February 21, 2008
Apparel Retailers Must Act Vertical
By Tom Ryan
According to Kurt Salmon Associates, the top apparel retailers are increasingly “acting vertical,” or controlling every piece of the value chain, from creating product concepts to getting finished goods into the hands of consumers. According to the consulting firm’s ActVerticalSM model, this marks a dramatic shift from merchandising’s traditional mindset, “they invent and make it, and we sell it.”
While retailers such as Gap, The Limited and Talbots adopted vertical models 40 years ago, widespread adoption has accelerated in the last ten years, including stores such as Macy’s and H&M, as well as traditional suppliers such as VF Corp. Driving the ActVerticalSM trend are five factors: the consolidation of retail brands; the proliferation of product brands; the emergence of internet retailing and the channel conflicts it has created; the need to accelerate time to market of new and existing products; and Wall Street pressure for year-on-year financial improvement.
But much of the push is driven by a need to “to react quickly to more-demanding consumers whose tastes are changing faster than ever.”
“Acting vertical” does not require retailers to own inflexible manufacturing assets, but comes in part from “striking strong and mutually beneficial working relationships with manufacturers.” KSA also highlighted three required capabilities for success:
1) Working with consumers to co-create demand: This includes more extensive testing of new products, colors, and patterns before retailers make commitments to suppliers, as well as more frequent testing of the entire consumer experience. This also means taking input from every consumer interaction (in store, online, via the catalog) and analyzing and acting on it. Retailers gain a deeper understanding of how their products fit within consumers’ lifestyles and belief systems.
2) Delivering a great consumer experience in the store: The overall store experience must be superior, involving “how well consumers can test products before purchase, maximize their use after purchase, and fulfill other needs directly and indirectly related to the products.”
3) Tailoring supply chains: Leading vertical retailers have at least three supply chains, based on a combination of factors such as service levels required, type of demand (e.g., basic products should never be out of stock), and display. Currently, categories, whether fashion, seasonal, and basic, still move all three types to their stores through the same supply chain at many stores. In analyzing performance, retailers must measure “net realized margin,” taking into account the total profitability of getting products from the factory to the store, including their selling price. Today, many only focus on lowering transportation and logistic costs.
“Retailers that can adopt and embrace a vertical business model will increase their influence on the design, development, manufacture, and distribution of the goods they bring to market,” KSA wrote in its report. “They’ll be able to put a unique stamp on those products, as well as on how consumers experience them, thereby distinguishing their stores from the pack.”
Discussion Questions: Which type of apparel retailers would benefit most from becoming more vertical? What’s driving this trend? What challenges does implementing such a strategy present?
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Vertical integration fulfills two critical business needs for apparel retailers. Firstly, it gives them greater control in delivering a cohesive, compelling lifestyle presentation and experience to their customers. This is a critical element in establishing the basic price-value proposition with their customers, and maintaining long-term price integrity.
Secondly, going vertical gives them far greater control over manufacturing costs and the various pieces of the supply chain, giving them much greater control over their total cost of goods sold.
Combined, the ability to maintain price integrity and control product costs affords them some measure of margin control, in an environment of too many retailers continually bidding prices, and margins, down.
The great risk, of course, as pointed out above, is that when you’re right with the goods you develop vertically you can be very right, but when you’re wrong, you’re likely too be very wrong,. High risk, high reward. But that’s the pattern we’ve seen from the leaders of vertical retailing over the past twenty years or so; retailers such as Gap and the Limited.
I agree that virtually every retailer will benefit. Consumers will also benefit if care is taken to provide quality–and if innovation is built into the system.
Almost all types of retailers will benefit from “acting vertical” if they stay within their domain of targeted consumers, and stay within their own points of differentiation and images.
Retail consolidation has left a few key national players (think Wal-Mart, Target, Macy’s, Penney and Kohl’s) in an unprecedented position of power over the vendor community. The fewer the retailers, the more important to differentiate themselves in terms of branding and product development.
