Cold Chain in Frontier Markets, the heat is on.

For many Chinese and Vietnamese consumers, frozen food is still a foreign concept. Large retailers in China and Vietnam continue to focus on fresh food options such as live chickens and in-store fish tanks. However, consumer shopping and buying patterns are changing. Chilled products, including juice and frozen foods are increasingly becoming popular in emerging markets such as China, Vietnam, and India.  Young people, in particular, are driving consumer demand.  This is true especially in cities that are undergoing rapid urbanization.  The growth is fueled also by new legislation in the retail environment that gives foreign investors and retail chains greater access to these markets. In all this retail frenzy, the cold chain is becoming a hot topic.

The challenges

One of the key challenges in emerging markets is a dysfunctional supply chain that is highly fragmented in the retail section.  In a fragmented retail segment, companies struggles to achieve economies of scale on both the retail and supply sides. With the projected growth in these key emerging markets, even given the current financial crisis, there are great opportunities for both local and foreign investors. Unfortunately, a lack of cold chain facilities is hampering expansion into these markets, especially in second and third tier cities. Even in first tier cities, such as Shanghai, Ho Chi Minh City, and Mumbai, multinationals struggle to find the right cold chain partners and facilities.  Foreign investors currently view the lack of an established cold chain as one of the major barriers to market entry.

How does the traditional system work?

Agricultural produce typically travels from farmer to trader to agent to wholesaler to retailer. In some countries local administrators add extra distribution layers. In some cases, state-owned companies will distribute products to provincial distributors before reaching local markets.  Each step in the process adds additional handling and cost.  Often products are transported without boxes and with limited or no refrigeration. Products are exposed to the elements and, consequentially, many products end up as waste. Quality suffers as products travel down the chain with limited cold storage and frequent processing delays. China currently accounts for 13 percent of global fruit production and 40 percent of the world’s vegetable output. However, it is estimated that around 30 percent of the total production of fruit and vegetables are wasted due to an inefficient cold chain. In India it is estimated that about 60 percent of the value of agricultural output is lost between the farm and market.  An A.T. Kearney report on China estimates that only 15 percent of products that require chilled handling are currently handled that way. This compared to 85 percent in Europe.

What is required?

For any company, it is critical to evaluate and understand the cold chain system. Temperature control is important as it is a key requirement to keep products within a specific temperature range throughout the supply chain.  This can be particularly challenging in emerging markets.  One solution is investing in packaging that can protect products against temperature variations and improve product quality at the final destination. Companies also need to have a clear understand of the product flow and routing dynamics, including the transportation modes and refrigeration capability.  Delays in delivery and processing can have severe effects on the quality. Companies should have a back-up plan as transportation normally takes longer than expected in emerging markets.

The key to any cold chain is driving end to end processes and efficiency. It requires direct delivery with temperature cold trucks, warehousing and advance technology tracking and traceability for food safety.  Companies need to account for geographical aspects as they truck products for one end of a country to the other.  Distribution centers (DCs) can play a key role in a company’s cold chain strategy. DCs have the ability to service several layers of the distribution system. This can further improve distribution and supply efficiencies.

Collaboration is important

Cold chains are expensive to operate and in many cases a coordinated effort is missing.  Local companies that try to establish their own facilities often lack capital and expertise.  For such companies, a key first step to developing a cold chain is to seek out or create a consortium.  The consortium will be responsible for creating industry standards with government authorities.  As standards are set, more companies will join the consortium.  It is critical to include all key stakeholders in the process.  Effective cold chain consortiums will include logistics providers, cold chain equipment suppliers, multinational and local companies within their membership.  Stakeholders can collaborate during various projects and at the same time share risks. The entry of foreign retailers such as Mal-Mart, Carrefour and Tesco can add cold chain expertise and help to reduce margins and improve efficiency in the overall system.

Rethink technology

Technology investment is a key element of establishing a cold chain.  Companies need to have a long term perspective in relation to technology investments.  In many cases the technology and equipment are available, but companies find the investment too substantial and lack the economies of scale to make it a viable option.  Finding companies to make the investment can be one of the key challenges during market entry. In emerging markets, companies seek simple and cost effective solutions to problems. For example, some companies now are using pressure-sensitive labels.  Once the label is exposed to specific conditions, the label changes colour and alerts the supply chain of a disruption in the cold chain.

Focus on education

Education is also key to creating a cold chain. Trainings and workshops can be used to educate and inform partners about challenges and how to overcome them. For example, A.T. Kearney has run a series of conferences in China the UK and the US to improve China’s cold chain distribution systems. The conferences bring parties together that are interested to enter or expand their cold chain distribution in China. Such conferences and workshop are great venues to inform companies and authorities about the health and safety risks, an increasingly important topic.

The cold chain is critical to global trade in almost all commodities. With a growing demand among emerging market consumers for chilled products, the cold chain is becoming an increasingly important part of the supply chain strategy. One of the key requirements will be to reduce waste and improve quality. Recent food shares in China and the rest of Asia have highlighted the importance of food safety and health during the process. With all this attention on the cold chain in emerging markets, the cold chain will likely heat up even further.

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