COLD STORAGE INDUSTRY IN GEORGIA Caltrider Advisors Ltd This Industry Analysis on the Cold Storage industry in Georgia was prepared for the Georgian National Investment Agency (GNIA), which was established in 2002 under the Ministry of Economic Development and plays an essential role in economic liberalization. GNIA is the only government agency responsible for investment promotion and facilitation. The purpose of this industry analysis is to present a profile of the Cold Storage industry that clearly identifies its strengths and weaknesses, while also distinguishing the gaps that exist within the value chain structures that present additional opportunity for investment, growth and profitability. MCG financed cold storage units in Kakheti About this Industry
Industry Definition This industry provides third-party storage services for perishable foodstuffs under controlled temperatures in order to maintain product quality. This storage can occur under chilled (above zero) and frozen (below zero) temperatures. The storage activity can be under contract which may include distribution. Storage services are public and attract a fee for the storage and preservation of perishable products. There are two main categories of Cold Storages: (1) those owned by a food producer, distributor or retailer (private storage) and (2) those owned by independent firms that provide storage to other commercial enterprises (commercial storage). Both private and commercial storage facilities exist in Georgia, this analysis will focus only on commercial storage facilities. MAIN CONCLUSIONS Performance & Outlook From 2005-08, the industry had strong levels of financial performance, with an annual growth rate in revenues of 33.4%.Trailing 5-Year growth rates are positive, especially when compared to GDP growth. Net profit margins from 2005 to 2009 were 8.1%, 12.9%, 12.7%, 14.7% and 9.0% respectively. The international financial crisis had a significant impact on Georgia, resulting in a 3.9% decrease in GDP growth in 2009. Despite tight economic conditions, the Cold Storage industry maintained a positive revenue growth rate in 2009 of 6.7%, with total industry revenues in the amount of GEL 23.5 million. There seem to be mixed results for 2010 with many firms experiencing dramatic decreases in capacity utilization rates while others are reporting strong earnings and operating at full capacity. These decreases in industrial capacity utilization correspond to the 29.5% decrease in Total Trade Turnovers in 2009. With increasing demand from domestic producers and a simultaneous expected increase in Total Trade Turnover (estimated 14.1% in 2010) and in GDP growth (estimated 4.5% in 2010 and 5-6% in 2011), the demand for Cold Storages should return to previous levels of growth and profitability over the next 2-3 years. In the short-term, the outlook for the Cold Storage industry in Georgia is slightly negative for 2010, with decreases in turnover reversing and signs of a rebound in trade, as well as increased development within the domestic agricultural production chain. The medium and long term outlook is positive, considering Georgia s key position as a trade route and the recent moves toward modern, cost-efficient facilities. There are several players in the market that are competitive and well positioned to introduce innovation and new value-added services into the market. Currently, the Cold Storage industry is in a transformation period, focusing on quality growth. This transformation is seen in the higher quality of services being provided as well as the in the phasing out of Soviet-era facilities for modern ones that can ensure a higher standard of food safety and product quality.
Current Trends The most significant positive trend observed in among Cold Storages today is that owners and managers are moving away from the independent operator model to one based on integration with the International Cold Chain. This change moves the operational focus from simply transaction-based operations to one based on transaction and product quality management. Cold Storages are investing aggressively to respond to changing demand and arising opportunities. This is a positive sign, especially compared to previous periods of missed opportunity. From 1991 to 2000, the entire market experienced a state of inertia and Cold Storages failed to respond to the market s demand for highquality standards and missed many significant opportunities for growth. Several Cold Storages are turning to international sources of capital to reduce costs of capital expenditures and working capital. A very positive development that has been occurring for the last few years is that Cold Storages in Georgia are undergoing a broad-based transformation and paradigm shift from the former Soviet-era standards of operation to more modern operation models. For example, firms have begun to renovate low-quality Soviet-era facilities and reinvest in up-to-date, high-tech building and equipment. Labor-intensive, manual activities are being replaced by modern, more capital-intensive, automated processes. To increase competitiveness, several Sovietera Cold Storages are either currently undergoing or will soon undergo renovation of facility buildings and equipment. Furthermore, over the last 3 years, new facilities developed through private investment or donor assistance have used exclusively modern facilities and storage techniques. With the recent decrease in imported products and transit products, some Cold Storages are beginning to consider other potential markets to serve, such as providing storage for domestic agricultural producers, which would secure significantly higher occupancy rates for longer periods of time. Currently, there is limited demand from domestic producers since most of the domestically produced meat and produce are sold directly to the market. However, this includes large surpluses that are dumped on the market at the end of the harvest season that result in supply and price distortions. As more producers delay sales by storing their products and slowly liquidating their surpluses into the market, they will receive higher and more stable prices for their products.
The industry has received, and continue to receive, significant Direct and Indirect Industry Assistance from the Georgian government and the international donor community in developing Cold Storages, specifically in regards to accessing cheap credit and to developing services and the capacity to serve domestic and regional agricultural producers. Beginning in January 2011, new reforms focusing on food safety standards will be introduced through the 2005 Law on Food Safety and Quality. Although all of the details of implementation have not been made public yet, the first steps will be to establish a set of registration rules and establish state control and inspections for producers and distributors of food, as well as for other related businesses. These new regulations will initially increase the need for new investment, but will ultimately increase confidence among the International Cold Chain customers and counterparts. Significant Opportunities in the Value Chain Significant opportunities exist for Cold Storages that also offer other value-chain services, especially in the areas of wholesale purchasing and distribution, food processing and collection services. Food processing and transportation can be expanded and upgraded, allowing a smooth transition to Cold Storages, since all fruits, vegetables and meats need to be cleaned, sorted and/or processed before placed in storage. There are many Cold Chain value-added services not being offered by Cold Storages in Georgia. The implementation of these services would imply further integration into the International Cold Chain, which could diversify a facility s client base and revenue streams and increase a firm s level of competitiveness. With the current low level of competition among existing Cold Storages, increasing the competitiveness of a facility or offering additional value-added services could result in short-term market share gains. For example, none of the major facilities offer food processing, packaging or export facility services. These value-added services would contribute to firms growth rates and to integrating Georgia s Cold Storage industry into the International Cold Chain. Additionally, other services, such as environmental and climate sensing/monitoring services would allow Georgian facilities to attract a greater amount of international transit products. With only two out of the top ten Cold Storages offering chilled storage services for fruits and vegetables, this is a significant untapped market that can demand long-term storage services. Cold Storage demand will grow as the quality of products and total volumes of agricultural production increase. There is significant opportunity within the Wholesale Trade section of domestic agricultural products. For example, currently wholesale trade opportunities are very low, with most distributors to restaurants and hotels offering Georgian produce only during the summer and fall months and imported products in the winter and spring. This gap offers significant opportunities for investors to enter as wholesale buyers and Cold Storages. They can purchase large surpluses of produce at significant discounts, store them and sell them directly to the market or to local distributors. MAIN ACTIVITIES The main activities of this industry include providing storage for: - Domestic products for staged distribution or export; - Imported products for local distribution; - In-transit bulk products. Although Cold Storages often serve firms across several industries, those in Georgia provide services almost exclusively to the Food Industry. Most Cold Storages provide services for only frozen products, such as meat, poultry and fish, while only a few also provide chilled services for fruit and vegetable storage. The major services in this industry are: - Multi-Temperature Storage Facilities - Chilled Storage, 0-5o C - Frozen Storage, -18-20o C - Air-Blast Freezing, - 40o C - Bonded Storage - Real-Time Internet Access - Transloading
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