why integrate backward so late in the product life cycle?

Question

The supermarket industry in north America is brutally competitive some retailers are inverting heavily in creating their own brands, private labels. The limited distribution of these brands makes it uneconomical to match the national brands massive promotional campaigns, and these brands have built formidable brand equity over the decades. It would seem, a folly to enter their markets, not to mention the negative effect on trade relations of competing with one's own suppliers. why integrate backward so late in the product life cycle?

Answer 1

The supermarket industry is, for the most part, a mature industry. The industry went through the classic growth life cycle. When domestic store growth stagnated, they grocers tried to boost same-store sales by offering more services (e.g. organic produce, dry-clean pickup, upgraded deli/wine sections). After competitors essentially matched these moves, the return on investments for these revenue enhancers fell.

Where does one go when there are fewer revenue opportunities? Cut costs. You're starting to see an erosion of low turnover/loss generating SKUs, evolution of self-checkout and push toward more private label goods.

Margins on name-brand grocery items are quite low. Some margin can easily be picked up by offering private label brands, which retails for less but costs even less to produce. While grocers can hurt their vendor relations by offering a wider selection of private label, that's where the money is. In short, the backward integration is the classic move of a mature industry - cost focus (because revenue growth is not an option).