As German frozen food sector booms, once-ailing warehouses rebound nicely.

As German Frozen Food Sector Booms, Once-Ailing Warehouses Rebound Nicely

Intervention commodity stockpiling has reduced available cold store capacity to zero. But operators don't fear a repeat of the shock of 1987-88 thanks to retail growth and new business opportunities for expansion in the east.

What now for the German cold storage industry? With political and economic union so recent in history, the two Germanys must be considered separately as the full effects of unification cannot yet be measured.

For decades, the West German refrigerated warehouse industry was shaped and coddled by the government's policy of stockpiling commodities. As intervention was the overriding priority, enterprise was not required to succeed commercially. The collapse came in 1987-88 when, to the benefit of taxpayers and to the loss of cold store operators, state intervention was scaled back. This resulted in a drastic decline in occupied storage space, losses suffered by warehousemen, and even bankruptcy.

The warehouse this writer is running was also hard-hit. Because of the abrupt unloading of intervention butter, more than 50% of its storage space was suddenly left empty.

Since then, as a result of unification of the two Germanies, intervention goods again require deepfreeze storage capacity -- indeed, more so than ever. Surplus space has disappeared throughout the country as virtually every square meter is filled with stock.

Nonetheless, the shock of 1987-88 struck deep, and refrigerated warehouse operators have lost confidence in the long-term continuation of intervention storage business.

The commercial cold storage industry is now reorienting itself toward frozen food products. Several "strategic alliances" have been established with various partners who promise short- and long-term future economic viability. The cold store is no longer considered an isolated entity but rather as an important component of a triangle made up of production, logistics and sales. Logistics consists of interlinked transport, storage, commission and delivery -- and the center of gravity is clearly the cold storage warehouse. Operators have increasingly more important obligations to fulfill in providing service and maintaining and improving the quality of logistics functions. Enterprise, business-political imagination, and turnover capacity are required in today's market.

Boom in QFF

The cause of reorientation of the German cold storage industry is the booming expansion of the frozen food sector. Consumer awareness of the necessity for preserving food and of the quality of deepfreezing as a healthy means of preservation has greatly increased. The controversy over food irradiation, for example, has increased consumer awareness of the advantage of frozens. The trend to lighter, more quickly prepared meals has also strengthened the QFF market. The intensity of the boom can be seen in per capita consumption, which reflects a pattern pointing straight up after charting continuous annual growth for the past three decades. The typical West German ate some 16.6 kilograms of frozens in 1989, as shown in the chart on page 58.

This trend, highly favorable for cold storage operators, is also explained by West Germany's relative backwardness in per capita consumption of frozen food and in the number of households with microwave ovens, as compared with other countries. Germany's position is far behind the front-running USA, where Americans eat some 43 kilos each. The Federal Republic ranks in the lower middle, between Norway's 18.2 kg and Switzerland's 16.0. Other statistics demonstrate the country's lack of development: for example, Germany ranks twelfth when calculating the amount of QFF storage space per 1,000 people.

Growth Prospects

All of these figures have been analyzed in an in-depth study by a well-known national market research company. It has projected further advances for QFF through the year 2000, predicting a whopping 143% growth rate. Such favorable prospects for already filled warehouses make investments in larger cold stores necessary.

Demand for increased space comes from both frozen food manufacturing and distribution sectors, as steadily growing volumes of QFF, poultry and ice cream has led each to invest money in bricks and mortar. It would be wiser for them to concentrate capital and management skills on their own areas of expertise, leaving the warehousing to the warehousemen. The producer should stick to product development, manufacture and quality control, while the distributor should focus on sales. Logistics belongs in the hands of specialists.

This trend emerged in Germany in the mid-80s, hesitantly at first, and with few concrete examples. Subsequently, the movement established itself and became evident. Some cold storage operations embraced the change and adopted it as their guiding philosophy. Others entered into strategic alliances with better equipped partners.

Our own company survived the "Shock of 1987-88" by revamping warehouse operations and services toward the frozen food market and away from unpredictable intervention business. Certainly the cold store's location in the heart of the Rhine/Main area, only 12 kilometers from the center of Frankfurt, was extremely helpful. It stands on about 20,000 square meters of company-owned land. In the main building, 35,000 cubic meters of frozen storage space are available. In addition, about 1,000 square meters of frozen and cold storage space capacity are offered in 10 rental rooms. Expansion plans call for a grand total of 90,000 cubic meters in the near future.