At the same time, these national chains witness the growth of “fast fashion” chains like Zara and H&M.
So it’s imperative that the “last ones standing” verticalize their merchandise content from beginning to end, and it’s imperative that the big vendors learn to play by the new rules in order to survive.
The trend is being driven by two factors: 1) The desire to cut cost from the supply chain and 2) The shift towards consumer empowerment. If a retailer can sell what a consumer wants, when he/she wants it, at a price the consumer likes, that retailer should benefit financially.
The risk in this model is misjudging consumer tastes. Gap, until recently, has been a prime example of this. Under previous management Gap made style choices that did not fit consumers’ image of the brand. It’s sale suffered accordingly and resulted in a top-down shake up of the company.
Fashion retailing is not an easy business. It’s important for any fashion retailer to stick with their core brand story and and the key priorities of listening to consumers, understanding what they want and delivering on their brand promise.
Vertically integrated apparel retailers have performed better than those that are not, especially in challenging times. Their ability to control the entire process provides the capability to quickly react to change. The easiest application of this approach is with Private Label for all retailers.
Supermarket chains that have their own manufacturing have complete flexibility, but one does not have to own the production to be successful. What is required is to own the process from design through production scheduling–not just purchase order creation.
This is not new. Every division of Limited Inc. (past and present) has done this for at least 15 years.
It’s the absolute best (only?) way to control your brand from start to finish. The problem is, as we have seen at retail quite a bit recently, that if you’re flawed in process anywhere in the system, especially in the area of product design (see also: boring apparel retail of this decade), you’re going to pay dearly.
A better question is: how do retailers stay fresh and continuously improve DESPITE the fact that they’re vertical? When is new insight into process, design, sales and logistics best to apply? That’s been the dilemma.
Many good points made so far about control, speed, cost containment and other aspects of VI. But to me the most important aspect is that it allows a retailer to be a uniquely differentiated consumer experience. NO one else can be Lands’ End or L.L.Bean, The Territory Ahead or Victoria’s Secret. They completely shape the unique experience that is their store. It is why we keep citing the apparel retailers as the gold standard model for proprietary brands versus “private label” to CPG retailers….
I agree this is not a new story. The reasons for verticalizing are, of course, straightforward–more gross margin dollars for the retailer. Similarly, apparel brand managers are opening stores and online direct-to-consumer channels for the exact same reason…keeping more of the proceeds from each garment sale. They find themselves in competition with their retail customers.
While co-creating with consumers SOUNDS great in concept, in fact, most especially for apparel, the differential between supply chain lead times and profitable product life cycles is too great. By the time a product hits the stores, its profitable life may well have passed. This means that merchants still have to be a bit prescient. Even though our firm focuses on the value of technology, I’ve come back to really appreciate the value of the ART of merchandising as well. Deciding how much to buy is a science…deciding WHAT to buy and who it will appeal to is an art.
Our data is telling us that retailers are collaborating with suppliers rather than consumers, mostly to improve their speed to market. Certainly this has creating quality issues across the board, but still, average time to volume is now 6-12 months for almost half our PLM survey respondents vs. only 28% of last year’s respondents.
Channels are blurring, both vertically and horizontally (web, store, catalog). It’s a new world.
Apparel retailing is vertically integrated because the margins are better. This isn’t consumer driven. It’s financially driven. Many industries’ financials look healthier when the distributors and manufacturers are combined. Antitrust laws are often the only obstacle. TV networks were limited by the government from producing their own prime time TV shows. Movie companies were forced by the government to sell their theater chains. Barnes & Noble was prevented by the Justice Department from buying Ingram, the #1 book wholesaler.
Vertical integration can be cost saving and incredible if done correctly in terms of giving people things that they want or things that they think they want. The first will carry you into the future as a star. The second will give you a short period of success followed by a time of being seen as “out of style” if the mix does not or cannot change and adapt. If you get stuck with bad design and things that people simply don’t want then you can be dead in the water for an uncomfortable period–and an unprofitable period.
