true that many operators have fuel escalator clauses built into contracts, but these rarely cover the whole costs of any prices, not least because there is a time lag between paying for the fuel and getting extra payment from the customer."

Hutchings fears that the escalating costs of red diesel could lead to smaller companies being less diligent about box temperatures. "I am not aware of anyone doing it yet, but there has to be a temptation to not turn the refrigeration unit on to save fuel, and not all units have electric standby.

"The application of a fuel surcharge means more companies are putting their business out to tender when contracts come up for renewal," reports Hay. "The only solution is to be completely transparent about it." Swindells agrees: Langdons is now updating its fuel duty surcharge - published on its website - every two weeks.

Co-operation in adversity

NFT's Frankish says that if fuel prices continue to rise there will have to be a culture shift in the sector, with more co-operation between different retailers, manufacturers and logistics providers. "Through sharing vehicles, retailers, manufacturers and logistics providers can dramatically increase vehicle utilisation and reduce their fuel costs," he says.

One established load-consolidation operation is the ChillNet network, which handles small frozen and chill loads from producers to wholesalers and food retailers. Rather than a hub-and-spoke operation, which would raise costs, ChillNet trunks from member depot to member depot. "It does put more pressure on the traffic planners," admits Langdons' Swindells, "but it saves the cost of a central hub." The key to the ChillNet service and its reliability, says Swindells, is that all the companies share the same IT system: Mandata's Manpack 3. "Everyone in the network can see exactly what is going on at any time, and we can give customers live updates."

Although temperature-controlled transport requires special equipment in the form of refrigerated trailers, bodies and, usually, storage capacity, it is the investment in IT systems required to meet customers' service level demands that can act as a barrier to entry. "There are incessant demands for ever-higher levels of service and if you are in this sector you have to rise to the challenge and meet them," says Hay. "We have had to work smarter to deliver the consistently high levels of service customers demand. Delivering case-level RFID order tracking, for example, has been quite challenging," he reports.

Samworth has invested in upgrading its mobile telematics systems. "We were already using MAN Telematics in our vehicle fleet. We have now upgraded it to include the trailers in the fleet. Customers can now log on to a secure website and check the progress of their delivery in real-time."

However much it has invested in technology, it remains underwhelmed by the government's recent decision on LHVs. Hay is "utterly disappointed" that the government has closed the door on longer heavier artics without further investigating the benefits. "By giving way to scare-mongering and false perceptions they have denied the industry the opportunity to make best use of two scarce resources: fuel and drivers." All of Samworth's warehouses, he points out, are within 500 metres of a motorway. "This is a tightly controlled industry," points out Hay. "We have clever people in it who could operate longer, heavier artics safely."

Some operators are investigating low-noise packages that might help them win government concessions to deliver in urban environments at night. Sainsbury's, for example, is trialling a low-noise version of Carrier's Vector 1850 refrigeration unit, which is compliant with the Dutch government's PEIK 65 decibel limit for night-time deliveries.

Another concern for operators is the impending changes to cabotage rules. "Reducing the limitations of the current cabotage regulations will be a significant factor for UK operations," says Hutchings of the FSDF. "A foreign haulier delivering in the north of England can collect a load, and deliver it to Oxford, say, on his way back to a port. He'll be using cheaper fuel and paying no road tax or toll, so will be able to undercut UK-based companies."

G&S International has an operating centre in Holland as well as at Bellshill, Lanarkshire, and Brown takes a more sanguine view. "We're all in Europe and the playing field is getting more level, thanks to greater enforcement, at least by western European governments. The French and the Spanish have now toughened up on enforcement, so we no longer have to compete, for example, with Spanish hauliers who expect their drivers to work 80-hour weeks."