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When is the best time to invest in facilities?

Shane Brennan, chief executive of the Cold Chain Federation, explores the best time for logistics businesses to invest in their facilities, and emphasises that although expensive, quality investments might be a strain on finances, they are essential.

I have never spent millions of pounds on a major new logistics facility. I have never backed my own judgement that the value, location and design which could make or break the prospects of my business is right. I have never put faith in colleagues, consultants and contractors to take care of the details and deliver the right quality at the right price. I have so much respect for everyone that I have met from across the industry that has.

It is very easy for politicians, commentators and campaigners to second guess the decisions made by anyone in that hot seat, but unless you’ve done it yourself you should always be self-aware when handing out advice. So, with that disclaimer very much in my mind, I am going to set out what I observe are some of the realities of making that kind of decision in today’s cold chain.

The first observation is that it is striking how many cold chain leaders seem to agree that now is the time to invest. The fundamentals of our market are the strongest they have been for some time. Without the short-term uncertainties and distractions of Brexit, I think there would have been a lot more than the healthy amount we have seen. The root of this strength is the growing level of demand fuelled by sales growth in frozen and chilled food, but also a growing focus in boardrooms on the opportunities offered from sustainable growth and the competitiveness advantages that come from investing in the supply chain. 

The second is that new facilities are needed. Not just because it’s a fairly safe bet that demand for cold storage is likely to continue to grow, but also because lots of the facilities we currently rely on are coming to the end of their useful life.

Exit strategy

Predicting exactly when existing capacity will exit the market is one of the tougher judgement calls. It’s always striking how resilient and creative businesses can be in eking out more use from old assets. It’s a skill that seems to have been perfected in the cold chain.

For most businesses the compelling reason to invest will be a proactive and positive one, bringing new capacity, new technology or new services into the market. But for others the needs are more defensive. For them the growing realisation is that investment today is the only way to prepare the business to deal with the increasingly obvious operational challenges and cost pressures of tomorrow.

That is what gives rise to my third, and main, observation. That logistics businesses, whether in the cold chain or not, cannot afford to ignore the external pressures that are coming in the relatively near future. Workforce will only get harder to recruit and retain and automation will become mainstream. Moving goods around the country is going to become more regulated and more expensive so competition for prime locations will only intensify, and the cost and availability of the electricity, gas and water we need to operate cold storage facilities is likely to increase dramatically.

Agreeing that now is the time we should be investing is one thing. The next challenge is being clear about what to build and having the confidence to focus on the long-term value of a project rather than being overly focused on the lowest possible upfront capital expenditure. Now more than ever the risks of taking a chance on the lower cost option could really come back to bite.

On-site energy generation

I hope that anyone that is considering building a new, or substantially refitting an existing, facility is thinking carefully about ensuring their upfront investment will put them in the best position to meet these future challenges head on. Now more than ever it is worth the additional capital expenditure to put in place the best insulation, refrigeration plant, monitoring systems and staff welfare areas. We must also be giving serious consideration to on-site energy generation, whether that be heat recovery, solar power, bio-digestion or wind power.

I know that these features can add daunting numbers to the upfront costs of a project, and I am well aware that the return-on-investment case is still a tough one to make. I am, however, sensing a definite shift in mindset away from a pre-occupation with the up-front cap-ex of a project to a fuller assessment of the whole life value of a facility. 

None of this is easy, primarily because it requires a different mindset not just from the businesses themselves, but from the customers that rely on that service, today and in the future. All parties will have to think more long term and it requires collaborations that give certainty on all sides in a way that we have not been used to. In many cases it will also require support from government. If the demands placed on industrial facilities, through taxes and regulation, are to undergo rapid transition to greater on-site generation and more demand responsive use of energy from the grid, then financial support and incentives are going to be required to make that possible. 

I don’t underestimate the scale of this challenge, the risks that have to be taken and the confidence required on all side are immense, but I do think there is cause to be optimistic about the future. Change brings opportunity and innovation. 

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