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Coffee write: vertical integration


November 15, 2013
By Brian Martell

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Nov. 15, 2013, Canada – Brian Martell discusses vertical integration and how it should be avoided, despite its strong marketing lure of coffee served fresh.

Nov. 15, 2013, Canada – 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, or as the noted international business consultants, McKinsey and Company, point out: “where management’s reasons are spurious”.

In our industry, the vast majority of the players has gravitated to market niches or has expanded horizontally by offering new product lines. Some have attempted vertical integration, but few have succeeded.
The stratum of the coffee continuum involves with growers, processors, exporters, transporters, importer/brokers, roasters, distributors and service providers (OCS et al), and ultimately consumers. From 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) and 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 as well as market the “freshness” of your product. Several OCS providers bought into this idea, some even being provided with “free” roasting equipment in exchange for being contractually bound to buy green coffee from the equipment provider (taking a page from the OCS playbook on providing free brewing equipment).

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What quickly became apparent was 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. Parenthetically, if the OCS’s roaster-supplier is a roast to order operation, that marketing advantage evaporates completely.

In our experience, we have seen several OCS companies who 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 principle 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 dates after filling in quickly.


Brian Martell works at Heritage Coffee as vice-president of sales and has 21 years of industry experience. Brian has also been the recipient of three prestigious awards: the Don Storey, Stuart Daw, and the Albert DeNovelus Customer Service awards. Questions, comments, feedback, start a dialogue? E-mail him at brian@hertiage-coffee.com.


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