246 CHAPTER13 SELECTING ANDMANAGINGMARKETINGCHANNELS
Vertical Marketing Systems
One of the most significant recent channel developments is the rise of vertical mar-
keting systems. A conventional marketing channelcomprises 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.
Avertical marketing system (VMS), by contrast, comprises the producer, whole-
saler(s), 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 cooper-
ate. 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 elimina-
tion 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.➤ Acorporate VMScombines 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.
➤ Anadministered VMScoordinates 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.
➤ Acontractual VMSconsists 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 chainsorganize 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 cooperativesarise when the stores take the initiative and organize a new busi-
ness 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 mem-
bers in proportion to their purchases.
3.Franchise organizationsare created when a channel member called a franchisorlinks
several successive stages in the production-distribution process. Franchises
includemanufacturer-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).