Online Grocery and Meal Delivery Purchases
In the last few years, online grocery shopping and meal kit delivery services have quickly become the new normal and a mainstay for much of the American public. Everything is moving toward online and at our door in an instant – which can prove to be a challenge for grocery and meal-kit delivery businesses. Delivering quality fresh ingredients is the promise, but a few businesses have had a hard time delivering on that promise. Meal services like HelloFresh and Blue Apron have received serious backlash for having delivered spoiled food at customer’s doorsteps – the problem being a shortage of cold storage.
The rise in popularity of online food purchases over the last few years has created an incredible demand for cold storage facilities, which currently makes up between two and three percent of the total industrial property market. As of June 2019, experts estimated the need of additional cold storage to be 100 million square feet over the next five years.
However, with the threat of the Coronavirus spreading across the globe, online grocery and meal delivery purchases have skyrocketed. Prior to the nationwide “stay-at-home” requirements, online grocery sales were predicted to increase by 129% by the year 2022, and this pandemic has only magnified that estimate. Usage of popular online grocery apps like Instacart, Walmart’s grocery app, and Shipt increased 218%, 160%, and 124% respectively since this time last year. As long as this virus hangs around, people will continue to shop online. Facing an already sparse supply of cold storage facilities on the market, this unforeseen outbreak could drive the estimated demand even higher.
Difficulties of Cold Storage
Part of the reason there is such a shortage of cold storage facilities is the difficulties associated with it. Cold storage comes with higher costs and complexities to develop and operate than traditional dry storage warehouses. By comparison, it costs an average of $80 to $120 per square foot to build a traditional industrial warehouse versus an average of $250 per square foot to build a cold storage facility.
Cold storage facilities need to accommodate different zones for various inventory. Each zone needs its own loading dock as well as the ability to maintain its optimal temperature to ensure inventory does not spoil. Proper zoning requires unique mechanical and refrigeration equipment, specific insulated metal paneling, premium concrete, and subfloor heating. Many, if not all of these features, require installation by specialized experts. Ceiling heights of cold storage facilities are also often higher than traditional dry storage to increase efficiency, however, it also adds to the complexity of the project.
Due to these additional requirements and regulations, construction of a cold storage facility will take an average of four to five months longer than traditional industrial spaces. The specifications of materials, installation, and prolonged time frame only add to the cost and complexity of developing and maintaining cold storage warehouses.
A Lasting Impact on Supermarkets?
This sudden shift in grocery shopping could have a lasting impact on the supermarket industry. Baby boomers and other previous in-store purchasers, are expected to join millennials and continue to purchase groceries online after having discovered the convenience of doorstep delivery.
In an effort to meet the needs of consumers, supermarkets are beginning to consider alternatives to the traditional supermarket location. One alternative is a hybrid store, essentially a smaller version of the grocery stores we know, with a large cold storage area in the back. The front half of the facility acts as a regular grocery on a smaller scale, and the cold storage area would be closed to the public where online orders and deliveries are processed and filled. Another consideration for grocers is the development of “dark stores” – a retail location that looks like the regular supermarket, but is not open to the public. Its sole purpose is the fulfillment of online grocery purchases. The changes to the supermarket industry could turn out to have a large effect on the industrial property sector of commercial real estate as well.
What Does This Mean for Commercial Real Estate?
The increasingly high demand for cold storage units is good news for those in the industrial property sector, as business is anticipated to boom in the near future. Prior to COVID-19, online grocery shopping was predicted to grow enough to demand an additional 100M SF of cold storage. With such a high pre-existing market demand, the threat of prolonged online shopping only adds to the need.
It can be expected that clients will be searching for any available existing cold storage facilities and dry storage warehouses that are able to be converted to cold storage. Demand for land to develop new facilities from the ground up is also expected to increase.
What Does It All Mean?
The difficult nature of cold storage certainly adds to the shortage faced by retailers everywhere. Prior to the COVID-19 outbreak, 100M SF of additional cold storage was the estimated need to keep up with the growing online shopping trend. However, the coronavirus accelerated online grocery and meal purchases like we’ve never seen before – and these high levels are forecasted to remain as long as COVID-19 is around. Meaning, with record high online grocery and meal purchases, we will face a record high demand of cold storage. With such high levels of demand, the industrial property sector is expected to see a surge in business as businesses begin to seek out new cold storage opportunities in the near future.