This business model has grown a lot in the last decade all over Europe and globally. A vertical retailer is a retail business that designs, produces, and sells its own products, without using middlemen or wholesalers, so that it can satisfy customer demands very efficiently. Examples are:
- The Gap
Not limited to retail and distribution activities, but integrate also design process, brand image and communication.
The value chain can be more or less responsive to the market trends, that means incorporate different levels of fashionability:
- Mass basic retailers
- Fast fashion retailers
Mass basic retailers offer a wide products range with many iconic styles and carry overs in large and welcoming stores at convenient price (The Gap, Uniqlo).
Fast fashion retailers offer a flow delivery of new fashionable merchandise in large and welcoming stores at convenient price, new fashion products appear every 2 weeks (Zara).
Vertical Retailers have different percentage of vertical integration.
Vertical integration is an arrangement in which the supply chain of a company is owned by that company. Usually each member of the supply chain produces a different product or (market-specific) service, and the products/services combine to satisfy a common need.
High degree of vertical integration (manufacturing, design, distribution and retailing) are provided by fast fashion retailers such as Zara. Others control only some activities, they do not own factories, but have production offices next to the main suppliers in local countries (mass basic retailers such as H&M).
In order to increase profits and gain more market share, Alibaba, a Chinese-based company, full use of vertical integration makes it more than an e-commerce stage. Alibaba has built its leadership in the market by gradually acquiring complementary companies in a variety of industries including delivery and payments.
Luxottica owns 80% of the market share of companies that produce corrective and protective eyewear as well as owning many retailers, optical departments at Target and Sears, and key eye insurance groups, such as EyeMed.
Internal advantages of vertical integration are:
- Lower transaction costs
- Synchronization of supply snd demand along the chain of products
- Lower uncertainty and higher investment
- Ability to monopolize market throughout the chain by market foreclosure
- Strategic independence
Internal disadvantages are:
- Higher coordination costs
- Higher monetary and organizational costs of switching to other suppliers/buyers
- Weaker motivation for good performance at the start of the supply chain since sales are guaranteed and poor quality may be blended into other inputs at later manufacturing stages
Benefits to society are:
- Better opportunities for investment growth through reduced uncertainty
- Local companies are often better positioned against foreign competition
Losses to society are:
- Monopolization of markets
- Rigid organizational structure
Fast Fashion Retailer: Zara
is part of Inditex Group. A designer boutique alternative for the price-conscious but trendy customer. Consumers are men and women aged from 18-40, which have from low to middle class income and mainly are fashion followers. Full research on Zara
The company brings a great innovation:
- Customer centricity
- Products lifecycle of two weeks, small production, small orders and frequent deliveries
- Efficient logistics, strong investments in 4/5 logistic platforms in Spain
- Flexibility, close to the market in terms of manufacturing, in Spain and Europe
Lifecycle production in Zara:
Design based on trends⇒ Stores with daily analysis of sales⇓
⇑Manufacturing (short production run) ⇐Design (collections update to reflect demand)
There are such brands of Inditex:
- Zara (1975)
- Zara Home (2003)
- Pull and Bear (1991)
- Massimo Dutti (1991)
- Bershka (1998)
- Stradivarius (1999)
- Oysho 2001)
- Uterqüe (2008)
Zara Business model
- Manufacturing in close contact with market⇒rapid response to demand
- Highly effective logistics⇒products get updated constantly
- Stores managed in-house⇒strong customer focus