An array of logistics services was developed over the past four years that proved to be unusual for cold storage warehouses in Germany. Further evolution has seen the establishment of a strategic alliance with an important partner engaged in frozen food wholesaling and distribution -- the Frischdienste-Gruppe (Fresh Service Group). This combination of several regionally active companies serves the entire West German area with all kinds of products including milk and dairy foods. Individual firms within the organization are largely independent, but share a unified system of accounting and identical computer software, thus offering customers a uniform standard of wholesaling, commissioning and distribution.

Our direct partner is FZ -- Frischdienst Zentrale Sud GmbH & Co. (over 1.6 billion DM sales, 1,500 employees), which serves the Rhein/Main area, the states of Hesse and Rheinland-Pfalz, the Neckar region and others from our cold storage warehouse. Each week, more than 1,100 types of items are commissioned for the leading retail food distributors, and about 1,000 outlets are served by more than 1,500 deliveries.

The Former East Germany 

As for the former Deutsche Demokratische Republik (DDR), there had been no commercial cold storage trade to speak of. All 39 major refrigerated warehouses can be considered nothing more than industrial adjuncts. They were associated with various industries, particularly state-owned and operated "People's Own Companies" such as the combine for frozen fruit and vegetable preserves, the production group for frozen potatoes, and producers of frozen chopped meat, baked goods, ice cream, etc.

These warehouses and the affiliated product manufacturers were administered by a state organization called the Cold Storage Industrial Combine. The total storage volume was about 1.5 million cubic meters, with the warehouses themselves divided into three categories as explained below.

The Rostock type (10 to 15 years old) is the most modern cold storage warehouse design in East Germany. There are about 10 such buildings, with average sizes of 45,000 cubic meters for frozen food storage, and 25,000 cubic meters for non-frozen volume in separate cold storage facilities. They can be operated at temperatures as low as -28 [degrees] C.

The other two types are the Treuen style single-level warehouse, and the standard multilevel design of the 1960s and '70s. They operate at temperatures of -18 [degrees] C and -21 [degrees] C, respectively.

The condition of most cold stores -- especially the older ones -- is very bad. Intact warehouses are rare. As a rule, major overhaul work is necessary. But it can be assumed that for the vast majority of the antiquated structures, renovation is not economically justifiable. Sooner or later, they will have to be demolished.

The future of the cold storage industry in the former DDR really depends on what happens to the affiliated manufacturers. It can be expected that with only a few exceptions, these operations will not be able to survive competitive pressures for long in a united Germany. For that reason, some warehouses face the prospect of being closed down.

Only in a very few cases have cold stores in East Germany so far been able to evolve beyond their former role and their reliance on single industries to negotiate deals with western partners to continue operating commercially.

QFF in the East

Because of the way the cold storage warehouse industry was organized in the DDR, and due to the lack of wide retail frozen food product offerings, the per capita consumption of QFF up to now has been very low. The catch-up process in the east can already be discerned, however. Frozen food is being purchased in increasing amounts, with high growth rates anticipated. Retail grocery stores, even supermarkets, are already under construction and more will be built and opened complete with freezer cabinets.

Furthermore, the former East Germans are rapidly buying electric household appliances such as washing machines, kitchen equipment and radios. Once the demand for these items is satisfied, purchasers will move on to freezers and microwave ovens. With that, market growth is apt to take place the same way it did in West Germany. Now that buying power -- thanks to hard currency and a rapid adjustment to western salary and income levels -- is increasing (and since retail stores are springing up quickly in every available space), all the conditions for quick growth are in place.

With unification, a country with an average development of the frozen food market (West Germany) has been merged with a country where the market has not been developed at all (East Germany). That means a drastic statistical decline in terms of all figures relevant to the frozen food industry. The current boom in the former West German area, combined with the expected boom in old East Germany, will significantly strengthen the upward trend for QFF.

Given these circumstances, the German cold storage industry is about to take off. With capital and imagination, the smart entrepreneuer can participate in the steadily growing retail frozen food market. Now, thanks to unification, it is about to grow even faster. Within the framework of the logistics chain, a commercially enduring, healthy future can be ensured far beyond the year 2000.

PHOTO : Kuhlhaus-Center Muhlheim-Main Betriebs- und Verwaltungsgesellschaft is situated just 12 kilometers from Frankfurt.

DR. KLAUS ZIMMERMANN formerly a banking senior, is head of a Mainz-based business consulting company that specializes in corporate strategies, reorganizations, mergers and acquisitions. He is also president of Kulhaus-Center Muhlheim-Main Betriebs- und Verwaltungsgesellschaft GmbH, which owns and operates a medium sized refrigerated warehouse near Frankfurt. Herr Zimmermann and staff take credit for saving the cold store from bankruptcy four years ago.