Vertical integration is one of the biggest buzz words in business. It refers to companies that control as much of the product chain as possible by being involved in sourcing, manufacturing, distributing and selling. With the opening of their own retail stores De Beers is a prime example of vertical integration; controlling a diamond from the ground to the finger.
The first signs of vertical integration in the jewellery industry started around 10-15 years ago as manufacturers, suppliers and brokers discovered online selling. The ease of uploading an existing inventory database to a web site made setting up an online store a breeze. The margins at retail are much better. Even when reducing the retail price to beat the competition, there was more profit to be made.
At first, wholesalers that sold retail online did so in secrecy and under a different business name. It was considered unforgivable to work both sides of the street by selling wholesale and retail at the same time. Retailers were reluctant to buy from someone who is in competition with them. But for the wholesaler, online sales were a great way to supplement their cash flow with higher margin, pre-paid sales. Today manufacturers, dealers and wholesalers are much more open about their online selling and this trend is starting to intensify.Vertical integration can work in both directions. The 130 store Diamonds International, retail chain in the Caribbean, went the other way and became a sight-holder for both diamonds and tanzanite. They even produce a proprietary diamond cut, the “Crown of Light” and exclusive lines of jewellery that are only available in their retail stores. They demonstrate perfect vertical integration: sight holder, stone design, cutting, jewellery design, manufacturing, and retail.
You can use vertical integration in your own business to be competitive. Find ways to become your own source or manufacturer. Make as much of your jewellery as possible in-house or contract to a small factory to produce your own unique line. Buy over-the-counter from the public to source metals, stones and jewellery items that can be refurbished. Travel to gem shows and gem markets to source your gemstones. Build the mystique of travel and the cost savings into your marketing program to become “The Source” for jewellery in your area.
In my first retail store, a Gem and Mineral Gallery, we took it to the extreme. We mined, cut, designed, and produced more than 50% of our inventory. If needed we could have been self-sufficient without any outside suppliers. Our marketing featured our mining adventures. It allowed us to close the store for a few weeks at a time to travel for rocks and gems knowing that on our return, lines of people would be waiting for us to open and show off the new treasures.
Think about how you can expand vertically to control your own supply chain. Your suppliers are going to by-pass you and go retail, so you might as well by-pass them and be your own source.