Vertical integration in grocery retailing: A perspective on strategy versus opportunism

07.05.2019

Introduction

Vertical integration is accelerating in the grocery industry. The number of M&A deals involving European grocers buying suppliers has risen dramatically, up 133 percent between 2016 (six deals) and 2017 (14), and it continues to climb. Vertical integration is not a new concept for grocery retailers; at some organizations, the approach dates back to the 1950s, and  most grocers have some kind of private-label business in place, typically involving third- party manufacturing. But until recently, most companies have limited their efforts to a few product categories or a few steps along the value chain, with little strategic coherence.  This is in stark contrast to other industries, in which innovative companies have completely disrupted traditional players by integrating along the entire value chain: sourcing their own materials, developing private-label offerings that can compete with national brands, and getting those into the homes of consumers through new last-mile solutions.

The recent push among grocery retailers to vertically integrate stems from three main causes. As the market evolves, grocers need to:

  • Control costs along the entire supply chain (rather than just claiming a slice of profits through private-label products)
  • Increase transparency across the entire supply chain
  • Holistically manage and produce key product categories

To succeed, management teams will need to move beyond short-term, opportunistic decision making and instead develop a comprehensive strategy for vertical integration within key products. Moreover, they need to build up the capabilities to execute that strategy and understand the implications it will have on their business model.

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“In the past vertical integration in grocery retailing often was born out of necessity.”

Conclusion

The grocery industry is changing, and grocers must change too. Vertical integration is a key means for grocery retailers to adapt to this new environment and defend themselves against disruptive new entrants from outside the industry.

Key takeaways

  • Technology-enabled disruptions in other industries, such as fashion, have already diminished those retailers’ role as the main gatekeeper to end customers. The same could happen to grocers, which means holistic vertical integration strategies are becoming a key capability.
  • Vertical integration used to be a way for grocers to claim part of the profit pools of manufacturers. Today, it’s also a way to control costs across the end-to-end value chain.
  • End customers increasingly want transparency regarding the source of their groceries, and vertical integration can help grocers create that transparency.
  • As traditional manufacturers begin selling directly to consumers, vertical integration helps grocers dominate key product categories and thus capture customer insights that can inform future product development and innovation.

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Vertical integration in grocery retailing: A perspective on strategy versus opportunism

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