The Impact of Vertical Integration

I guess the first thing we should talk about is what exactly vertical integration means. Simply put, when a manufacturer of finished goods sells directly to the end consumer. Now, in the Kitchen and Bath industry, that could mean Builders, Remodelers, etc. It could also start with raw materials, but we will leave that segment out of this discussion.

This is already happening with smaller plants and micro-manufacturing facilities but will also become more commonplace with Large Production Companies as well. The question used to be “if” they would sell direct and now it’s “when” will they sell direct. Manufacturers have been cautious about upsetting the dealer Applecart and will stay that way, but will use a private label to minimize any disruption in the relationship. It’s not like they want to go this route but view it as a necessity to understand this type of business better and not lose market share.

Personally, I think they should be focused on helping their dealers do this so that they can become a hybrid company (bricks and mortar + online) to stay viable. It would certainly provide insurance for the Manufacturer when it comes to the very important dealer channel. I feel like the dealers are going to soon be hit by so many different types of new competitors that they will feel punch-drunk by the end of the day.

Please understand that this Industry is enormous, roughly $170 billion, and it’s attracting some big players from other industries. The main focus is space planning for the home and providing products that will meet the consumers’ needs. Installation could be provided by the supplier or a third party. You need not look further than Facebook and the Metaverse (BTW, they recently partnered with Matterport) to see how space in the home will become much more interactive with the people living there.

This all points to how adaptive manufacturers and dealers alike will have to become in the future. Throw in some advanced LiDAR technology plus AI and BOOM!–then things really start getting interesting!
Sorry for the sidetrack but I can’t pull myself away from words like “adaptability”, “speed of change” and a lot of other non-sensical things…

Everybody in the channel needs to add value efficiently and removing a dealer from the process only moves cost to the manufacturer since they are now responsible for providing more services to move their product. They must become very good at these new services since they will now be handling hiring, training, marketing, consumer website, logistics, customer feedback, and other solutions needed for the end-user business. So, it comes down to whether a company can really excel with the two different types of disciplines. Word up! Looks easy, does hard. 

You need to split these two businesses with financials so you can really gauge how each is doing as a stand-alone. Both need to turn at least a 10-15% Profit. If you have integrated systems and processes, followed by a top training program and culture…. oh Daddy! You can start swinging 20% + to the bottom line. Sweet! This would allow the total company to have funds for investments back into the business or for acquisitions if that is part of the plan. 

If you don’t become solid at whatever discipline you want to own, then the value starts to decrease, and your future looks less inviting.
So, whether it’s a big plant, micro-manufacturing, vertical integration, hybrid dealer, or a bricks-and-mortar model, you better start becoming very good at your core functions. As Jack Welch used to say, “Be number 1 or number 2. When you’re number four or number five in a market, when number one sneezes, you get pneumonia.”