Vertical integration is a business growth strategy that is employed when expanding a business in a ‘vertical direction’. This refers to taking over business that is part of the supply chain. So thinking in terms of growing vertically downward a business would grow vertically by taking over the business of a supplier. Growing vertically upward would involve taking over business of a customer. There are many different opportunities for vertical growth in the automotive repair business. The efforts and level of investment will vary in size as will the potential increase in sales and profits. Following are examples of potential vertical growth opportunities in auto repair:
- Sublet Services – Services that are outsourced to another business are usually based on the level of investment involved versus the potential sales volume. Another business may own certain diagnostic, alignment, tire mounting and balancing or towing equipment that a shop only has minimal demand for. Or services may be outsourced based on technical expertise that another business has. Achieving growth through bringing these services in house is akin to a business startup. The advantage a shop has with sublet services is a good picture of potential market size. If there is enough demand to justify the initial investment with a reasonable return on investment and projected breakeven point then the decision is much easier. If not, then some level of marketing investment will be required in order to achieve the desired sales volume. An important consideration in this area is that in vertical growth you will become a competitor of your supplier.
- Parts – Replacement parts are a major part of the supply chain in automotive repair. Becoming a parts distributor is a potential area for outgrowth however it involves investment in the purchase, storage and management of parts inventory. If there is a market for parts and distribution can be profitable then not only can revenue be generated through part sales but lower costs for the repair operation can be realized.
- Automobile Sales – Often auto repair shops provide services to car dealerships. This type of relationship is quite prevalent with tire shops. Moving into the vehicle sales area would be an example of upward vertical growth. In auto repair sales the vehicles are viewed as inventory thus the basis of the business is similar to parts distribution in that costs are based on the purchase, storage and management of vehicle inventory. The advantage to an auto repair shop is in the lower cost in preparation of vehicles for sale. The shop can perform this function itself.
