5. Vertical Integration
The fifth factor in the T Algorithm is the ability to control the
consumer experience, at purchase, through vertical integration.
All of the Four control their distribution. If they don’t produce the
product, they source it, they merchandise it, they retail it, and they
support it. Levi’s went from $7 billion to $4 billion from 1995 to 2005
because it didn’t have control of its distribution. Seeing Levi’s jeans
piled up as you walk through JCPenney’s is just not an aspirational
experience. Cartier has caught, or possibly surpassed, Rolex’s brand
equity by making a big bet on its in-store experience. It turns out that
where and how you buy a watch is as important as which tennis player
wears that watch. Maybe more.
The ROI of investing in the pre-purchase process (advertising) has
declined. That’s why successful brands are forward integrating—
owning their own stores or shopper marketing. I believe P&G will
begin acquiring grocery retail, as they must develop distribution that’s
growing, and not depend on Amazon, who is their frenemy... minus
the friend part.
Google controls its point of purchase. In 2000, Google was
growing so rapidly that Yahoo, the biggest search engine at the time,
bought the rights to offer Google search on Yahoo’s homepage. No
longer. Facebook obviously is vertical, as is Amazon. Neither produces
its own products, but other than sourcing and manufacturing, both
control their entire user experience. The biggest innovation for Apple
is considered to be the iPhone—but what put the company on track to
be a trillion-dollar company was the genius move into retail, usurping
control over its distribution and brand. A decision that, at the time,
made little or no sense.
A company has to be vertical to reach half a trillion dollars in
market valuation. That’s easier said than done, and most brands
leverage other companies’ distribution, as distribution is expensive to
build. If you’re clothing designer Rebecca Minkoff, you’re not going to
build your own stores beyond a dozen flagship locations around the
world; you don’t have that capital. Instead, you sell your products at
Macy’s and Nordstrom’s. Even if you’re Nike, it’s much more efficient
to sell through Foot Locker than to build your own stores.