Comment: Vertical integration rises up the agenda
Retailers owning their own manufacturing facilities has perennially flip-flopped between being seen as favourable one minute and seriously out of fashion the next.
The chief driver has historically been purely about lowering costs but just as vital today is ensuring a security of supply and provenance.
There is a growing body of retailers that are making it a priority to invest in the ownership of greater parts of their supply chains, which involves them getting their hands dirty at the manufacturing end of things. We are talking about a large shift towards the adoption of the vertically integrated model.
My recent visits to a couple of furniture and homewares businesses in London highlighted this phenomenon. At the combined Andrew Martin International and Timothy Oulton businesses 75% of overseas products come from its own workshops in Southern China and the company also owns its own tannery in Brazil. The company’s CEO Mike Durbridge says: “Vertical integration is very important as you need to be able to stand behind your product manufacturing and feel comfortable.”
It is a similar story at NiX by Nicola Harding that is very careful with its sourcing of products – much is purchased from family-owned businesses in the UK – and would ultimately like to be in a position of investing in its own workshops. It would then have much more control over its supply chain and be extremely confident in the provenance of its products.
These two businesses are pursuing the same strategy as many of the global luxury brands that have not only found themselves under increasing pressure to secure the necessary volumes of raw materials they need but also have a full grasp of the provenance of these materials and the conditions of the workshops in which their products are produced.
The answer has been vertical integration and serious investment is being made in this area by brands such as Chanel. It has stated that it has plans to continue to make acquisitions to integrate its supply chain further after a raft of such deals last year. Philippe Blondiaux, global chief financial officer at Chanel, says: “We are accelerating the vertical integration of our supply chain because we believe this is key to controlling our manufacturing and materials.”
There is a similar commitment to vertical integration at Prada Group, which recently confirmed its strategy involves a focus on bolstering its current brands, which along with Prada includes the likes of Miu Miu and Church’s shoes. To this end it has recently been acquiring local suppliers, which includes taking a large stake in a tannery in Tuscany. Andrew Guerra, chief executive of Prada Group, recently stated at a conference: “Most of the world’s fashion luxury apparel in made in Italy so anyone who is intelligent would be thinking [of acquiring suppliers].”
All these companies have experienced difficulties securing the necessary products through their supply chains – for myriad reasons including pandemics, wars, and blockages of the major shipping routes etcetera – and so the move to vertical integration makes sense. This is doubly so when you consider the increased responsibilities being placed on brand owners with pending ESG legislation and consumers’ increasing demands for hard evidence to support the provenance of the products they are buying.
The potential for brand damage from a lack of visibility and control over their supply chains is becoming increasingly acute and is a risk that a growing number of retailers and brans owners are unwilling to take any longer. As is often the case the trends are being initially set within the high-end, luxury part of the market but they will invariably trickle down into the mainstream.
It seems inevitable that we will see greater amounts of vertical integration in the retail sector – whether that is through outright acquisitions of suppliers, stake-building or much more integrated joint-ventures with manufacturers – that will maybe bring to an end the flip-flop nature that has historically defined the combining of retail with production.
