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Companies seeking to reduce distribution costs and gain greater control over supply sources or resale of
their products pursue forward and backward integration. However, both types of integration increase a
company's capital investment and fixed costs. For this reason, many companies favor contractual vertical
marketing systems to achieve channel efficiencies and marketing effectiveness.
Contractual Systems
Under a
contractual vertical marketing system,
independent production and
distribution firms integrate their efforts on a contractual basis to obtain greater functional economies
and marketing impact than they could achieve alone. Contractual systems are the most popular among
the three types of vertical marketing systems.
Three variations of contractual systems exist.
Wholesaler-sponsored voluntary chains
involve a
wholesaler that develops a contractual relationship with small, independent retailers to standardize and
coordinate buying practices, merchandising programs, and inventory management efforts. With the
organization of a large number of independent retailers, economies of scale and volume discounts can
be achieved to compete with chain stores. IGA and Ben Franklin variety and craft stores represent
wholesaler-sponsored voluntary chains.
Retailer-sponsored cooperatives
exist when small, independent
retailers form an organization that operates a wholesale facility cooperatively. Member retailers then
concentrate their buying power through the wholesaler and plan collaborative promotional and pricing
activities. Examples of retailer-sponsored cooperatives include Associated Grocers and Ace Hardware.
The most visible variation of contractual systems is franchising.
Franchising
is a contractual arrangement
between a parent company (a franchisor) and an individual or firm (a franchisee) that allows the
franchisee to operate a certain type of business under an established name and according to specific
rules.
Four types of franchise arrangements are most popular.
Manufacturer-sponsored retail franchise
systems
are prominent in the automobile industry, where a manufacturer such as Ford licenses dealers to
sell its cars subject to various sales and service conditions.
Manufacturer-sponsored wholesale franchise
systems
exist in the soft-drink industry. For example, Pepsi-Cola licenses wholesalers (bottlers) that
purchase concentrate from Pepsi-Cola and then carbonate, bottle, promote, and distribute its products
to retailers and restaurants.
Service-sponsored retail franchise systems
are used by firms that have
designed a unique approach for performing a service and wish to profit by selling the franchise to others.
Holiday Inn, Avis, and McDonald's represent this type of franchising approach.
Service-sponsored
franchise systems
exist when franchisors license individuals or firms to dispense a service under a trade
name and according to specific guidelines. Examples include Snelling and Snelling, Inc. employment
services and H&R Block tax services.
