Vertical expansion increases margins

Busmen’s holidays are a walk in the park compared to retailers’. We can’t escape retail anywhere: idea-laden, benchmark-able stores can pop up in the quaintest of resorts and even on proverbial desert islands our iPads can surf us onto retail sites unseen.

Yet holidaying and retailing can happily co-exist. Having just spent a 20th-plus consecutive Christmas in my French home, shopping – once again – was a treat, not a chore.

Turning a blind eye to les grandes surfaces (and to newspaper reports that Leclerc, quelle surprise, was still cheaper than Carrefour), I fixed a beadier one on local independent food outlets.

Many are truly vertical businesses: the boulanger, five kilometres away, bakes bread at dawn and delivers it to my door for breakfast (eat your heart out Ocado); and many poulterers and greengrocers in Les Halles de Narbonne sell products they’ve raised or grown themselves.

Farmers markets have a high profile but tiny presence in the UK. Most retailers here subordinate vertical expansion strategies to horizontal (or concentric) ones focusing on new categories, services, channels and/or markets.

Morrisons is a seminal exception, vertically integrating abattoirs, farms, food production and packaging plants to provide a competitive and margin-enhancing point of difference, while endowing its ‘Market Streets’ with an authenticity that eludes its peers.

The whys and wherefores of vertical integration fuel an old debate that has turned full circle. When I was a buyer for C&A in the early 1970s, the company’s wholly owned manufacturing became an economic millstone, decelerating rates of stockturn and ramping up markdowns.

Marks & Spencer then smugly described themselves as ‘manufacturers without factories’ (ironic that Asos and other pure-players could now refer to themselves as ‘retailers without shops’). Then Zara turned the vertical debate on its head and showed that fashion can only really be fast if you make it yourself.

Brands are the most common driver of forward and backward integration: brand- owners increasingly embrace the lucrative appeal of directly owned stores over third-party accounts; retailers are vertically allured by the dramatic increase in margins from private labels, or by the purchase of established brands to enhance their retail propositions and their bottom lines (the masterly Sports Direct is poised to add distressed surfwear brand Hot Tuna to a historic list of bargain acquisitions including Dunlop-Slazenger, Karrimor, and Lonsdale).

But the real power of vertical integration can often be far less visible. Card Factory’s sector pre-eminence, for example, lies in no small measure in having its own publishing in-house.

However, unless retailers nurture or acquire their own genuine specialist supply chain skills, they’re better to second sourcing to expert partners in a vertical parallel universe, than to muddle themselves with the delusion that just ‘cutting out the middleman’ will enhance retail performance. This argument is one through which the dedicated professionals at powerhouses like Ultimate Products and Li & Fung have demonstrably driven a bus.

• Michael Poynor, managing director, Retail Expertise