Back to the future with vertical integration

The brewing industry is a great example of how the vertically integrated model of doing business is making something of a return.

The Bull in Highgate: returning to an old business model

Where once there were lots of brew-pubs around the UK, there have been none for some time. But in recent years there has been a return to this business model as brew-pubs have been springing up all over the place.

Many down-and-out boozers are rejuvenating their proposition by the addition of home brewed beer. Take the Bull in London’s Highgate that had been boarded up for 18 months. Yes, even in affluent leafy Highgate the pub with a duff offer is a failing beast.

But it is now a brew-pub whose beers have been so popular with its customers that it now only stocks its own ales. The fact it has a unique offer is a massive upside in these tough ultra-competitive times.

And it’s margins are significantly enhanced when compared with having to buy in other people’s beers. Needless to say, the brewing industry is not the only sector to re-visit vertical integration.

Retailers are coming round to thinking that combining manufacturing and selling has both defensive and offensive attractions in today’s market.

As highlighted in his recent column on Dan Coen of Zolfo Copper cited Card Factory (click here) as a great example, with its store estate flogging cards that it has designed and produced in-house.

The likes of Clintons Cards are getting hammered on price because it is reliant on buying its cards in from wholesalers. And to make matters worse these products are available elsewhere so there’s no USP or margin for poor old Clintons.

Hotel Chocolat is another vertically integrated operator that has gone a significant step beyond combining retailing and manufacturing – it owns a cocoa plantation on which it grows the crucial raw material for its chocolate goods.

Hotel Chocolat: pointing the way forward

But Angus Thirlwell, founder of Hotel Chocolat, told that it is not exclusive products, or speed to market, or protection of your intellectual property, or even healthier margins that are the most important factor in vertical integration. No, it’s the fact it shows “ultra commitment” to the product.

“We grow the cocoa, we make the products in the UK, and we then sell them in our own stores. It’s called ultra commitment,” he says, adding that this is exactly what consumers are demanding today.

In a similar vein, having its own farms and abbatoirs has helped Morrisons differentiate its offer from the other supermarkets. Like most ‘modern’ retailers its rivals are advocates of the lean business model where pretty much everything is outsourced.

But maybe we are entering an era when the fat model is again back in vogue and the skinny variety, which has been more appealing in recent years, is becoming increasingly less fashionable.