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Vertical Integration in Grocery Retail 2018

  • ID: 4667592
  • Report
  • Region: Global
  • 115 Pages
  • ResearchFarm Ltd
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The Discounters are Growing so Fast and their Future Demand Forecasts are so Big, Only a Vertical Integration Strategy can Guarantee Business Continuity

FEATURED COMPANIES

  • Aldi
  • Holland & Barrett
  • Lidl
  • Mercadona
  • MORE

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All in all, this means the grocer can manage the total value chain according to its OSA needs, rather than some quickly outdated plans of its buying department.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.

Note: Product cover images may vary from those shown
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FEATURED COMPANIES

  • Aldi
  • Holland & Barrett
  • Lidl
  • Mercadona
  • MORE

1. Executive summary                                           

2. Millennial shopper

  • Millennial shopper: an introduction
  • Millennial shopper: (1) Green, health & wellness
  • Millennial shopper: (2) Craft/artisanal
  • Millennial shopper: (3) Digitalisation, social media, voice
  • Millennial shopper: (4) Urbanisation challenges

3. The future of Grocery Retail     

  • Grocery retail: Five theses for the future of retail
  • Grocery retail: (1) the age of store based foreign expansion is over – unless you’re a discounter
  • Grocery retail: (2) Discounters will become the biggest EU retailers by sales
  • Grocery retail: (3) Vertical integration in grocery retailing will continue
  • Grocery retail: (4) Winning strategies: convenience, fresh and foodservice
  • Grocery retail: (5) digitalisation and innovation logistics, loyalty and in store

4. The future of FMCG       

  • FMCG: (1) Ingredients splitting three ways
  • FMCG: (2) all growth from small scale start ups
  • FMCG: (3) almost all innovation from small scale start ups
  • FMCG: (4) cost cutting & M&A, (5) Silicon Valley
  • FMCG: a new golden age for CPG? Not likely for the small players

5. Vertical integration                                           

Why now?     

  • Why now: the return of vertical integration strategies, PESTLE framework
  • Why now: vertical integration as risk management

Advantages  

  • VI Advantages: control, NPDs, SKU counts and OSA management
  • VI Advantages: price and cost control, supply chain transparency

Disadvantages                                                

VI Disadvantages: cost, complexity, dependence                               

VI trends               

  • Nonfood VI: global champions lead the way, IKEA, Inditex, Apple
  • Foodservice VI: global champions lead the way, Starbucks

6. The Champions of VI     

  • Global Top Ten, US$bn sales, 15 years ago
  • Global Top Ten of Retailing: assessing the importance of range, decline of loyalty
  • Global Top Ten of Retailing: the platform players and their VI strategies
  • Global Top Ten, US$bn sales 2016/17

7. Aldi & Lidl - the Champions 

  • Similarities – business principles
  • Discounters: product centricity, one format players, international presence
  • Discounters: adaptability
  • Operational set up
  • Discounters: operational principles fine-tuned for decades
  • Private Label Strategy
  • Discounters: average SKU sales Aldi/Lidl UK 2017, massive potential
  • Triple supply, replenishment costs, supply chain (I)
  • Discounters: triple supply chain, different approaches from Aldi and Lidl
  • Discounters: NPDs at the discounters
  • Triple supply, replenishment costs, supply chain (II)
  • Discounters: replenishment costs, efficiency

8. Aldi - the Original     

  • Aldi - source logistics
  • Germany: Aldi logistics, innovation testing and optimisation
  • Vertical Integration in China
  • Aldi: VI in China, non food
  • Aldi: clothing and textiles ripe for considerable disruption

9. Lidl – the Innovator  

  • Lidl VI in fruit & vegetables (I)
  • Lidl VI in fruit & vegetables (II)
  • Lidl: vertical integration achieved in soft drinks, WIP in confectionery, the PET system
  • Lidl: vertical integration in fruit and vegetables, DCs built, owned and run by Lidl
  • Lidl: Delays with the ice cream project, investment scaled up, cutting edge facilities
  • Germany: Lidl is pushing further vertical integration in agricultural supply chain
  • Germany: Lidl dependent on business performance of handful of large farmers
  • Latest developments
  • Germany: where are Aldi and Lidl vertically integrated?

10. Mercadona, Spain’s market leader   

  • Store pictures
  • KPIs 2017 retail
  • Spain: Mercadona, the vertical integration champion
  • KPIs 2017 supply chain
  • Spain: Mercadona, the supply chain champion
  • KPIs 2017 NPDs
  • Spain: Mercadona, the co-innovation model
  • KPIs 2017 supply chain II
  • Spain: Mercadona’s co innovation and vertical integration strategy and facts
  • Private Label pictures
  • Spain: Mercadona’s success factors, the large industrial cluster
  • Interprovidores (I)
  • Spain: strict exclusivity for interprovidores
  • Interprovidores (II)
  • Spain: Mercadona decides M&As of interprovidores, margins and dividends
  • Interprovidores NPD (I)
  • Spain: NPD successes, case example
  • Interprovidores NPD (II)
  • Spain: cross pollination among interprovidores

11. Holland & Barrett, leading health retailer in the UK 

  • Holland & Barrett (I)
  • Holland & Barrett: PE, Brexit investment, spun out of Nature’s Bounty
  • Holland & Barrett: 5 key areas, vitamin supply, surfing the h&w trend wave
  • Holland & Barrett KPIs
  • Holland & Barrett: Morestores, vegan nail bars, 32 quarters of growth
  • Holland & Barrett (II)
  • Holland & Barrett: taking on the Body Shop
  • Holland & Barrett (III)

13. Conclusion and Recommendations   

  • FMCG Tactics
  • FMCG tactics: Conclusion and Recommendations
  • FMCG Tactics (II)
  • FMCG tactics: what should FMCG players do?
  • Sources

Tables & Charts                                               

Table 1: Global Top Ten Retail, US$bn sales, 15 years ago                       

Chart 1: Global Top Ten Retail, US$bn sales 2016/17                           
Chart 2: Aldi & Lidl average SKU sales 2017 UK/ROI in £m                       
Chart 3: Replenishment costs by store type US, DE, FR, UK in %                       
Chart 4: Mercadona KPIs 2017 retail                                           
Chart 5: Mercadona KPIs 2017 supply chain                                       
Chart 6: Mercadona’s KPIs 2017 NPDs                                           
Chart 7: Mercadona’s KPIs 2017 supply chain II                                       
Chart 8: Holland & Barrett KPIs

Note: Product cover images may vary from those shown
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  • Aldi
  • Holland & Barrett
  • Lidl
  • Mercadona
Note: Product cover images may vary from those shown
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