Vertical integration. Sounds expensive. So does horizontal integration, for that matter.
But when a business needs to find new opportunities, often those opportunities are right on the doorstep. And integration, whether vertical or horizontal, isn’t just for big companies with deep pockets. A
ny size firm can use that strategy to grow.
Vertical integration involves analyzing your supply chain to find better, more efficient access to the raw materials and supplies that are used to create your products.
It’s basically putting those materials or supplies under one ownership.
The real question is whether your business has the wherewithal to take on another segment of your supply chain.
Horizontal integration seems a bit less intrusive.
That strategy usually involves finding new or untapped markets for your existing products. In simple terms, a business may expand its geographic reach and open new stores, or it looks to sell goods directly through a website.
Horizontal integration also often describes a business’ expansion through purchase of additional locations, including a similar business that is struggling and looking to be bought out. In fact, sometimes opportunity will find you.
We’ve been watching how one local entrepreneur has stayed competitive over the years.
Christian Kar, CEO of Silver Cup Coffee, has been successful in business, even during tough economic times.
He started his business enterprise with one drive-through coffee stand in 1990. The business was named Espresso Connection. Timing is everything in the coffee stand business, and Kar, having started early in the drive-through coffee craze, was able to build the business to 18 formidable locations, with most in Snohomish County. Yet as competition and market saturation were beginning to affect the business with diminishing returns, Kar decided to evaluate other opportunities.
We asked Kar how he developed his business philosophy and strategies.
“It’s all about the beans!” Kar said. “We needed to get connected with a roaster in hopes of improving our margins by purchasing directly from the source.”
This brainstorm strategy of vertical integration would ultimately cut out a middleman supplier. Kar later learned that the roaster/manufacturer would only work through distributors and not directly with a retail chain. So Kar then had to create a distributorship operation that would satisfy the supplier. He created a new and separate business unit: Silver Cup Coffee.
Running the two business units proved profitable and saved Espresso Connection plenty of money. But then came another opportunity whereby Kar envisioned roasting his own coffee, eliminating another link in the Silver Cup supply chain. In 1996, Silver Cup began a micro-roasting coffee business in Everett: a new brand was born.
“In business, it’s important to get a few good breaks,” said Kar. “When we were invited to enter the Northwest Taste Micro-roaster Competition (The McCormick and Schmick’s Cup) we were elated to come away with first place in our second year of competition. That endorsement proved to us that we were on a winning track. Our product was recognized as award-winning and worthy of notice.”
Yet with economic challenges and a shift from running coffee stands to a greater focus on the wholesale and roasting business, Kar realized that he needed to make some moves to keep business growing. Growing actually involved downsizing retail and selling off some of the stands.
More recently, Kar found another opportunity that made business sense. After the Tully’s Coffee location in downtown Everett decided to close its doors, Kar looked at the retail side of Silver Cup Coffee with a fresh perspective and created Silver Cup’s first coffeehouse.
“Visibility is important; so, too, is daily cash flow,” Kar said. “While our wholesale business is strong and sound, there’s something to be said about the benefit of having daily receipts.”
This horizontal integration strategy provided Silver Cup the company’s first and finest retail position where customers can sit and enjoy their coffee indoors. They’re promoting their business just up the street from Starbucks.
While Kar has no delusions of ever growing Silver Cup to compete with a national chain, he sees a great future for Silver Cup simply doing things they do well and applying strategy that keeps the business fleet and nimble.
Pat Sisneros is the vice president of college services at Everett Community College. Juergen Kneifel is an associate faculty in the EvCC Entrepreneurship program. Please send your comments to entrepreneurship@everettcc.edu.
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