How vertical integration helps fashion leaders grow?
Examples of vertically integrated businesses that are thriving
There are numerous examples of vertically integrated businesses and they include some of the highest-valued companies on the equities markets and some of the most successful fashion and sportswear brands.
One famous example is Amazon. Although this business started with a simple ‘asset-light’ model, it gradually identified significant value in the warehousing, fulfilment and cloud-computing segments of its business, developing these further and offering them as third-party services to clients. Amazon Web Services (AWS) is now a major source of income for the company. Clients of AWS include the CIA, NASA, Barack Obama’s Presidential campaign, and Netflix (which is also vertically integrated).
Investors are still keen to see money being spent in areas that bring sustained growth – like vertical expansion and digitisation. You don’t need to be a tech company to ‘get vertical’ – many of the leading names in fashion retail are thriving with this strategy.
H&M and Zara are two excellent examples of vertically-integrated Fashion brands, which have excelled in good years, and survived the bad ones with an agile and vertical supply chain. The fact that they do this in different ways to each other shows that there is ample room for variation when it comes to vertical expansion.
The largest company in the Inditex group, Zara operates a vertically integrated business that controls all design, production, warehousing, logistics, and distribution processes for the 450 million items sold annually in their stores.
The company leverages nearshored production located close to the distribution HQ in Spain. Using centralised logistics, Zara provides regular small-batch deliveries that arrive at stores on time. Ownership of the whole process enables the efficient arrival of items at the store, already labelled and priced.
The deeply engrained, regular rhythm of these deliveries ensures other tasks can be planned and managed around them, with positive effects on worker efficiency and profitability. Zara maintains an agile approach that can be optimised with a vertical structure; designs can turn into trend-dependent items on the store shelf in a matter of weeks.
Some 85% of their factory capacity is reserved for the ability to turn around in-season stock adjustments, meaning the brand can remain flexible about frequency, quantity and variety. The ability to respond to demands almost in real-time means the brand has a stunning sell-through rate; 85% of Zara’s stock is sold at full price – way above the industry average!
The company is ranked as the #41 most valuable brand on the 2020 Forbes list (coming just after Ikea), and actually improved its position from 2019 when it was #46.
That’s during the pandemic period.
Zara succeeded during this tough year, partly by having a strong online sales segment, and the brand plans on closing 1000 stores to focus on expanding their online sales further.
Unlike Zara, Swedish fashion brand H&M does not own factories, but outsources their supply processes. This is a good example of a collaboration-powered vertical model. The company keeps close control of the process using strong links with around 850 independent suppliers.
Powered by a rich exchange of information and widespread digitisation, the company maintains overall control and oversight regarding matters like environmental impacts and working conditions. Designers in Sweden have real-time insights into factory capabilities and stock levels of raw materials (which H&M procures throughout the season), meaning orders are sent to the factories best able to efficiently produce those goods.
Their design strategy is more focused on long-term range planning than Zara, but the designers also have an agile strategy for the production of real-time design for latest trends. Items intended for the long-term assortments are produced in Asian factories, and shipped by sea. By contrast, short-term, trend-driven items are designed and produced with a quick turnaround in smaller batches in European factories, travelling by rail to reduce carbon footprint.
H&M leverages a flexible production strategy, with 80% made in advance and 20% produced afterwards based on trend success. All goods arrive at regional replenishment centres, which operate ‘lean’, with minimal buffer stock, using a centralised inventory management.
The whole setup requires extensive coordination and a free flow of information among all stakeholders. For this reason the company has invested heavily in a powerful centralised IT system that enables overview and control over the whole process. Although H&M’s vertical structure is not ‘fully owned’, the collaboration of partners with fully-aligned objectives (delivering what the customer wants) means the structure operates in concert.
Both H&M and Zara are thriving, thanks to a finely-tuned vertical structure.
How Retailisation enables collaborative action in vertical businesses
The biggest factor in achieving success as a vertical business is ensuring the smooth flow of information from all parts and the translation of this data into coordinated and meaningful actions. While many companies create custom IT solutions to achieve this, the Retailisation software can work with any business model. It can realise a high level of business intelligence and coordination, with some very attractive benefits for companies that are expanding vertically.
The software is designed to bring together and process information from multiple sources, giving an overview of the entire company. It is perfect for companies that operate Omni-channel or online sales, but also Brick-and-Mortar only companies or those looking to expand, because it can bring together different data sources into one seamless overview. Inventory levels are available with multiple filters, and the smart algorithm works together with pre-defined thresholds to generate the right order – every time. Replenishment and reallocation options are also just a few clicks away.
The software’s perspective encompasses the entire operation, and not just each department – this helps to ensure collaborative working across the entire chain with clearly-aligned objectives. Detailed metrics and reports clearly identify areas for improvement, and the system feeds back real-time sales data which can inform supply decisions further back along the chain.
Information is the lifeblood of a vertically integrated company – and the Retailisation software is a big part of keeping both information – and inventory – flowing in the right direction.