Mar 15, 2010

Is Vertical Integration The Future?

One distribution system design question is popping up in more and more markets in the U.S. and globally:
For over twenty years, companies like Pepsi have marketed their brands and managed growth in their global product portfolio by consolidating their independent channels (bottlers) and influencing them at arms length through minority stakes (usually in the 30% to 40% range).
So Pepsi reversed course. It’s completing its forays into forward integration, by buying virtually all of its two top bottlers, which together command 80% of  capacity in Pepsi’s carbonated soft-drink (CSD) business.  Pepsi has offered at least three reasons for its decision in the WSJournal and NY Times:
  •  Gain “greater flexibility” to direct capacity at fast-changing consumer tastes
  • Build advantage in the fastest-growing portion of the nonalcoholic beverage market – waters, juices, energy drinks, Gatorade – all of which are now distributed more and more through non-CSD bottler routes-to-market
  •  Reduce the number of margin-takers in the product pipeline to anticipate a long down-market in which overall system profits are smaller
Pepsi puts a spotlight on the two biggest demands on marketing channels today: adaptability and speed. Both seem to suffer in traditional distribution structures. As a result, we're seeing a decided uptick in companies concluding that collaboration and partnering with third-party distribution players is simply too difficult, too slow, and too costly. 
That may be. But Pepsi paid a heft premium of over $1 billion for its distribution partners. That will be very hard to earn back. And the company now has added considerably to its balance sheet, putting increased pressure on asset productivity. It's distribution 101 time: you can cut out the middleman, but not the activities (and costs).

do product makers need to own their distribution channels to make them high performing?

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