This is quite a hot topic in the sector. In general I’m not a fan of vertical integration, I much prefer a tightly focused business. However I think there are two specific instances where vertical integration makes sense:
- Customer experience – Certain processes are vital to the customer experience and are a true differentiator such as the website, mobile apps and fulfilment. However backend systems such as accountancy and warehouse management should just be bought rather than owned. Historically processes that were differentiators have become commoditised so it may be that outsourced options will emerge for the current differentiators in the future (but no doubt other differentiators will emerge).
- Using unique technology – Nespresso have (literally) hundreds of patents on their technology and use a very complex process to create their capsules. This is not something that could be outsourced as they would be risking their intellectual property and in addition the only possible customer would be Nespresso which would prevent the manufacturer from sharing costs with multiple customers.
- Provenance – Guinness or Perrier would both be good examples. Indeed Guinness did experiment with brewing outside St James’s Gate, Dublin but that beer was considered inferior and production was shifted back. Equally Perrier could not be outsourced to another water company. It is a key part of the respective brands that these products are made in a particular place under the control of the company.
I think there are some quite bad reasons for vertical integration:
- Margin/cost – Unless there is a market failure margin will typically land at cost of capital. Margin in UK food manufacturing is very low and it is almost certainly not a good use of capital for an e-commerce business. Committing to larger volume is or outsourcing to a lower cost country is nearly always a better way of reducing price than vertical integration.
- Reliability of supply – This is quite often given as a reason. I would accept that in certain locations (e.g. Tata running their own electricity supply in India) this may be valid. But with careful sourcing reliability is rarely an issue in a developed country.
Move Fresh’s core competencies are management of brands, sales, marketing and creating a great customer experience. Outside of these areas we are keen to find high quality partners to fill in the gaps.