Vertical Commerce: The next chapter of the retail industry
– Nitin Chhabra, CEO, ace turtle
The world over, increased involvement by members of the leadership team of brands in ensuring efficient supply chain management attests to its growing importance in overall planning. Forecast by consulting firms such as EY, in a recent report on supply chain logistics, have underscored the impact that increased cost of raw materials, labour, and the geopolitical climate, will have on existing global supply chains, stressing the need to decouple them. Cognisant of the need to decentralise the supply chain, brands are embracing innovative solutions to sustain profitability. One such novel solution is Vertical Commerce, wherein brands assume, either directly or through a licensee partner, complete control over the supply chain. The flow of information from each segment of the supply chain can better inform decisions by the management on capital expenditure on production, marketing, et al.
Agility in business practices
In an operational model centred on vertical commerce, brands have near-total autonomy over all processes – design, manufacture, pricing, distribution, marketing, and sales – that provides more flexibility over all functions. Control over distribution and sales creates a direct channel of communication on offline and online channels, with customers sans filters. Data sourced about products directly from customers allows decision-makers to apportion resources for production to cater to the demand. Furthermore, data on customers allows for customising shopping experience, besides offering personalised feedback. For instance, an apparel brand can more readily make changes to the design of its shirts or trousers based on assessment of customers’ preference.
The autonomy that Vertical Commerce offers retail brands in the management of the supply chain means that they can effectively eliminate the middleman in taking their products to the consumer. Not only does this help widen their profit margin but also establishes a direct channel of communication with the consumer, one wherein they are receiving unmediated feedback. Since a vertically integrated production cycle is more agile, brands can more readily leverage consumer feedback to respond to changing preferences, and trends. In fact, information gathered across touchpoints – brick-and-mortar stores, exclusive web stores, e-retail markets – compiled on a centralised database can be analysed using ‘Big Data’ to detect patterns in consumer behaviour. For instance, an apparel brand with extensive presence across a country like India, is likely to receive feedback from a varied cross-section of consumers. Should analysis of consumer data compiled by the brand shed light on growing demand for, say, ‘slim fit’ trousers and tee-shirts among consumers of a specific age group, the management can apportion more resources for manufacture of those products to meet the rising demand. The agility built into the ‘Vertical Commerce’ model enables brands to recalibrate production plans, and distribution strategies that much faster, enabling them to capitalise on the high demand.
In the ‘omnichannel’ world of commerce, brands need to be conscious of the need to ensure a consumer’s engagement with them is both consistent, and memorable, across platforms and channels. Regardless of a consumer’s chosen mode of entry into the sales funnel, brands can, by using data, ensure a personalised experience. This can take the form of offering customised suggestions, or attractive personal discounts, all of which can help increase a brand’s consumer retention percentage, at a time when businesses the world over are eager to balance the lifetime value (LTV): customer acquisition cost (CAC) ratio.
Asset-light inventory management
Vertical integration of the production process, and a streamlined supply chain makes adoption of an asset-light approach to inventory more feasible. An asset-light approach, while ensuring all sales touchpoints – e-retail markets, supermarkets, webstores, exclusive outlets – do not run out of safety stock, allows brands to reduce cost associated with logistics. Brands, while leveraging the influence of their reputation, can further sharpen their marketing strategies by using performance metrics of those products that have won favour among customers. The ‘asset-light’ model also helps brands greatly reduce their stock of dead inventory, which, in turn, helps the management cut down expenditure on logistics such as warehousing.
The streamlining of all production processes helps return linearity to the business model, offering the management a clear view of all functional wings of the organisation. Primarily, it provides management with a single view of the distributed inventory, allowing decision makers to move merchandise in accordance with demand either on a specific channel or in a particular city, or region. Enabling seamless shipment of inventory from one place to another is a testament to the agility and flexibility of a vertically integrated model.
Technology-powered logistical management
In his book on the evolving retail landscape, leading consultant and author Murillo C Xavier has found that rising cost of supply chain management – primarily, logistical costs – tend to neutralise the value of enhanced quality of products, by considerably shrinking the profit margin. Adoption of technology can help brands negotiate such problems. One of the key advantages that technology-powered sales and database platforms offer brands is that they allow for dynamic decision making since data is updated and shared in real-time.
Data having turned into the new currency in the retail world, brands with innovative technological solutions that can use the huge piles of customer data to drive profits have a decisive edge. To begin with, software that can assist management with inventory management – ensuring no outlet ever runs out of safety stock, economising delivery costs by ensuring order fulfilment from nearest warehouses – is an invaluable addition to a brand’s supply chain infrastructure. Technology can also use the same volume of data to help management decide on warehousing, and transport.
Immense scope for growth
It is impossible for the retail world to insulate itself from the altered geopolitical landscape, which will necessitate brands to decouple global supply chains more effectively. Vertical commerce, with its comprehensive focus on all sales channels, and view of all operational processes, holds the promise of optimising the efficiency of customer service, and reducing operational costs.
Additionally, India, with its attendant technical advantages, could well be at the vanguard of the ‘Supply Chain 4.0’ revolution that will witness increased use of technological tools such as Internet of Things (IoT), Artificial Intelligence (AI), and RFID technologies to better monitor shipment and delivery processes. Retail brands today are leveraging the capabilities of AI tools such as ChatGPT to automate many a repetitive task, besides using it to enhance customer experience. Once a ChatGPT-powered bot is supplied the requisite amount of data about a brand’s operations, and the sales model, consumers will find themselves receiving updates about inventory, and even personal suggestions. In fact, if consumers share information about their preferences, ChatGPT and similar AI tools could even be counted upon to perform the role of a styling expert.
The internet retail industry is projected to grow to USD 1 trillion by 2030, according to an EY report – to put that figure in perspective, the entirety of the retail sector across all channels was valued at USD 836 billion in 2022 – and brands will be eager to explore the possibilities that the Indian market offers. The potential for growth in India’s retail segment also presents a great opportunity for organisations that offer logistical support, given that requirement for transportation, warehousing, among other functions is bound to grow as consumer demand rises. An estimation by EY claimed that the Indian warehousing market could attract investment to the tune of USD 3.8 billion! For stakeholders in India’s retail sector to reap the rewards of this rapidly growing market, adoption of efficient business models is a prerequisite, and ‘Vertical Commerce’ is bound to lend consumer brands a decisive edge, given the many advantages of the model.
