I recently spoke with Greg Laurin on how Conestoga Cold Storage is helping customers meet the challenge of cost containment while preparing for growth. Greg had some very interesting insights I would like to share with you.
Q: Over the past two years of recession, users of temperature controlled services concentrated on cost containment. As we head into the recovery, how is their focus changing?
Laurin: Food manufacturers have hit a wall in terms of cost containment. Worldwide uncertainties – political and environmental – combined with the increased cost of oil and raw materials have forced the industry to take on more expense than it can possibly absorb. The softer US dollar has helped ease inflationary pressures to a certain degree for companies that can source raw materials from outside the country. Expect to see more manufacturers passing along higher costs to the consumer by the end of the year. A stronger economy should help our customers servicing the restaurant industry as that sector tends to be the hardest hit in financial down times. A stronger economy results in higher commodity prices and increased inflation, therefore we are locking in long-term financing rates as well as concentrating on debt reduction.
A dramatic change for the food distribution model in Canada is the increased number of retailers adding frozen and refrigerated lines to their traditional dry listings. From the arrival of Walmart and their full grocery line to the impending arrival of Target in 2013, existing major Canadian retailers are attempting to increase sales by adding food products to their stores. This trend is gaining momentum as more non-traditional food retailers such as Shoppers Drug Mart, Giant Tiger and even Canadian Tire increase frozen food offerings. These additional sales channels and the resulting fragmentation of the market will drive up distribution costs. Smaller order sizes result in greater picking and trucking costs. Adding food items will also challenge the distribution model of retailers not accustomed to the complexities of multiple temperature zones, date rotation, HACCP, CFIA control and the challenges associated with food related recalls.
Q: How is Conestoga addressing the current challenge of cost containment while meeting the need for growth among its clients?
Laurin: We have addressed these challenges by increasing efficiency and fine-tuning our systems. We have recently reviewed all of our key suppliers to ensure we are getting the most value for our money. Price increases are always difficult to pass on but there is generally an understanding that cost increases do occur in areas that are beyond our control. If the US economy continues to strengthen and the rapid growth continues in developing countries, inflationary pressures are going to put a strain on cost containment over the next 12 months. Gaining efficiencies and improving labour productivity is always of paramount concern as labour is our largest expense. We continue to invest in our computer systems and have introduced new software logic into our automated buildings that allows the system to look at upcoming order demand when it is idle and move product to the most efficient locations in order to manage peak-shipping times more efficiently.
Q: Technology can be a key differentiator in both improving efficiency to foster growth while at the same reducing waste and unnecessary cost. Which technological capabilities are becoming a must for superior service when it comes to the cold chain and what does Conestoga offer in this regard?
Laurin: We continue to pursue improvements in automation technology and source the best equipment from around the world to improve our systems here in Canada. We recently upgraded all of the drives on our stacker cranes to AC drives. These drives are cheaper to maintain, allow for more precise control and provide a 40% increase in vertical and horizontal speed. These devices are regenerative drives that feed energy back into the grid when braking, further reducing our energy costs. A new laser locating system interfaces directly with the new drives instead of communicating with a PLC. This gives us far better motion control and precise location measurement to within 1 millimetre over a 200-metre distance. We have completely redesigned our shuttles to allow us to handle heavier and taller pallets as well as installing wireless cameras on the ASRS cranes to allow us to control the stackers from the dock. We continue to invest in high-speed battery charging units that significantly reduce battery-changing downtime. We are also investigating the economic benefits of hydrogen power. Over the next 12 months we will be monitoring the technological developments of hydrogen power. This new technology could prove to be a very competitive option to current battery systems.
Q: Last we spoke you were working on the purchase of a 4.5 million cubic foot cold storage facility next to the airport in Montreal. Can you update us on how that purchase is working out and what it has added to your service capabilities?
Laurin: The purchase of the facility was completed in May 2010 and we have been working hard since then to fill the new space in a difficult market. We established our reputation for superior service in 2006 with our first warehouse in Quebec. Our reputation and experience has helped us develop a new customer base and we have been able to transfer some existing customers into our Dorval facility. We were at capacity at our original location prior to the purchase of the new facility. As a result, we were unable to offer distribution services to our customers from Ontario looking to enter the market in Quebec and the East Coast. With the additional 15,000 pallet positions we have been able to transition existing Ontario based customers into our new location. We also have ample room for future growth. This new location, close to the main highway and Montreal’s largest container yard is providing an ideal alternative for many of the food manufacturers located close to the Trudeau airport.
Q: Are there more such expansions to your network in the works for the near future?
Laurin: We have had an aggressive growth strategy in the Canadian market and have continually expanded to meet our customers’ increasing space requirements. We are currently reviewing expansion options in Ontario but the West and East seem to be well serviced from a cold storage perspective. Our rapid growth has helped us gather a first class list of top tier food manufacturers and has keep costs down by spreading out overhead costs.
Q: How is the need to provide more environmentally sustainable business practices affecting the temperature-controlled industry and how is Conestoga responding?
Laurin: More than 60% of our capacity is high-rise type storage buildings. This unique warehouse design gives us an advantage from an environmental standpoint because the buildings are inherently more energy efficient. They have a small roof load, small doors and no lights creating heat inside the building that has to be removed. Our refrigeration systems automatically shut down during periods of high hydro demand thus reducing our energy consumption during peak hours. We utilize the waste heat generated by the refrigeration systems to heat the dock areas and supplement the under floor frost-protection systems. The money we save on energy efficiencies can be passed on to our customers.