The key is design and some of that may require risk in terms of TRYING some things that may not work but with out risk, reward can be slim. It is difficult to be on the edge, but fashion is difficult at times. If control is desired earlier in the pathway then attention and concern for detail also MUST be there. This is not revolutionary OR new–as mentioned, many chains have operated this way for decades (e.g. the Limited family of stores; The GAP). Department stores traditionally had in-house design, but not in the style of today.
In the old days, in-house design was a way for apparel retailers to differentiate themselves from their competitors. Today, however, in-house BRANDS rule and are fantastic for profit. In the old days, there were many potential suppliers of components or product but today more than ever there is the risk of sameness. Securing merchandise made in vast quantities in China and placing an in-house brand name on that merchandise is not like having a number of designers for a store and producing their ideas.
This is a problem retailers face and now are fighting, mostly through attempting “exclusives” with known designers. Target with Mizrahi, etc, Kohl’s with Vera Wang, Chaps/Lauren, JCPenney with Nicole Miller and the new Penney/Lauren line, and Macy’s with Hillfiger, etc….
This seems to be working at present to avoid the problem of every store looking the same, as was the case 10 years ago where everyone had the same merchandise.
Ultimately, acting vertically can be great for control of product offering, potential uniqueness, and for profit to the store but, as with anything else, the better the work, planning, and support, the better the results.
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Vertical integration fulfills two critical business needs for apparel retailers. Firstly, it gives them greater control in delivering a cohesive, compelling lifestyle presentation and experience to their customers. This is a critical element in establishing the basic price-value proposition with their customers, and maintaining long-term price integrity.
Secondly, going vertical gives them far greater control over manufacturing costs and the various pieces of the supply chain, giving them much greater control over their total cost of goods sold.
Combined, the ability to maintain price integrity and control product costs affords them some measure of margin control, in an environment of too many retailers continually bidding prices, and margins, down.
The great risk, of course, as pointed out above, is that when you’re right with the goods you develop vertically you can be very right, but when you’re wrong, you’re likely too be very wrong,. High risk, high reward. But that’s the pattern we’ve seen from the leaders of vertical retailing over the past twenty years or so; retailers such as Gap and the Limited.
I agree that virtually every retailer will benefit. Consumers will also benefit if care is taken to provide quality–and if innovation is built into the system.
Almost all types of retailers will benefit from “acting vertical” if they stay within their domain of targeted consumers, and stay within their own points of differentiation and images.
Retail consolidation has left a few key national players (think Wal-Mart, Target, Macy’s, Penney and Kohl’s) in an unprecedented position of power over the vendor community. The fewer the retailers, the more important to differentiate themselves in terms of branding and product development.
At the same time, these national chains witness the growth of “fast fashion” chains like Zara and H&M.
So it’s imperative that the “last ones standing” verticalize their merchandise content from beginning to end, and it’s imperative that the big vendors learn to play by the new rules in order to survive.
The trend is being driven by two factors: 1) The desire to cut cost from the supply chain and 2) The shift towards consumer empowerment. If a retailer can sell what a consumer wants, when he/she wants it, at a price the consumer likes, that retailer should benefit financially.
The risk in this model is misjudging consumer tastes. Gap, until recently, has been a prime example of this. Under previous management Gap made style choices that did not fit consumers’ image of the brand. It’s sale suffered accordingly and resulted in a top-down shake up of the company.
Fashion retailing is not an easy business. It’s important for any fashion retailer to stick with their core brand story and and the key priorities of listening to consumers, understanding what they want and delivering on their brand promise.
Vertically integrated apparel retailers have performed better than those that are not, especially in challenging times. Their ability to control the entire process provides the capability to quickly react to change. The easiest application of this approach is with Private Label for all retailers.
Supermarket chains that have their own manufacturing have complete flexibility, but one does not have to own the production to be successful. What is required is to own the process from design through production scheduling–not just purchase order creation.
This is not new. Every division of Limited Inc. (past and present) has done this for at least 15 years.
