Vertical Integration in Grocery Retail 2018

Vertical Integration In Grocery Retail 2018

Release date: October 29th, 2018 (115 pages)
PDF/Powerpoint format. Price: GBP934.00


In the age of digitalisation Vertical Integration (VI) has made a triumphant eturn. As it remains unclear where value will be created in future, a VI strategy can be seen as risk mitigation. Owning the entire value chain means being in control of the value generating business.

The leading grocers have become so big and are in need of such huge volumes that the drive to vertical integration comes from the desire to secure supply (and fully stocked shelves). The discounters for example are growing so fast and their future demand forecasts are so big, that only a vertical integration strategy can guarantee business continuity.

But, a vertical integration strategy has other benefits too. If executed in the right way, VI will give retailers the agility & speed to react to emerging trends. This is especially the case with NPDs and differentiation through PL.

A VI strategy also confers to the retailer the ability to ramp up/down SKU count, according to its needs (economic parameters). In other words when times are getting harder the SKU count in store can be reduced, as shoppers won’t have as much disposable income. This would happen without having to take contractual obligations with third parties such as the FMCG industry into account. This can then easily be reversed once the economy improves again.

And to further underline the point, this concerns SKU counts, not just volumes of the single SKU. All in all, this means the grocer can manage the total value chain according to its OSA needs, rather than some quickly outdated plans of its buying department.

Moreover a VI strategy will enable better quality control, the potential to differentiate especially on the private label ranges, but it also means having a unique handle on replenishment costs, processes and standards. There are huge gains in efficiency to be had.
Naturally, VI cuts out the various middle men, such as the wholesalers and brokers. This is not only relevant for costs and margins but also for delays/time spent on admin/negotiating. Vertical integration can yield total control over pricing and margins, marketing spend etc

VI is not only good for input price control but it’s also good for cost control in logistics (and not just the hard cash but also the carbon footprint). Owning the entire value and supply chain gives the grocer much better predictability. This means investment can be made over a longer term horizon and then guarantees business stability, in effect it makes higher investment levels possible, as the owner can take a long term view.

There will be much future evolution in VI strategies. Some key topics include digitalisation, block chain promises making the supply chain more transparent, an end to end supply chain culminating with the
integration of online sales, selling to 3P, the impact of automation, and more potential for retail private label brands.

If current VI trends continue, it will get much harder to get listed especially if products don’t have a serious claim to being innovative.

What is the way out for small scale producers? They could ignore mass retail and try to get their products into hipster coffees hops, gastro pubs etc. They could also look to partner up, through M&A or looser agreements to gain scale. A final option is of course to go direct and there the best option will be provided by the online marketplaces.

