Vertically Integrated Commerce

Recently Tech Crunch had an article by Boris Wertz that started by claiming that there “has been more e-commerce innovation during the past year than there has been during the last decade.” I’d probably agree, as we’ve seen emerging business models, rising m-commerce execution, and an ever-accelerating consumer acceptance of online shopping. The article goes on to raise the idea of vertically integrated commerce and explain why it’s the new frontier.

Wertz also mentions the better prices and margins angle, but by this stage that is just a given in the e-commerce world. Retailers who don’t understand how to price for the online world are consistently shown up by their more savvy competitors. The more vital parts of this article are the mention of barriers to entry and brand building.

Vertical Integration

It’s an interesting and timely article, but in reality vertically integrated businesses are not a revolutionary an idea - at the base it is just the same idea as everyone already knows from offline business: build barriers to entry to create competitive advantage. Indeed the article author Boris Wertz acknowledges that for all the difficulties of establishing the vertically integrated business, the main advantage is the barrier to entry: “this means that once a vertically integrated company makes it, they’re less likely to be uprooted by the latest up-and-comer”.

These ideas, while not necessarily breaking new ground, are part of the evolution of e-commerce, from simply selling things efficiently online, to building sustainable and growable businesses. The skills needed to sell online, and the skills needed to establish vertically integrated businesses are in many ways disconnected currently; you would be lucky to find someone who can explain how to effectively optimise search engine ranking while also negotiating with a manufacturer over a new design. Of course, you don’t need those skills in one person, but you do need the end to end understanding to build a succesful vertically integrated business.

Building Brands

The other major point of interest in Wertz’s article is the idea of building brands. In a similar vein, a brilliant article by Lawrence Lenihan popped up last week, expounding the shift occurring where brands will increasingly engage directly with consumers, leaving less room for retailers, and highlighting the importance of building strong brands:

I’m also putting my money behind retailers who recognise that brands can and will go directly to their customers and rather than try to fight and prevent them from doing so, are creating platforms that enable brands to build and strengthen their relationship with their customers

In particular, Lenihan is putting his money where his mouth is and is investing in companies that are vertically integrated and have a strong sense of enduring brand.

Opportunities In Ecommerce Right Now

For mine, the biggest opportunities in ecommerce right now are exactly in the intersection of these two articles: vertically integrated businesses that understand building a brand online (whether there is an offline component or not). Brands like Warby Parker, and locally in Australia Sneaking Duck and Shoes of Prey, are gaining an advantage right now by executing on this strategy. Who will be next?