What is vertical integration?
Vertical integration is a business strategy where a company expands its operations into different steps in the same value chain. For example, a manufacturer might begin to supply raw materials, distribute its products, or open retail stores. In multifamily, this means performing multiple functions, such as both owning and operating the property, as opposed to hiring a third-party property manager. This strategy offers various advantages to enhance the competitiveness of the company.
What are the advantages of vertical integration?
1. Cost Control
One of the most significant advantages of vertical integration is cost reduction. By performing functions itself, a company can eliminate the markup that would typically be applied by suppliers and intermediaries. This cost saving on procurement of raw materials and distribution channels can lead to lower overall renovation costs, increasing profit margins. Arlast utilizes its internal procurement function to acquire materials at a discount to standard retail and wholesale pricing.
2. Enhanced Supply Chain Coordination
Vertical integration allows us greater control over our supply chain, reducing uncertainties related to the availability and delivery of renovation and repair materials. By storing materials locally, we offer same-day delivery of replacement parts. Vertical integration also allows us to ensure high quality materials are used in our projects versus relying on outside assurances.
3. Diversification of Revenue Streams
Vertical integration allows us to diversify our revenue by performing multiple functions that have different levels of risk and reward. By including steadier cash flows from businesses like property management, it allows us to reduce the risk of relying only on performance fees. This allows us to regularly compensate staff and ensure the stability of the company across economic cycles.
4. Faster Innovation and Increased Agility
We can communicate more easily within our affiliated companies than with external entities. This allows us to more quickly design and implement new innovations. With control across all functions, we can respond more quickly to market changes and technological advancements, keeping the company agile and ahead of the competition.
5. Improved Investor and Customer Service
Our incentives are aligned across the company and there is no outside party to blame for any issues, allowing us to provide better service to our stakeholders. Our vertical integration allows us to receive feedback from investors or tenants and immediately make changes in our asset management or construction functions. This helps to ensure a quality experience, increasing lease renewals or repeat investments.
6. Secured Access to Inputs and Services
Vertical integration secures access to critical inputs and services, which can be particularly advantageous in volatile economic environments or when resources are scarce. For example, by performing construction in-house, we are not subject to wait times during busy periods.
Arlast Capital’s vertical integration is core to its ability to generate superior returns for investors by providing advantages in cost, coordination, diversification, speed, service, and access. For more information about our capabilities, register for our investor portal.
