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Food for Thought - the rise of Food Logistics

The food and grocery sector in Australia has recorded strong growth over the past year and this has created a positive thematic for the industrial and logistics sector amid a challenging economic environment. As consumers became more cautious in their spending patterns in 2020, there was a large shift towards consumer staples, and this led to strong demand from industrial occupiers in the food subsector.

Since the beginning of 2020, prior to the panic induced buying in March 2020, expenditure on food items has risen by 9.5%, well above the 2.7% recorded for the corresponding period in 2019. In 2020, 43.2% of every retail dollar spent in Australia was on food items, well above the 6.8% spent on clothing and the 18.5% spent on household goods.

While a contraction of 2.2% was recorded in spending at cafes 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, there was strong demand in 2020 from investors seeking assets anchored by food-based tenants.

Online food sales

Online food sales only represent ~5.0% of total retail sales, however, this is up from 1.5% in 2015 with growth of 31.0% per annum being recorded over the past five years. By comparison, online retail sales excluding food represents ~15.0% of all retail sales and highlights the enormous growth potential of online food sales.

food for thought chart

For the major supermarkets of Woolworths and Coles, online grocery sales represent only a small portion of total revenue (~5.5% for Woolworths and ~4.0% for Coles) and as a result, the bulk of online orders are currently serviced via their existing retail store network. However, the fragilities of this were brought to the forefront when COVID-19 hit with both Woolworths and Coles suspending 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 over 45% in the last few weeks of February and early March alone 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% 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.

Implications for the industrial and logistics sector? 

Online food sales are forecast to grow significantly over the next decade and as a result, major food retailers and delivery platforms are expected to invest significantly in their online fulfilment capabilities to build resiliency in their supply chains. For the supermarkets, this will mean a greater take-up of automation within their warehouses and further rollout of dark stores while online takeaway food retailers are expected to make further investments in dark kitchens in infill locations close to major population centres.

These trends have already occurred to some extent in recent years with Woolworths operating multiple dark stores and temporarily converting three existing supermarkets in Victoria to dark stores to cater towards online grocery orders when Melbourne entered stage 4 lockdowns. Woolworths has also more recently opened its third dark store in Sydney (Lidcombe – 15,000 sqm) which will enable them to boost online distribution capacity of their groceries by almost 20% while they continue to invest in micro fulfilment centres at the back of or close to their existing supermarkets.

Regardless of whether food is bought instore or online, further growth in the demand for food and consumer staples will have positive implications for the industrial and logistics industry in Australia. Considering that over 90% 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.

From an investment perspective, 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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Luke Crawford

Director

Research

Sydney CBD

Luke has 10 years’ experience in property research and real estate advisory, providing strategic advice and research to private, government and listed groups. Luke currently heads up the national industrial research function at Colliers International, where he provides high quality research and advice on the trends impacting the sector to both internal business lines and clients.

Prior to joining Colliers International, Luke has held roles within the Real Estate Advisory Services (REAS) division at KPMG and the Research and Consultancy team at Knight Frank.

Luke’s areas of expertise include property research, demographic assessments, highest and best use analysis and supply and demand assessments across a broad range of property sectors including industrial, office, residential, student accommodation and retirement and aged care.

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