Cold Storage Operations
Academic Group23 20th Jan 2010 Industry boundary
Vertical scope: The below diagram depicts the key activities performed in a cold chain. Of these, packaging, precooling and cold storage are typically provided by the same player. These activities are together referred to as cold storage operations, and form the ‘vertical scope’ of our industry analysis. Horizontal scope: Cold chain logistics are used for a variety of products such as pharmaceuticals, dairy products, farm produce, fish, flowers etc. However, we will be looking at cold storage operations specifically for fruits and vegetables commonly referred as ‘farm to table’. Business modal: Cold storage operators for fruits and vegetables can function as both traders as well as service providers. In their capacity as traders, they purchase the products directly from the farmers, package them, store them and then sell them to large retailers. However we are limiting our scope to cold storage operations as service providers, where the cold storage operators are engaged by either the producers or (most commonly) buyers (mainly) organized retailers to render packaging, pre-cooling and storage services. Geographic carrier: We will be looking at this industry at the pan-India level Barriers to entry
Economies of scales: It is a largely untapped, fragmented & full of unorganized small size players. No player has achieved economies of scale and thus a new a new entrant with deep pockets can enter this industry and still be at a major cost advantage. Capital Requirement & Technology: The cold chain logistics is a highly capital-intensive industry (cost of real estate and refrigeration equipments) with a large-size cold chain has a payback period of as high as five years. Incumbency advantages independent of size: Existing players like Snowman have built expertise by operating in this industry for longer periods in time & use imported hi-tech equipment, which new entrants would find difficult to emulate. Access to distribution: Lack of an organized distribution system, objections by the trucker’s union & bottle necks in cold storage during transit poses a threat to new entrants. Another reason for non competitiveness in this industry is the lack of a strong retail front. However, India is witnessing a transformation in its retail front end which would provide a boost to new distribution players too. Retaliation to new entrants: Cold chain players face resistance from farmer’s community as this industry promotes hoarding of food items. A farmer would be forced to sell his excess produce to retailers at low price, who in turn might be in an advantageous position to sell the products at a higher price in off-season by leveraging cold storage. Overall high barriers to entry, which will be the case in future too as the industry will mostly remain capital intensive. Barriers to exit
Exit barriers: Because the growth opportunity that the industry shows one can easily sell off his business to another entrant or an existing player to give him economies of scale or more geographic coverage. Though when there are enough players, due to high capital investments and specialized assets exiting industry would be very difficult. Asset Specialization: Cold chain assets are capital intensive & are not multi-purpose. Heavy investment in capital & technology will act as a barrier for incumbents to leave this industry. Higher break even time period will also act as a deterrent for players to close shop. Emotional Barriers: Farmers from far off regions avail the services of one cold storage in a big region. Closing down would cause lot of inconvenience to these farmers who would be using the plant to save their excess produce from spoilage which in turn would be disadvantageous for the incumbent’s brand image. Interrelated Businesses: Incumbents like Snowman Frozen Foods Ltd have an integrated storage, handling and transportation infrastructure for...
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