Table of contents

Executive summary p9
Millennial shopper p12
Millennial shopper: an introduction p13
Millennial shopper: (1) Green, health & wellness p14
Millennial shopper: (2) Craft/artisanal p15
Millennial shopper: (3) Digitalisation, social media, voice p16
Millennial shopper: (4) Urbanisation challenges p17
The future of Grocery Retail p18
Grocery retail: Five theses for the future of retail p19
Grocery retail: (1) the age of store based foreign expansion is over – unless you’re a discounter p20
Grocery retail: (2) Discounters will become the biggest EU retailers by sales p21
Grocery retail: (3) Vertical integration in grocery retailing will continue p22
Grocery retail: (4) Winning strategies: convenience, fresh and foodservice p23
Grocery retail: (5) digitalisation and innovation logistics, loyalty and in store p24
The future of FMCG p25
FMCG: (1) Ingredients splitting three ways p26
FMCG: (2) all growth from small scale start ups p27
FMCG: (3) almost all innovation from small scale start ups p28
FMCG: (4) cost cutting & M&A, (5) Silicon Valley p29
FMCG: a new golden age for CPG? Not likely for the small players p30
Vertical integration p31
Why now? p32
Why now: the return of vertical integration strategies, PESTLE framework p33
Why now: vertical integration as risk management p34
Advantages p35
VI Advantages: control, NPDs, SKU counts and OSA management p36
VI Advantages: price and cost control, supply chain transparency p37
Disadvantages p38
VI Disadvantages: cost, complexity, dependence p39
VI trends p40
Nonfood VI: global champions lead the way, IKEA, Inditex, Apple p41
Foodservice VI: global champions lead the way, Starbucks p42
The Champions of VI p43
Global Top Ten, US$bn sales, 15 years ago p44
Global Top Ten of Retailing: assessing the importance of range, decline of loyalty p45
Global Top Ten of Retailing: the platform players and their VI strategies p46
Global Top Ten, US$bn sales 2016/17 p47
Aldi & Lidl - the Champions p48
Similarities – business principles p49
Discounters: product centricity, one format players, international presence p50
Discounters: adaptability p51
Operational set up p52
Discounters: operational principles fine-tuned for decades p53
Private Label Strategy p54
Discounters: average SKU sales Aldi/Lidl UK 2017, massive potential p55
Triple supply, replenishment costs, supply chain (I) p56
Discounters: triple supply chain, different approaches from Aldi and Lidl p57
Discounters: NPDs at the discounters p58
Triple supply, replenishment costs, supply chain (II) p59
Discounters: replenishment costs, efficiency p60
Aldi - the Original p61
Aldi - source logistics p62
Germany: Aldi logistics, innovation testing and optimisation p63
Vertical Integration in China p64
Aldi: VI in China, non food p65
Aldi: clothing and textiles ripe for considerable disruption p66
Lidl – the Innovator p67
Lidl VI in fruit & vegetables (I) p68
Lidl VI in fruit & vegetables (II) p69
Lidl: vertical integration achieved in soft drinks, WIP in confectionery, the PET system p70
Lidl: vertical integration in fruit and vegetables, DCs built, owned and run by Lidl p71
Lidl: Delays with the ice cream project, investment scaled up, cutting edge facilities p72
Germany: Lidl is pushing further vertical integration in agricultural supply chain p73
Germany: Lidl dependent on business performance of handful of large farmers p74
Latest developments p75
Germany: where are Aldi and Lidl vertically integrated? p76
Mercadona, Spain’s market leader p77
Store pictures p78
KPIs 2017 retail p79
Spain: Mercadona, the vertical integration champion p80
KPIs 2017 supply chain p81
Spain: Mercadona, the supply chain champion p82
KPIs 2017 NPDs p83
Spain: Mercadona, the co-innovation model p84
KPIs 2017 supply chain II p85
Spain: Mercadona’s co innovation and vertical integration strategy and facts p86
Private Label pictures p87
Spain: Mercadona’s success factors, the large industrial cluster p88
Interprovidores (I) p89
Spain: strict exclusivity for interprovidores p90
Interprovidores (II) p91
Spain: Mercadona decides M&As of interprovidores, margins and dividends p92
Interprovidores NPD (I) p93
Spain: NPD successes, case example p94
Interprovidores NPD (II) p95
Spain: cross pollination among interprovidores p96
Holland & Barrett, leading health retailer in the UK p97
Holland & Barrett (I) p98
Holland & Barrett: PE, Brexit investment, spun out of Nature’s Bounty p99
Holland & Barrett: 5 key areas, vitamin supply, surfing the h&w trend wave p100
Holland & Barrett KPIs p101
Holland & Barrett: Morestores, vegan nail bars, 32 quarters of growth p102
Holland & Barrett (II) p103
Holland & Barrett: taking on the Body Shop p104
Holland & Barrett (III) p105
Conclusion and Recommendations p106
FMCG Tactics p107
FMCG tactics: Conclusion and Recommendations p108
FMCG Tactics (II) p109
FMCG tactics: what should FMCG players do? p110
Sources p111
A bit more on ResearchFarm p113
Tables & Charts p8
Table 1: Global Top Ten Retail, US$bn sales, 15 years ago p44
Chart 1: Global Top Ten Retail, US$bn sales 2016/17 p47
Chart 2: Aldi & Lidl average SKU sales 2017 UK/ROI in £m p54
Chart 3: Replenishment costs by store type US, DE, FR, UK in % p59
Chart 4: Mercadona KPIs 2017 retail p79
Chart 5: Mercadona KPIs 2017 supply chain p81
Chart 6: Mercadona’s KPIs 2017 NPDs p83
Chart 7: Mercadona’s KPIs 2017 supply chain II p85
Chart 8: Holland & Barrett KPIs p101
Tables & Charts p8