Verticalization in the search for competitive advantage

On August 03, 2019, Ambev Brewery announced an investment of BRL 700 million for the construction of an aluminum can factory in Sete Lagoas, which already has a production and bottling plant for the Skol and Brahma labels.¹. It is one more step towards increasing its control over its production process and its logistics chain, bringing responsibility for one more of its inputs.

Figure 1 : Ambev has stood out for its strategy of verticalizing its chain, taking on activities from the production of agricultural inputs to sale to the final consumer2

Recently, the company had already expanded its range of activities with the launch of the B2C sales platforms Zé Delivery and Empório da Cerveja, which allow the company to bypass retail trade to reach its end customer.³. The leader in the beer segment also has the incubator ZX Ventures and Accelerator 100+ to anticipate market opportunities and diversify its service portfolio^4,5.

Ambev is an example of companies that have embarked on verticalization in recent years to seek competitive advantage in their respective sectors. By integrating different links in the supply chain within the same company, the level of information sharing is increased and this unified visibility facilitates informed decision-making. For Ambev, this strategy aims at maximizing margins, as well as reducing operational risk, guaranteeing the quality of its raw materials and ensuring a reliable supply of its breweries.

For companies like Inditex, which owns brands like Zara, Massimo Dutti and Pull&Bear, the goal is to speed up the response to constant changes in the consumer market.⁶. By bringing together the functions of design, fabric manufacturing, clothing manufacturing, distribution and sale to the final consumer⁷, the group reduces the obstacles for a new product to be conceived and reach its store windows within 15 days⁸. In addition, a feedback mechanism is generated, with sales data being transmitted to the team of stylists who use consumer trends to create new pieces.⁶.

Examples of companies that opted for verticalization appear in several sectors:

In the sugar and alcohol sector, Cosan founded Rumo Logística in 2008 to transport its sugar production and this is today the largest logistics operator with an independent rail base in Latin America¹⁰. In 2011, with the establishment of Raízen, j with Shell, Cosan expanded its influence in fuel distribution, previously represented by the Esso brand¹¹;
Among shipping companies, it has become common practice to offer a door-to-door service, including land legs in the package contracted by shippers. It is also common for large shipowners to have port terminals operating within their groups, such as APM Terminals, belonging to the Maersk group (Santos-BTP, Buenos Aires-T4 and Pécem terminals)¹², and Terminal Link, owned by CMA CGM (terminals in Houston, Antwerp and Fos-sur-Mer)¹³;
In consumer goods, IKEA and Faber-Castell have their own forests to supply their wood needs, which allows them to maintain reforestation control and obtain certifications of the origin of their products^14,15.
Samsung and Apple also present a certain degree of verticalization, with the Korean giant manufacturing some of the electronic components of its products, and the American company acting in the development of the with of your smartphones and with a network of 506 stores¹⁶.
In the health segment, Unimed and Amil operate both in the provision of health plans and in the care of their policyholders through the various hospitals that the chains have. The first also has a network of laboratories specialized in diagnostic services;
The entertainment industry, with Netflix, an exponent of the entertainment services sector, streaming, increasing its catalog of original titles every week, also placing itself on the market as a content producer.

A few examples are not enough to conclude that this is a trend that all companies should follow. It is necessary to evaluate the economic and political scenario in which the institution is inserted in order not to make hasty decisions that put the longevity of the company at risk. The city of Fordlândia, in the north of the country, does not let us forget the failure of vertical integration in the past. A city idealized by Henry Ford to supply the American automotive industry with everything needed to manufacture a car and which today is in ruins¹⁸.

There are, also in the present, evidence that verticalization still comes up against protectionism and legal issues. The large shipping groups, for example, carry out their container transport services in Brazil through their local representatives to comply with Law No. 6.288, of December 11, 1975¹⁹. Vale is unable to use its fleet to ship iron ore to China, responsible for 53% of exports of the product in 2017²⁰, because the country refuses to receive the mining company's vessels, thus protecting the Chinese fleets COSCO and CMES²¹.

Verticalization provides several competitive advantages, but often requires large investments and makes the company responsible for the operational risks previously assumed by its partners. In a country like Brazil, with a high cost of capital, it takes courage to risk verticalization and patience to reap the rewards.

For this reason, many companies are betting on downstream vertical integration, with less fixed capital, through online stores, such as Compra Certa and Loja Brastemp by Whirlpool, which recently sold its compressor manufacturer Embraco²² in movement of horizontalization of its chain; and physical stores, with different clothing brands, such as Nike, Adidas, Vans, setting up in the country through their own boutiques.

With the increasingly competitive market, companies seek new forms of advantages over their competitors, even if, for that, they have to deviate from their core business and take on activities that they are not deeply familiar with. The return on investments related to the verticalization of the supply chain must be evaluated in the long term, since the fixed amounts are high and the payback it may take a while to come.

Sources:

(1) https://diariodocomercio.com.br/sitenovo/ambev-tera-fabrica-de-latas-em-sete-lagoas/ (accessed 07.08.2019)

(2) https://www.shorelinefruit.com/blog/tree-to-table-vertical-integration-in-the-food-industry (accessed 08.08.2019)

(3) https://exame.abril.com.br/marketing/ambev-lanca-delivery-de-cerveja-que-entrega-em-ate-uma-hora/ (accessed 07.08.2019)

(4) https://epocanegocios.globo.com/Empresa/noticia/2016/12/casinha-da-ambev-para-pensar-o-futuro.html (accessed 07.08.2019)

(5) https://aceleradora.ambev.com.br/ (accessed 07.08.2019)

(6) https://digital.hbs.edu/platform-rctom/submission/inditex-king-of-fast-fashion/ (accessed 07.08.2019)

(7) https://www.slideshare.net/Comunidade_Lean_Thinking/logistica-caso-inditex (accessed 07.08.2019)

(8) https://www.forbes.com/sites/gregpetro/2012/10/25/the-future-of-fashion-retailing-the-zara-approach-part-2-of-3/#3ac42117aa4b (accessed 07.08.2019)

(9) https://www.bloomberg.com/news/articles/2016-11-23/zara-s-recipe-for-success-more-data-fewer-bosses (accessed 08.08.2019)

(10) http://cosan.com.br/pt-br/rumo/logistica (accessed 07.08.2019)

(11) https://exame.abril.com.br/negocios/cosan-e-shell-apresentam-a-raizen/ (accessed 07.08.2019)