Vertical Marketing Systems

One of the most significant recent channel developments is the rise of vertical marketing systems. A conventional marketing channel comprises an independent producer, wholesaler(s), and retailer(s). Each is a separate business seeking to maximize its own profits, even if this goal reduces profit for the system as a whole. No channel member has complete or substantial control over other members.

A vertical marketing system (VMS), by contrast, comprises the producer, wholesaler^), and retailer(s) acting as a unified system. One channel member, the channel captain, owns the others or franchises them or has so much power that they all cooperate. The channel captain can be the producer, the wholesaler, or the retailer. VMSs arose as a result of strong channel members' attempts to control channel behavior and eliminate the conflict that results when independent channel members pursue their own objectives. They achieve economies through size, bargaining power, and elimination of duplicated services. VMSs have become the dominant mode of distribution in the U.S. consumer marketplace, serving between 70 percent and 80 percent of the total market. There are three types of VMS: corporate, administered, and contractual.

^ A corporate VMS combines successive stages of production and distribution under single ownership. Vertical integration is favored by companies that desire a high level of control over their channels. For example, Sears obtains over 50 percent of the goods it sells from companies that it partly or wholly owns; Sherwin-Williams makes paint but also owns and operates 2,000 retail outlets.

^ An administered VMS coordinates successive stages of production and distribution through the size and power of one of the members. Manufacturers of a dominant brand are able to secure strong trade cooperation and support from resellers. Thus Kodak, Gillette, Procter & Gamble, and Campbell Soup are able to command high levels of cooperation from their resellers in connection with displays, shelf space, promotions, and price policies.

^ A contractual VMS consists of independent firms at different levels of production and distribution integrating their programs on a contractual basis to obtain more economies or sales impact than they could achieve alone. Johnston and Lawrence call them "value-adding partnerships" (VAPs).15 Contractual VMSs are of three types:

1. Wholesaler-sponsored voluntary chains organize groups of independent retailers to better compete with large chain organizations. Wholesalers such as Drug Guild work with participating retailers (for Drug Guild, independent pharmacies) to standardize their selling practices and achieve buying economies so the group can compete effectively with chain organizations.

2. Retailer cooperatives arise when the stores take the initiative and organize a new business entity to carry on wholesaling and possibly some production. Members of retail cooperates such as ServiStar concentrate their purchases through the retailer co-op and plan their advertising jointly; profits are passed back to members in proportion to their purchases.

3. Franchise organizations are created when a channel member called a franchisor links several successive stages in the production-distribution process. Franchises include manufacturer-sponsored retailer franchises (the way Ford licenses dealers to sell its cars); manufacturer-sponsored wholesaler franchises (the way Coca-Cola licenses bottlers—who are wholesalers—to buy its syrup concentrate and then bottle and sell it to retailers); and service-firm-sponsored retailer franchises (the way Hertz licenses participating auto-rental businesses).

Continue reading here: Conflict Cooperation and Competition

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