Jonathan Starks

Reefer outlook anything but chilly

Nov. 8, 2018
FTR Transportation Conference 2018 coverage

Come economic rain or shine, the refrigerated freight business has been remarkably stable, at the least—and, more recently, a model for sustained growth. And, as was made clear throughout the FTR conference, what’s good for fleets is good for trailer makers.

“It’s not just a stable market; it’s not just a market-share market—there’s a lot going on within refrigerated,” FTR Chief Intelligence Officer Jonathon Starks said. “If we look at the statistics—orders, production—they’re all at very high levels, and sustained levels for several years, hitting new record after new record. And there wasn’t any single thing that indicated why that was continuing to happen.”

To better understand where the refrigerated market has been and where it’s headed, Starks invited Rob Fortney, director, Dealer & International Sales, Great Dane Trailers, to explain the opportunities and challenges.

“As Jon said, and everybody probably knows, business is good. It’s very good,” opened Fortney.

Pointing to FTR data, refrigerated truck loadings have been on an upward trend since 1992, gaining 25% between 1998 and 2008, and another 15% in the 10 years since. And any downturns in the market are slight, with hardly a change from record highs during the Great Recession. Rates also have been high.

And trailer production has largely tracked the refrigerated freight growth trend. Fortney noted that reefer production recently has slipped slightly from the record of just above 47,000 units in 2016, but the projection averages 42,000 per year through 2020. And even with a projected decline in 2021-2022, production still will be on par with the record levels seen prior to 2014, at about 38,000.

“Part of that total is constrained because there are only two domestic refrigeration manufacturers, and that’s about what their capacity is,” Fortney said. “There are other challenges as the refrigerated truck body market has grown, and they serve those markets as well.”

Equipment age in the reefer industry has come down “considerably” to just under six years, he added, noting the “pull-forward” impact of the Food Safety Modernization Act. And he expects the trend to continue.

Several of the large fleets are trading out on a more rapid basis, partially because CARB regulations do not allow a refrigeration unit that’s over seven years old to operate in California, Fortney added. He also explained that new equipment means no “thermal issues” for fleets.

He noted that Prime Inc, the largest refrigerated carrier in the US, has been able to keep its fleet fresh by developing a channel to sell its used equipment “very quickly.”

“The challenge of selling a refrigerated trailer with lots of hours on the unit, like 20,000 hours, is that you know when you buy it you’re going to have to overhaul it,” he said.

The key reefer segments are truckload, food service, grocery/dairy, and truck bodies/last-mile segment.

The top four truckload carriers (Prime, C.R. England, KLLM Transport and Stevens Transport) claim 71% of the market by revenue, while the food service market—at $330 billion, and supporting another $700 billion in service jobs—is “kind of hidden,” Fortney suggested. And it likewise is dominated by just a few companies: Sysco, U.S. Foods and McLane control 63% of the market, based on truck count.

Similarly, McLane Grocery, Albertsons, Ahold Delhaize Group, and United Natural Foods have 57% of the recently consolidating grocery/dairy wholesale market, again based on fleet size.

For truck bodies, refrigerated units make up about 10% of the total segment. “There’s been a great push in final mile, and e-commerce is certainly helping that,” Fortney said. “We’ve built [refrigerated bodies] for several different companies, and a lot of them get in [the business] and get out of it pretty quick. There are untold challenges yet to be addressed with final mile.”

Continued growth?

Looking ahead, Fortney doesn’t see any reason for the market to soften substantially.
“It’s all about food, really,” he said. “People like to eat.”

The consumer segment will remain robust with the continued demand for fresh food, a resurgence in frozen food shipments, and the escalating home-delivery grocery battle between Amazon and Walmart.

In terms of economic growth, the reefer market also rises with disposable income and restaurant sales. And aging baby boomers are driving growth in pharmaceuticals, much of which ships in a temperature-controlled environment. Government policy also plays a role: Tax reform, food safety, CARB and the Significant New Alternatives Policy (SNAP) program, which impacts foam insulation blowing agents.

As for tax reform, an ATA survey found that 47% of fleets planned to take the windfall from tax reform and invest it in new equipment. “And I can assure you they did, and they are,” Fortney said.

And again, what might be a challenge for fleets is an opportunity for trailer manufacturers in the tightly regulated Golden State.

“A trailer sold in 2011, can’t go to California today,” Fortney said. “There was a lot of angst in the used trailer business about what to do with all of the reefers they can’t sell in California. But, come to find out, in 47 contiguous states plus Canada and Mexico, you can sell them and they work really well there.”

Other measures are trending upward as well.

Food demand grows with the population and creates more refrigerated loads, and annual food imports have soared over the last 20 years. 

“We’re the fourth largest port in the US now, and we see literally thousands of refrigerated containers coming into Savanah every week. There’s been several million square feet of refrigerated-only warehouse space built in Savanah—it’s incredible,” Fortney said, referring to Great Dane’s headquarters location.

Grocery retail sales climbed 33% from 2006-2016, with no sign of stopping. Frozen food, with producers now aligning their frozen offerings to the healthier attributes consumers demand, is also projected to see steady growth into the next decade. Meals consumed at home reached a nearly 30-year peak in 2017 at 78%, Fortney noted.

Last-mile grocery delivery was about $14.2 billion in 2017 and is expected to rise to nearly $30 billion by 2021. “The question is how are they going to do it,” Fortney said. He pointed out that Walmart just announced it’s expanding online grocery delivery to 100 markets by the end of the year. Amazon, meanwhile, offers same-day delivery of groceries from Whole Foods in six cities and says it will expand the program to the rest of the country later this year. Meal kits like Blue Apron and Hello Fresh are a nearly $3 billion business and will grow 25-30% annually over the next 5 years. “All that requires some type of refrigerated transportation.”

Headwinds, horizons

But the business isn’t all ice cream parties for refrigerated trailer OEMs.

“Can the supply meet the demand?” Fortney said. “The supply chain is a real challenge. We could build more trailers, but we can’t get more parts. Everybody in the trailer business is completely capacity constrained based on what the component manufacturers can supply. And that’s everything from wood floors, tires, suspensions, landing gear—everything. 

“So, will there be the equipment to go past the 47,000 [trailers], or even maintain the 42,000 refrigerated trailer-level at this point?”

Looking ahead, Fortney points to the ongoing development of solar and battery-powered hybrid technology, as well as nitrogen cooling.

“Nitrogen is a real viable way to cool a trailer, but there are some concerns,” he said. “Number one, there’s no infrastructure for nitrogen. Number two, there are some safety issues. You have to evacuate a nitrogen trailer before you can go in it.”

Sustainability initiatives within the trailer industry include weight reduction to offset tractor weight increases, and aerodynamic innovation. “To really take the next step, the shape of the trailer is going to have to change,” Fortney said. “It’s going to have to be banana shaped, and shippers aren’t going to accept that lower capacity at the rear and the front.”

Fortney also envisions a future for containerized intermodal shipping. “I truly believe somebody in the truckload reefer business is going to get on this,” he said. “I think there’s a great opportunity to reduce rates and address driver issues. I’m talking about domestic containers with a reefer. I really and truly believe we’ll see it in the next five years—somebody will do it big.”