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May 10, 2005

Measures to Counteract Shrinking Profits in the Refrigerated Warehouse Industry
Toward a Structure that Returns a Profit Even with Moderate Inventory Ratios
Industry Leaders Point to Delayed Response

Companies in the refrigerated warehouse industry find themselves struggling to return a profit even when their warehouses are full to capacity because of an increase in costs such as overtime labor. Refrigerated warehouse operators are inclined to attach importance to inventory ratios and they try to pack in as much product as they can into their warehouses, even going so far as to leave goods in the aisles or pile them on top of each other. However, once the inventory ratio of a warehouse exceeds 35%, profits actually start to decline because of surging labor costs as a result of night work shifts and other overtime that becomes necessary to handle the inventory. The point is that companies in the industry need to be structured in a way that ensures they can make a profit even with inventory ratios of 35% or under. Management effort in the industry is being put to the test.

A hundred-thousand-ton and a million-ton class refrigerated warehouses are being built one after another in South Korea and China and are offering warehousing at low prices. Inevitably, volumes of imports of raw materials such as meat and fish have fallen as compared to former times. On the other hand, imported frozen vegetables and precooked foods have become increasingly important items for the Japanese refrigerated warehouse industry. The share of warehouse space taken up by this category is increasing year by year. As frozen foods are low in weight relative to their volume, they were formerly regarded with disdain by refrigerated warehouse operators, but as might be expected in recent years this category has become a force to be reckoned with. However, although operators welcome locally manufactured products that have high turnover rates, their honest feelings about the increasing importance of imported frozen foods is that "this trend is not something that I can feel sincerely pleased about" (the voice of an industry insider). Ironically, imports of frozen foods continue to grow, much to the dissatisfaction of many in the industry. "The warehousing rates for these products are too low relative to the workload they entail." (Industry insider)

If goods are bulky and the turnover rate decreases, inventory rates will increase. Inventory rates in Tokyo averaged approximately 38%, 37% and 37% for January, February and March respectively, far above the 35% that is said to be the appropriate level. The reality in the warehouses is that workers are forced to leave goods in aisles and pile them on top of other companiesユ goods. Inevitably, this situation reduces working efficiency in the warehouse and overtime increases. Mr. Yasuyuki Igarshi, Chairperson of the Tokyo Association of Refrigerated Warehouses urges operators to make efforts to improve efficiency, saying "This recent development presents us managers with a challenge to make the efforts required to ensure our businesses operate at a profit."

According to a survey conducted by the Ministry of Land, Infrastructure and Transport, ratios of current income to current expenses are decreasing across the industry. Business based on storage services alone is becoming less and less viable. And yet, operators are still not engaging enthusiastically in services such as third-party logistics (3PL). Mr. Igarashi points to the delayed response in the industry: "Although these things have been brought to our attention at study groups run by the Ministry of land, Infrastructure and Transport and in other forums, neither we nor the truck industry nor the regular warehousing industry have taken action. At this rate, neither sales nor profits will grow."

Mr. Shugo Ikeda, Vice Chairperson of the Tokyo Association of Refrigerated Warehouses (and President of Benirei Corporation) suggests: "Operators in the industry should make more functional proposals with regard to logistics, and they need to learn how to speak their minds authoritatively in their dealings with the owners of goods."

If they want to have their say, operators have no choice but to increase the value of their businesses by properly providing the services that their customers are looking for. Proactively getting involved in developments like 3PL, or in other words, making the effort to improve service is the route to prosperity in the industry.

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