After COVID-19 turned logistics on its head in 2020, one industry has come out as a clear winner in terms of growth. David Hall, Head of the Western Sydney Industrial team at Colliers tells MHD how the food industry will continue to grow into the future.
The food and grocery sector in Australia has recorded strong growth over the past year, creating a positive effect for the industrial and logistics sector, despite challenging economic circumstances, according to David Hall, Head of the Western Sydney Industrial team at Colliers. He tells MHD, that as consumers became more cautious in their spending patterns in 2020, there was a large shift towards consumer staples, leading to strong demand from industrial occupiers in the food subsector.
As retail stores struggled to replenish stock flying off the shelves at the height of the pandemic, food-based tenants had to bring larger volumes of stock in closer proximity to stores to service the demand. David says the result was a spike in short-team leasing to firm up supply chains.
“Since then, we’ve seen a fairly significant shift in groups looking to study or examine their supply chain models all the way back to their primary producers,” he says. “This has meant we’ve seen significant investment in relation to the functionality and efficiency in their operations, with groups exploring automation that never did before.”
David says nowadays, supermarkets are increasingly selecting individual grocery items from their warehouse rather than the shop floor as ‘dark stores’ become more widely used within the supply chain. “The pandemic and growth we’ve seen has changed the way these warehouses and distribution centres (DCs) are being run and how they’re actually storing product,” he says. “That’s a fairly labour-intensive operation. Now tenants are looking at how they can reduce labour costs as this represents a sizeable portion of the cost model – and a way forward for achieving that is automation.”
Since the beginning of 2020, prior to the panic-induced buying in March 2020, expenditure on food items rose by 9.5 per cent, well above the 2.7 per cent recorded for the corresponding period in 2019. In 2020, 43.2 per cent of every retail dollar spent in Australia was on food items, well above the 6.8 per cent spent on clothing and the 18.5 per cent spent on household goods.
While a contraction of 2.2 per cent was recorded in spending at cafés and restaurants in 2020 as many were forced to close, this fall was offset by significant growth in food expenditure at supermarkets over the same period. Given the resilience and perceived ‘recession-proof’ nature of the food industry, David says there was strong demand in 2020 from investors seeking assets anchored by food-based tenants.
“Going through COVID-19 has shown that the food industry is resilient to global pandemics, which is quite significant when you’re talking about weighing an industrial property portfolio in terms of risk,” he says.
David says food-based tenants and facilities are generally on longer-term leases, which also adds to their attractiveness from investors. “From a financial performance perspective for their portfolios it’s much better having a triple-A rated covenant, but also the length of the lease improves the valuation metrics of the asset,” he says.
ONLINE FOOD SALES
Online food sales only represent 5 per cent of total retail sales, however, this is up from 1.5 per cent in 2015 with a growth of 31 per cent per annum over the past five years. By comparison, online retail sales excluding food represents 15 per cent of all retail sales and highlights the enormous growth potential of online food sales.
For the major supermarkets of Woolworths and Coles, online grocery sales represent only a small portion of total revenue (5.5 per cent for Woolworths and 4 per cent for Coles) and as a result, the bulk of online orders is currently serviced via their existing retail store networks. However, the fragilities of this system were brought to the forefront when COVID-19 hit with both Woolworths and Coles, and they suspended home delivery and in-store pick up for a period of time as they struggled to keep up with demand. Online grocery sales jumped by an astounding 45 per cent in the last few weeks of February and early March, which placed significant pressure on delivery networks and supply chains.
Not all this growth has been recorded at supermarkets, with strong demand also coming from meal delivery kits and online food delivery platforms. The meal kit segment of the market is currently valued at $300 million annually in Australia and significant growth has been recorded in 2020. Two of the larger operators in this space, Marley Spoon and Hello Fresh, have both recorded growth in excess of 85 per cent over the past year. Given they remain in the early phase of adoption, the segment still has a significant growth opportunity, and operators are expected to seek investment to expand their operational scale over the next five years.
THE FUTURE FOR THE INDUSTRIAL AND LOGISTICS SECTOR
With online food and wider retail sales forecasted to grow significantly over the next decade, David says the result will be an emergence of hyperscale sheds, particularly in Melbourne and Sydney as the mostly densely populated parts of Australia. “You’ll see big, large and some fully automated distribution facilities, providing efficient supply chain solutions to the major densely populated markets while also acting as national DC’s within their networks,” he says.
As well as the change in type of facility, David also says we will see a significant shift in facility size. “On average it will grow,” he says. “The average pre-lease solution was circa 16,000sqm, which is now over 20,000sqm and is expected to get closer to 30,000sqm on average in the next five to 10 years in Western Sydney.”
Major food retailers and delivery platforms are expected to invest significantly in their online fulfilment capabilities to build resiliency in their supply chains. In supermarkets, this will mean a greater take-up of automation within their warehouses and further rollout of dark stores. Online takeaway food retailers are expected to make further investments in dark kitchens in infill locations close to major population centres. David says that as well as seeing more dark and automated facilities emerge, more transport type depots will also come into play.
“As these other facilities grow, ultimately, they are still serviced by heavy vehicles,” he says. “When you have that many vehicles on the road, and moving this much product around, there is going to be the need for parking, servicing, repair, fuelling and driver facilities.”
These trends have already occurred in recent years with Woolworths operating multiple dark stores and temporarily converting three existing supermarkets in Victoria to dark stores when Melbourne entered stage 4 lockdowns. Woolworths has also more recently opened its third 15,000sqm dark store in Lidcombe, Sydney which will enable the company to boost online distribution capacity of its groceries by almost 20 per cent. It will also help it continue to invest in micro fulfilment centres at the back of or close to its existing supermarkets.
Regardless of whether food is bought in-store or online, David says further growth in the demand for food and consumer staples will have positive implications for the industrial and logistics industry in Australia. Considering that more than 90 per cent of food items go through a warehouse at some stage before reaching the consumer, an increase in food consumption will generate further requirements for both cold storage and ambient distribution centres. David says this forthcoming need for more cold storage will also be reflected in growth in DCs going forward.
From an investment perspective, David says given the resilient nature of food, investors will continue to place a premium on assets backed by a strong food related covenant as they remain focused on tenant security.
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