Raising rivals’ costs or improving efficiency? An exploratory study of managers’ views on backward integration in the grocery market

Abstract

Large retail grocery chains’ backward integration into distribution, procurement and production is controversial, and has received a lot of attention by both policy makers and market players. If a large retail chain for instance takes over scale intensive distribution activities to its own outlets from some suppliers, direct distribution from these suppliers to other retail chains might become more expensive (and could even initiate costly industry-wide backward integration). An interesting question is thus whether large retailers undertake backward integration mainly for efficiency reasons or whether they do so in order to gain a competitive advantage through raising the costs of the smaller rivals. Theory and econometric analyses are inconclusive. The current study uses semi-structured interviews to investigate managers’ views on this issue, and does not formally test different theories. However, the results clearly indicate that large retail chains gain a competitive advantage if they choose to backward integrate, but that their main motivation for choosing this strategy is to increase channel efficiency.