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?