Vertical integration in retail trade
Vertical integration is used by retail companies that exert influence across various levels of the supply chain. The focus here is on close cooperation between industry and retail. For example, brands often present themselves using shop-in-shop concepts. Retailers, on the other hand, no longer operate exclusively in the classic sales segment; they also produce goods. The fashion, entertainment electronics and automotive industries can stand out with their shop-in-shop and mono-brand store concepts.
Teaser image description: In the foreground, you can see the Apple product line, presented as a shop-in-shop solution. In the background, you can still see the shop contours of the Saturn group.
Vertical integration allows industry and retail to merge. On the one hand, brands and manufacturers can present themselves directly at the point of sale with so-called area concepts. On the other hand, with vertical integration, retailers are able to have products produced or deliver inventory themselves. The latter is a particularly common concept in mono-brand stores. The degree of influence on the individual levels of the supply chain varies from company to company. One company may control more of the production, while another may focus more on delivery or the sales floor.
Important: For vertical integration, the fewer processes a company outsources to external companies, the higher the degree of integration – as with batch size, the highest and best possible degree starts with the value 1: degree of integration 1 = high vertical integration.
In contrast to this is horizontal integration: this represents the merger of companies in similar sectors.
Vertical integration concepts that are common for brands and manufacturers
Corner concept: Large retail chains such as Saturn, MediaMarkt and Karstadt are increasingly offering brands and manufacturers vertical cooperation in various forms. The simplest and smallest form describes a sales line within a store of less than 40 square meters. It is independently designed by the brand or manufacturer, adapted to the existing interior and regularly stocked with current products.
Shop-in-shop concept: If the sales line takes on larger dimensions, it is referred to as a shop-in-shop concept. Apple (see teaser image), Samsung, Sony and Microsoft, for example, regularly offer their product range at Saturn or MediaMarkt, in a designated sales area, usually with their own specialist staff. The shop-in-shop concept also uses separate shopfitting elements to show customers the boundaries between the different departments. It is important to note that the respective provider only presents and sells a specific range. This creates a certain exclusivity. The brand and manufacturer enter into a binding contract with the retailer, which regulates the range, delivery and revenue sharing within the store.
Concession concept: In this concept, the retailer merely acts as a landlord. He rents out a space directly to the manufacturer or brand. As a rule, the retailer provides his own furniture and staff. One possible variant is for the retailer to take on responsibility for this store as branch manager.
Franchising: In a so-called franchise sale, the franchise holder grants the so-called franchisee (tied retailer) a license to use the franchisee’s name, trademark, equipment and other intellectual property rights in return for a fee. The franchisee must use the sales strategies developed by the franchise holder, including the sales system. The retailer is also supplied with goods by the owner and trained on the products and how to use them.
Special case: retailer is also designer and producer
Vertical integration has become particularly prevalent in the clothing industry. Labels such as Zara and H&M control the entire supply chain, from design to production and logistics, right up to the sale to the end consumer. The advantage: Zara and H&M act as mono-brand stores and thus receive the entire profit from the sale. Both have an influence on the costs of production and delivery. In addition, the retail chains usually offer exclusive design collections, which have been designed by Karl Lagerfeld (H&M), for example.
Vertical integration in the automotive industry
Vertical integration can also be seen in the automotive industry. For example, specialist dealers working on behalf of VW and Mercedes depend on generating income from additional business (service and maintenance). One reason for the services (after-sales) is the low margins from the actual sale of cars. The advantage: they automatically retain both private and business customers while providing high-quality service.