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Page 415Companies 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 SystemsUnder 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 chainsinvolve 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 cooperativesexist 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. Franchisingis 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 systemsare prominent in the automobile industry, where a manufacturer such as Ford licenses dealers tosell its cars subject to various sales and service conditions. Manufacturer-sponsored wholesale franchise systemsexist 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 systemsare 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 systemsexist 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.