The Rise And Rise Of Vertically Integrated E-Commerce

Vertically Integrated Ecommerce

Easy-to-use e-commerce platforms such as Shopify and BigCommerce have enabled even modestly funded brands to sell their own products directly to customers on their own websites.

No longer do businesses need to find £10,000 for an e-commerce build before they can begin selling online – now, even the newest ventures can get started for less than their monthly coffee bill.

In fact, these hosted shopping carts, combined with improved access to graphic design help, digital marketing tools and on-demand business resources, have made online selling so attainable that many new brands now choose to sell via their own website (instead of via a retailer) as their first choice rather than an after-thought.

Many new ventures even decide to eschew deals with distributors and retailers completely, and choose instead to keep their website as their only sales channel and an exclusive place for eager consumers to get their hands on the products.

Where once rejection by distributors spelled certain death for a brand, working without their assistance is now the preferred choice for many savvy entrepreneurs.

Why vertical integration appeals

Getting picked up by a national stockist or chain retailer is no longer an essental part of growing, but has increasingly become entirely optional. This has been successfully demonstrated by start-ups as varied as BlackMilk, Tattly and Dollar Shave Club.

The advantages of selling your products exclusively via your own website have become obvious to even those who were traditionally brick and mortar retailers, many of whom have opted to focus on online retail instead of aiming to convince department stores and chains to take a gamble on their offering. American Apparel is a perfect example of a high-street brand who have opted to grow by focusing on e-commerce, while neglecting to persue sales via other high-street or online retailers.

By keeping their products exclusive to their own e-commerce stores, these brands have found a way to avoid unwinnable price battles with rival brands on Amazon, for example, whilst creating an exclusivity and cache around their brand.

As well as choosing to sell exclusively via their own channels, many brands are keeping more of their functions in-house, from product photography to marketing, hiring freelancers or small agencies where necessary. Keeping these operations within the business, as well as selling only via your own retail channels is what defines this new breed of vertically integrated e-commerce brands.

Because everything from manufacture to customer service is handled in-house, and because there are few outside businesses to rely on or sell to, these vertically integrated busineses remain leaner for longer and can make better margins than those courting distributors and retailers. Operations cost less because they are handled internally and without the markups associated with outsourcing.

The challenges of vertical integration

However, for all these benefits, vertically integrated e-commerce businesses face particular challenges. While the term applies to a broad range of businesses in disparate niches, they all face similar issues that are specific to the model.

Scaling is one of these issues. Because these brands have to earn all of their own traffic and PR, they can find it hard to scale – compared to say, a fashion brand who manages to get stocked by Net-A-Porter, which could genuinely transform their business overnight. Disturbing London is an example of a trendy brand with a niche following which was propelled to new heights of popularity when they were stocked by luxury department store Selfridges.

As well as boosting sales volumes, and therefore turnover, scaling up would allow these businesses to earn better price breaks from suppliers and therefore better margins. This in turn would mean that the profits on each sale would be higher. However, this is balanced with the elimination of the retailer’s markup, meaning lower prices could be offered for a product of equal quality.

Vertically integrated e-commerce businesses are as much about tech as they are about retail

In order to succeed with a vertically integrated model, brands will no longer be able to focus soley on designing and manufacturing their products – they are going to have to be as strong at online marketing as they are at creating products that people want. Even if they involve outside agencies, the skillsets required within this type of company are changing. We can expect to see the typical vertically integrated e-commerce business start to look a lot more like a tech start-up than a retail outfit, as digital skills become as important to their offering as the products themselves.

Vertically integrated e-commerce companies who feel they can benefit from taking their experience offline will have to find ways to showcase their products without the support of the national chains that dominate the high-street – which is part of the reason that pop-up stores (and semi-permanent shopping centers such as London’s BoxPark) have become such a common occurance in the past five years.

A powerful model for niche brands

Perhaps the vertically integrated business model is perfect for those businesses whose goal isn’t to reach huge sales volumes, gain outside investment and go public. Vertical integration is not without challenges, but could be the perfect model for boutiques, lifestyle businesses and niche offerings, who can focus instead on making impressive margins, rather than attempting to reach a huge audience.

One thing is for certain, as entrepreneuriship and online marketing become more accessible, we’re likely to see many more brands become successful using this model.

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