Vertical integration is a strategy designed to protect value or reduce market disruption where the risk of either happening is extremely high. All literature on the subject is critical of the practice where neither of these qualifiers exist -- and, as well-known international business consultancy McKinsey and Co. points out, "where management's reasons are spurious."
In our industry, the vast majority of the players has gravitated to market niches, or expanded horizontally by offering new product lines. Some have attempted vertical integration, but few have succeeded.
The coffee industry continuum extends from growers through processors, exporters, transporters, importer/brokers, roasters, distributors and service providers (OCS et al) and, ultimately, consumers. Along this chain, it is common for several links to be joined in partial integration, mostly at the commodity-logistical end (exporters integrated with carriers, for example). Following the acid test proposed by McKinsey, this makes sense when the scale is enormous.
Connecting other links in the chain has proven to be more complicated. In the earlier part of this century, there was a push by several American firms to encourage integration between roasting and OCS distribution. It, ironically, coincided with a push by the major roasters, who for the past 100 years had been active in servicing foodservice directly, to reduce their presence on the street and divest themselves of their distribution divisions. The lure was simple; roast your own coffee to control production, thus reducing your costs and marketing the "freshness" of your product.
A number of office coffee service providers bought into this idea, some even being provided with "free" roasting equipment in exchange for a contractual obligation to buy green coffee from the equipment provider (who had taken a page from the OCS playbook on providing free equipment as an inducement to contract for the delivery of coffee).
Problems With Scale
It quickly became apparent that vertical integration of this nature was a limiting factor to the OCS operator. Scarce financial resources now had to be divided between production and service/distribution; the lack of scale meant limiting the number of products practically available; and the promised reduction in product cost did not materialize, as most roasters work on razor-thin margins leveraged through large volume. Save a few notable exceptions (with the vast majority having sales in the hundreds of millions and beyond), this type of vertical integration has not worked to the advantage of the OCS provider. Those that persist do so purely on the marketing story line of freshly roasted coffee, recognizing that there is no economic advantage to roasting your own. (If the OCS company's present roaster-supplier is a roast-to-order operation, that marketing advantage evaporates completely).
In our experience, we have seen several OCS companies that had taken the roaster-integration path divest themselves from this model. Reversing vertical integration is not easy; it takes the planning of a logistician, as well as careful coordination with outside partners.
In every instance, however, these companies have experienced greater sales, lower costs and more profitability through focusing their human and capital resources on their principal business. One in particular showed me his new account installation calendar -- every day had one or more new installs on it for the two following weeks with later dates filling in quickly.
If you have comments, questions or other feedback, or if you'd like to start a dialogue, please let me know by emailing me at firstname.lastname@example.org.
BRIAN MARTELL is vice-president of sales for Heritage Coffee Co.'s Montreal-based Canadian division. Martell won the Canadian Automatic Merchandising Association's Customer Service Award for 2012, honoring his personal approach to customers. Martell is a recipient of the Don Storey Award (2008) and the Stuart Daw Gold Service Award (2010) and so is the first CAMA member to earn all three accolades.