Lincoln Watase, CEO and President of Yum Yum Donut Shops, lists the different ways that vertical integration helps a business maximize their profit opportunities, control the quality of the supplies, and diversify business risk.
Yes, vertical integration has worked well; it's an important part of what we do. It starts with our donut shops, which are supplied by our distribution system, which is supplied in part by our bakery mixed manufacturing system. Each system is a separate profit center. This allows us to better track that segment’s performance, as well as the employees in each segment can focus on that segment’s performance as well. Vertical integration allows us to maximize profit opportunities. In addition to retail profits at the shops, we also enjoy the distribution and manufacturing profits on the supplies used at the shops. Vertical integration allows us to control the quality of the supplies used at the shops. For our bakery mixes, we know exactly what ingredients and what processes were used. We know how those products were stored and delivered. In addition, we can easily modify formulas to improve product performance or roll out new products. Vertical integration diversifies business risk. A downturn in retail sales can be partially offset by our distribution and manufacturing sales. In short, we're better able to weather economic downturns. The key to our vertical integration is having enough shops, or volume, to justify the initial investment and ongoing overhead of maintaining our own distribution and manufacturing companies.