KANSAS CITY, Mo. – Backward integration, which is a form of vertical integration, isn’t new. But the use of backward integration by Walmart Inc. and Costco Wholesale to source animal proteins is potentially disruptive in the retail industry.
This tweak in supply chain management strategy started with Costco announcing the construction of a company owned poultry processing plant and continued with Walmart creating its own supply chain for sourcing Angus beef. Walmart is well-versed in backward integration — in 2018, the company opened a 250,000-sq.-ft. milk bottling plant in Fort Wayne, Indiana, to supply private-label milk to hundreds of Walmart stores. But backward integration of a supply chain for animal proteins is a unique approach for retailers, said Jeremy Scott, Restaurant and Proteins analyst at Mizuho, a financial services company.
MEAT+POULTRY asked Scott for his thoughts on backward integration and factors driving Walmart and Costco to adopt it as a business strategy.
MEAT+POULTRY: What is “backward integration”?
Jeremy Scott: Backward integration is when a company invests backwards into its supply chain, usually in an effort to control costs by removing the middlemen or to secure supply.
M+P: What are the risks and rewards in doing this?
Jeremy Scott: Risks are the introduction of new variables into the system that may add complexity to the model. Rewards are removing the margins that your suppliers commanded, enabling you to pass along the savings to customers.
M+P: Why are Costco and Walmart trying this strategy?
Jeremy Scott: For Costco, it’s an attempt to capture new efficiencies and extract supply chain savings on a high-volume product. For Walmart, it’s an attempt to build a differentiated brand under the Wal-Mart label. Because of the fragmentation of the beef supply chain, it’s difficult to track the cattle from calf to slaughter and therefore securing beef raised without antibiotics or growth agents has been a major challenge. This closed loop that Walmart is attempting to build is unique and will give them a marketing edge.
M+P: Is this a legitimate trend or experimentation? Why or why not?
Jeremy Scott: Costco is investing up to $400 million and rumors are there are plans for another chicken plant, so it’s a legitimate investment. Is it a legitimate trend? It’s something to be watched but I’m leaning no. Ag processing is a high investment cost, low return, labor-intensive, high-risk endeavor, and that’s why the industry is so consolidated. Consider the retail CFO presented with the ROIC [return on invested capital] profile of an agriculture investment pitted against other projects like building digital assets or building new stores or renovating existing ones. It likely drops down pretty low on the list.