IGD research shows there is an increased focus among a number of retailers, including Walmart, Kroger, Morrisons and The Co-operative, to become more vertically integrated and take control of the supply of products.
With this model providing a number of benefits to retailers including food security, the ability to reiterate fresh credentials to shoppers and transferring supply chain best practice downstream this trend looks set to continue.
Providing food security
In the last couple of years there has been increased focus by a number of retailers to become more vertically integrated both in terms of off-site and in-store production. Retailer interest in vertical integration is being driven by a number of factors:
- Provide security of food supplies, particularly commodities
- Reassure shoppers on food safety and traceability
- Grow private label penetration
- Highlight fresh credentials to shoppers
- Gain leverage with brands through deeper understanding of supply chain
- Gain upstream expertise and transfer supply chain best practice
- Potential to lower costs through better co-ordination of inter-dependent steps in the supply chain and minimise transaction costs
Five models of vertical integration
IGD research indicates that a range of different models and combinations of vertical integration have been adopted by retailers based around five models.
Growing/sourcing operations: This model ensure the safe and quality supply of fresh produce and commodities and also increases the speed of supply from farm to shelf improving the retailer's freshness credentials. The retailer will also benefit from less variability in costs due to commodity price changes and it supports government priorities to improve food safety and optimise the supply chain.
The Co-operative Group's Farms operation is Britain’s biggest farmer, and launched its ‘Grown by us’ branded range five years ago. With this capability, The Co-operative grows its own cereals, fruits and vegetables.
Private label manufacturing: By producing their own products retailers can control product quality by directly influencing ingredients and recipes and can directly address the needs of shoppers. In-house manufacturing allows retailers to set standards for production methods by providing benchmarks for national brands and provides retailers an opportunity to lower the cost of sourcing goods.
US retailer Kroger has an extensive manufacturing network, with 38 manufacturing plants across the US that produce around 40% of private label volumes.
Packing operations: An integrated packing facility give retailers greater control over inventory and availability in the supply chain. Integrating packing operations also enables retailers to better understand the total value chain and drive quality improvements across the supply chain.
Belgium-based retailer Colruyt is highly integrated retailer roasting its own coffee, bottling its own wine and packing its own rice.
Central kitchen operations enable retailers to employ tactical price and promotional activity that is difficult for competitors to match. In addition, kitchen facilities can drive profitability over the long-term by duplicating activity at store level and provide the opportunity to trial innovations with relatively low cost and risk.
Tesco's US operation, Fresh & Easy, operates a central kitchen facility next to its distribution centre in Riverside, California, that produces a range of prepared meals, soups and salads.
Store based production really helps to support a retailer's freshness credentials through daily production of products and adds an element of retailer theatre to the shopper experience. It does however increase food safety risks for retailers especially those with particularly large store estates.
As well as having central manufacturing facilities, Morrisons also produces around 1,700 products in-store daily.
To discover the opportunities, benefits and challenges of implementing a vertically integrated supply chain strategy, please read 'How retailers are taking control of supply'.