What is vertical integration, relative to the specialty foods business? In our opinion, it's the only viable way most small specialty food businesses will ever make a satisfactory profit. Interested? I would hope so. First, how the specialty foods business works now, then how it would work with vertical intgration.
Currently, if you create and sell your own specialty food products, it's usually on a scale so small that the combined costs, absorbed singlehandedly, are often more than the potential revenues from sales. This is why these products aren't seen in most stores and disappear relatively soon. At least that's what we've seen, since we've been in the business, starting in 2002.
Now, with vertical integration, the costs such as purchasing ingredients and packaging, not to mention production, warehousing, sales, distribution, merchandising and store margin would all be profit centers, rather than costs.
Some examples? Before Century 21 Real Estate came along, real estate business were mostly small and didn't make much money. With the creation of Century 21 as a franchise situation, most large costs such as advertising and marketing were shared, a national brand was created, and everyone's small business became profitable.
Another example is Virgin Records. When Richard Branson, the founder, started a small record store, it wasn't very profitable, because the costs were high and the profits weren't. Then he figured out that if he could manage the singers and write and produce the records, that the music business became profitable for him, because former areas of costs became areas of profits.
How does this apply to helping small specialty food businesses making satisfactory profits? Just imagine if there were one large, all purpose multifunction production facility for specialty foods in central New England. This facility would also have a large warehouse space for storing ingredients and packaging which could be stored in bulk, with room for finished product storage as well. This operation would have a fleet of box trucks for distributing the products. And where would the products be distributed? They would be sent to custom specialty food stores in malls and shopping areas all over New England. And what would these specialty food stores be called? Why, New England Specialty Foods, of course.
Why is all that good. Because if the hundreds and hundreds of small, struggling specialty food producers all over New England joined forces in a hybrid of a franchise, a coop, whatever you want to call it, and owned all the aspects just mentioned, all steps in the process could be profit centers rather than costs.
By the way, that's how Wal-mart started, and it's working pretty well for them.
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