It’s the absolute best (only?) way to control your brand from start to finish. The problem is, as we have seen at retail quite a bit recently, that if you’re flawed in process anywhere in the system, especially in the area of product design (see also: boring apparel retail of this decade), you’re going to pay dearly.
A better question is: how do retailers stay fresh and continuously improve DESPITE the fact that they’re vertical? When is new insight into process, design, sales and logistics best to apply? That’s been the dilemma.
Many good points made so far about control, speed, cost containment and other aspects of VI. But to me the most important aspect is that it allows a retailer to be a uniquely differentiated consumer experience. NO one else can be Lands’ End or L.L.Bean, The Territory Ahead or Victoria’s Secret. They completely shape the unique experience that is their store. It is why we keep citing the apparel retailers as the gold standard model for proprietary brands versus “private label” to CPG retailers….
I agree this is not a new story. The reasons for verticalizing are, of course, straightforward–more gross margin dollars for the retailer. Similarly, apparel brand managers are opening stores and online direct-to-consumer channels for the exact same reason…keeping more of the proceeds from each garment sale. They find themselves in competition with their retail customers.
While co-creating with consumers SOUNDS great in concept, in fact, most especially for apparel, the differential between supply chain lead times and profitable product life cycles is too great. By the time a product hits the stores, its profitable life may well have passed. This means that merchants still have to be a bit prescient. Even though our firm focuses on the value of technology, I’ve come back to really appreciate the value of the ART of merchandising as well. Deciding how much to buy is a science…deciding WHAT to buy and who it will appeal to is an art.
Our data is telling us that retailers are collaborating with suppliers rather than consumers, mostly to improve their speed to market. Certainly this has creating quality issues across the board, but still, average time to volume is now 6-12 months for almost half our PLM survey respondents vs. only 28% of last year’s respondents.
Channels are blurring, both vertically and horizontally (web, store, catalog). It’s a new world.
Apparel retailing is vertically integrated because the margins are better. This isn’t consumer driven. It’s financially driven. Many industries’ financials look healthier when the distributors and manufacturers are combined. Antitrust laws are often the only obstacle. TV networks were limited by the government from producing their own prime time TV shows. Movie companies were forced by the government to sell their theater chains. Barnes & Noble was prevented by the Justice Department from buying Ingram, the #1 book wholesaler.
Vertical integration can be cost saving and incredible if done correctly in terms of giving people things that they want or things that they think they want. The first will carry you into the future as a star. The second will give you a short period of success followed by a time of being seen as “out of style” if the mix does not or cannot change and adapt. If you get stuck with bad design and things that people simply don’t want then you can be dead in the water for an uncomfortable period–and an unprofitable period.
The key is design and some of that may require risk in terms of TRYING some things that may not work but with out risk, reward can be slim. It is difficult to be on the edge, but fashion is difficult at times. If control is desired earlier in the pathway then attention and concern for detail also MUST be there. This is not revolutionary OR new–as mentioned, many chains have operated this way for decades (e.g. the Limited family of stores; The GAP). Department stores traditionally had in-house design, but not in the style of today.
In the old days, in-house design was a way for apparel retailers to differentiate themselves from their competitors. Today, however, in-house BRANDS rule and are fantastic for profit. In the old days, there were many potential suppliers of components or product but today more than ever there is the risk of sameness. Securing merchandise made in vast quantities in China and placing an in-house brand name on that merchandise is not like having a number of designers for a store and producing their ideas.
This is a problem retailers face and now are fighting, mostly through attempting “exclusives” with known designers. Target with Mizrahi, etc, Kohl’s with Vera Wang, Chaps/Lauren, JCPenney with Nicole Miller and the new Penney/Lauren line, and Macy’s with Hillfiger, etc….
This seems to be working at present to avoid the problem of every store looking the same, as was the case 10 years ago where everyone had the same merchandise.
Ultimately, acting vertically can be great for control of product offering, potential uniqueness, and for profit to the store but, as with anything else, the better the work, planning, and support, the better the results.