The word on the street is that vertical integration is out. That probably means all those plans you had for growing your catalog business by throwing this and that together to make something really big are passé. Or maybe you wanted to do a little integration using your own credit card like some of the big guys (L.L. Bean, Eddie Bauer) do? Too late. Even Sears has sold its credit card division.
To understand why the demise of vertical integration is the latest hot topic we first have to agree on what it is. Robert H. Gertner's recent article in Capital Ideas, an e-newsletter from the University of Chicago's Graduate School of Business, offers this definition: “The vertical chain starts with the raw materials and ends with the consumer. Vertical integration is the extent to which there is a common ownership of various parts of that chain.” What he doesn't say, but is also true, is that the bottom line for being on the vertical integration bandwagon is to increase your company's strength through sales, buying power — whatever — in the marketplace.
The main reason integration has been considered a good thing to do is that the combined entities can do it better and cheaper than a supplier can.
Another big reason was an extension of the first two and goes something like this: Let's put these companies together, streamline operations and use the best of each other for fewer bucks overall. AOL/Time Warner comes to mind as a key example of how well that kind of thinking seems to be working in today's environment. On a smaller, closer-to-home scale, bet you can come up with at least 10 catalog companies who have bought other catalog firms, only to wind up with less than they began with. For instance, The Mark Group only recently shed all of its collection but one, Boston Proper.
Since vertical integration has been the be-all and end-all in business for many moons, why does it seem like it has become a seriously flawed business model? For starters, because many of us aren't doing it better or cheaper. Spiegel totally lost its direction. Montgomery Ward — once the catalog king — fell because “every classification that Ward's was in, somebody else was doing it better,” as National Real Estate Investor put it.
Trying to do too much, and not doing any of it well, has happened to too many catalogs. Ignoring the siren's call of vertical integration might be the way out of an enticing trap. In many cases, outsourcing many functions has become not only cheaper but also more professional. You think nothing of outsourcing security, cleaning, legal services, creative, printing and so on. But there's way, way more that should be considered.
Do you really need to manufacture that item yourself if the wonderful Internet now lets you search and find a reliable vendor who can do it for you with less risk, lower overall costs and better cash flow? Yes, you definitely want your own brand, but who says having your own unique merchandise means you have to actually make it yourself?
Do you really need to have billions of people sitting around waiting for the phones to ring when you can outsource your phone answering on demand for next to nothing? Offshore operations in the Philippines, India, China, Vietnam, Malaysia, Indonesia, Taiwan and even South Africa are growing quickly. Financial Times estimates that by 2005, “there may be as many as 35,000 outsourcing centers in action” in India alone. Wages are much lower, skills are high and local traditions often make retention and performance superior to that of the United States. It all translates to 40% to 50% lower cost, and sometimes better service.
If you outsource domestically or abroad, be certain you have your act cleaned up before you hand it off. Shuffling existing problems off to a new resource will only destroy your outsourcing plan before it begins. If you go offshore, Financial Times recommends making your choice based on “cost…the capabilities, skills and financial clout of local suppliers as well as factors such as physical proximity, shared time zones, languages, cultural affinity, regulatory environment and political and economic stability.”
The real potential problem for catalogers goes way beyond the symptoms of vertical integration breakdown that we see. It could be that our whole reason for being is based on obsolete consumer needs. “The Reader's Companion to American History” notes the following: “The mail order houses had an important influence on farm and rural living. Farmers…could turn to mail order houses for stylish goods and modern conveniences…The ability to buy goods by mail helped break down farm isolation and played a major role in homogenizing American society. But the relative importance of mail order houses began to decline in the late 1920s. Automobiles and improved roads made it easy for rural residents to travel.”
We temporarily solved that problem by coming out with “boutique” catalogs that catered to the millions of women who went into the work force and didn't have time to shop. They offered items that couldn't be found anywhere else, something that's no longer true today. Now we all look alike, talk alike and serve the customer with a numbing sameness. Maybe if we concentrated more on what we should be doing — marketing a distinctive presence — and less on vertical integration, we could recreate the catalog shopping mindset and actually experience something that American consumers feel is essential to their way of life.
Spend your money and time on the two keys to success, merchandise and marketing — what the product is, what the consumer thinks the product is, and what it brings to them. Let the specialists do the rest.
KATIE MULDOON is president of DM/catalog consulting firm Muldoon & Baer Inc., Tequesta, FL.
