Vertical Integration: Expanding Your Success in the Food Chain
After decades of focusing on specialization and outsourcing to maximize profits, food and beverage companies are now extending their expertise up and down the supply chain through vertical integration. Growing your operations this way involves acquiring or creating another company in your supply chain through forward integration, backward integration, or balanced integration.
When a manufacturer skips the middle man and performs its own distribution, that manufacturer is implementing a forward integration strategy. Local farmers do this when they sell directly to customers at roadside stands or farmers markets rather than going through distributors or retail grocers. Daily Table, the non-profit Boston grocer making headlines for selling healthy “food past its prime,” has also implemented this strategy. While their core business is collecting, repackaging, and cooking food, they increase margins by selling through their own store.
Backward integration occurs when a company acquires a key supplier. Ferrero, the Italian chocolate company, did this in 2014 when it bought a hazelnut processing company to aid in producing its famous Nutella spread (strategy+business). Similarly, McDonald’s grows its own potatoes. And Starbucks now owns coffee farms.
Some companies opt for balanced integration, an end-to-end strategy that incorporates multiple members of the supply chain under one corporate umbrella. For example, Tyson Foods uses a fully integrated supply chain for chicken production, beginning with its egg hatcheries and extending all the way to distribution centers, with each member of the channel adding specialized value (Market Realist).
Vertical integration can offer companies a number of advantages:
- Tighter control and coordination of processes (e.g. improve product quality, streamline processes, stabilize pricing)
- Reduced costs through economies of scale and efficiencies (e.g. consolidate staff, improve resource allocation, increase margins by eliminating “middle man” markups)
- Increased market share (e.g. differentiate through added expertise, gain access to limited production inputs from certain geographic areas, add distribution locations, create barriers to market entry for competitors)
Is vertical integration a good idea for your business? Although the advantages are many, certain disadvantages do exist, such as the potential for decreased flexibility and issues with inventory or production capacity (OccupyTheory.org). In fact, the conditions that create big advantages for some firms might wreak havoc on others.
The key to success lies in knowing what to look for. What problem does vertical integration solve for your company? What opportunities does it create? Is vertical integration realistic for you, or would pursuing such a strategy put your current operations at risk?
Whether you’ve implemented a vertical integration strategy or not, Capstone can help you optimize your supply chain from end to end. We can help you maintain tighter control over your integrated supply chain or craft custom solutions if you require more flexibility. We’ve built relationships with a vast network of food and beverage customers and work with a wide range of facilities—from farm to processing plant, all the way to the retailer, restaurant, or distributor. Contact us to learn more about integration strategies that could take your business to the next level.
Below is an example of how we craft custom solutions for our poultry customers.