5 Steps Towards Vertical Integration

Transcription:

Hi, guys, Syama Meagher, CEO of Scaling Retail. And today, I want to talk to you about vertical integration. Now, vertical integration is something that’s been pretty big in the food industry for a really long time. They’re all about Nabisco and Kraft and how they own their factories that they make the goods in, as well as sometimes owning the farms that they’re actually producing the product in, right? The farm that they’re growing the corn, the soybeans, etc.

But, did you know that in the fashion industry, vertical integration is something that’s pretty popular as well? And, vertical integration can come in the forms of simple things, like owning the factory or even owning the farm where your organic cotton is being produced. Or, even owning the process by which you are producing, let’s say, that specific textile or that particular technique.

So, the art of vertical integration is really owning a part of that supply chain. Now, why on earth would anyone want to do such a thing? Well, vertical integration is a fantastic way to streamline a lot of your costs. So, this way, you actually cut out any of the middlemen, right? You own the exact part of your business that you actually want to be scaling.

The second reason why it’s so great is really because this gives you an opportunity, as the brand owner, to now be selling other kinds of goods and services to other brands. Not only will you be able to be producing your own goods in your own factory or your own yardage, you’ll have all of that with any fibers or textiles you produce, but you can then sell off that space, you can sell off that fabric, that time in the factory, to other brands out there. So, that is another great reason why people do vertical integration.

But, how on earth do you get closer to that, and how on earth do you start? Well, the first thing to do when thinking about vertical integration is to really think about the key opportunities that you have in your business. Where are those opportunities? Do you already have a great manufacturer? Are they possibly looking to sell that business? Are they looking to sell that factory?

That would be a very easy way for you to then take over existing infrastructure. Or, possibly, you’re a sustainable brand out there, and you want to get a collective together in order to really place the right kinds of yields on the organic cotton that you want to be producing. So, you get into a collective with other like-minded brands, and you guys go ahead and start to do some vertical integration, techniques, this is sort of like a quasi-technique, where you actually own the land, right? But you own it together, right? So, vertical integration certainly doesn’t just have to happen with you as a brand on your own. In fact, companies like Pact out there that are really fantastic sustainable businesses, have gotten together in collectives and done the very same thing that I just spoke about. So, that type of thing is happening.

But, how do you know it’s something that’s right for you? Well, first of all, guys, you gotta make sure you have a lot of capital. Owning a part of a supply chain is no easy feat. In fact, it can be a little expensive. You’re buying infrastructure. You’re buying hardware. You have employees. In fact, guys, it’s a whole other business model. Some people are just factory owners, they are just farmers, and actually are the middlemen, and then they sell them off, and you have agents, etc.

So, when you go through this process, essentially, you’re saying, “I’m going to cut out the agents, I’m going to cut out the other factory owners, and I’m going to have my own production capacity,” or whatever that happens to be in the supply chain.

Now, the second thing to think about as you move towards this process is, “Exactly what would be a great revenue-generating stream for me that I can be using to sell to other vendors as well?” Certainly, when you’re done with that factory usage or when you’re done with the yardage, you want to make sure that you’re actually creating additional sources of revenue for your business.

So, you’ve got to go into it with that in mind. Now, that may mean that you need to hire a business partner or someone to kind of manage this new area of the business, especially if you’re buying this from an existing factory owner or anyone else who already has the infrastructure in place.

Now, the third thing to consider about if you are thinking about building out vertical integration is whether or not you’re going to buy out or build out. Now, buy out, of course, is doing something like working with an existing factory, but building out is saying, “Hey, this doesn’t exist.” Or, “Hey, I actually want to create this, and I can’t find it anywhere, so I’m going to build this up from scratch.” Now, this can be an extremely time-consuming process. You’ll certainly want to bring on board an expert, but if what you’re doing does not currently exist out there, then actually having the environment where you can be introducing a new commodity into the market, a new type of functionality, could actually be extremely lucrative for you, right? Imagine, once your brand is consistent and you’re doing well, and now you’re at the stage of scaling, you now have a totally different revenue stream that’s solving a problem in the market for the next 10 or 15 years. Because it is so cost-intensive and time-intensive to build out the back end, not too many brand owners are so keen on heading into that direction. So, if you are interested in doing that, then I say, “Kudos to you, but think about this, certainly, from a long-term strategy.”

Now, the fourth step, in terms of getting ready to head into that direction, is to really think about the other areas of your business that you plan on building out from a branded side. So, not just the factory, but what are the different kinds of products that factory is going to be able to produce? Are you a ready-to-wear brand that’s interested in launching accessories or jewelry or shoes? If so, you might want to be thinking about all the different areas of the business that you’re going to have to be pulling through this new factory, right? So, definitely think about the long-term strategy of your brand.

Now, the last thing, guys, as you step toward vertical integration, and you start to think about the supply chain in a much bigger way, it’s also very important to think about, not only cash flow, so money coming in and out, but all the start-up costs that are going to be necessary in order to build that business. You know, once you do absorb a business or you start something new, you are going to want to market it a little bit, you are going to want to let people know that you exist. So, think about all of the brand-building techniques and strategies that you did in order to get your brand to where it is today, and then think about everything you’re going to have to do in order to really integrate a new business model.

It’s going to be new scenario planning, new cash flow planning, and also new market, right? You’re going to have to let people know that you guys are there, you’re available, and of course, you’re going to keep maybe some of the best stuff for yourself, but you are going to want to remember that if you are using this as a revenue-generating stream, and you will be selling and working with other brands, keep in mind, one of these services and techniques, you’re going to want to preserve for your own collection and what you’re going to want to be using for the outside market.

All right, guys. Thanks for watching. I hope you enjoyed hearing a little bit more about vertical integration, expanding your horizons, and retail strategy and retail development. I hope you come find me on social. I love Instagram. I’m on Facebook. I’m on YouTube. I am where you are. Stay tuned for more awesome stuff on the Scaling Retail newsletter, and I’ll talk to you guys later. Bye.