PepsicoVertical Marketing Systems - 3 typesIn conventional marketing systems (non VMS),1.Corporate

A vertical marketing system (VMS) is one in which the main members of a distribution channel—producer, wholesaler, and retailer—work together as a unified group in order to meet consumer needs.  producers, wholesalers, and retailers are separate businesses that are all trying to maximize their profits. When the effort of one channel member to maximize profits comes at the expense of other members, conflicts can arise that reduce profits for the entire channel. To address this problem, more and more companies are forming vertical marketing systems.

A corporate vertical marketing system can be involved with the ownership that of the levels of distribution or production chain that is associated with a single company. An example for the corporate is Apple who is responsible for doing everything related with their products.

Apple Company has place for the designing and also the making of the products. These products that are made by the company are sold in the retailer shops of the company itself. They need not have to depend on any of the other people for the purpose of production or even selling of the products.

Administered Vertical Marketing System. a coordinated system of distribution channel organization in which the flow of products from producer to end-user is controlled by the power and size of one member of the channel system rather than by common ownership or contractual ties. Walmart and P&G utilize this type of system (detergents, etc.).

Contractual Vertical Marketing System (see 3 types of contractual below).

A contractual vertical marketing system is where firms at different levels of production and distribution work together to achieve greater economies or sales than they would on their own. These firms coordinate their strategies through contractual agreements in order to eliminate channel-conflict that may arise out of individual objectives. Conventional distribution systems (non VMS) seek to optimize individual profits regardless of consequences to members of the value chain. There are 3 types of Contractual below:

Wholesaler-Sponsored Vertical Marketing System

A chain of retailers organized by a wholesaler unite into a voluntary chain of stores. The stores are owned independently but they sign an agreement to work in the chain and they all agree to use the same name. The wholesaler buys large quantities of merchandize for the retailers, it ensures buying economically for products (and media), and enables this chain of retailers to compete with large organizations. A wholesaler-sponsored vertical system works to unite voluntary chains of stores to compete independently with large organizations. True Value Hardware is one example; IGA Grocers is another. The same concept works for manufacturers: For example, Pepsico's bottlers are part of a manufacturer-sponsored wholesaler.

Retailer Cooperatives

Retailers join together to organize a new wholesaling business known as a retailer cooperative. The new jointly owned wholesaling company renders their service to the members. The retail members must accept to purchase their goods from this wholesaler. The members in the retail organization use a name that is common among all of the retailers so that they can have their own private product brands and jointly advertise their brands. For example, retailer cooperatives are popular in food industries corporations.


A franchise is a contractual company that makes an arrangement between a franchisor, a parent company, and a firm or an individual; a franchise allows the franchisee to run a business under the parent companies name. This franchisee must follow the rules of the franchise and is granted rights to sell certain goods and services in their specific area. The franchise obtains distribution at the retail level and through their dealers, but maintains control over how the service will be merchandised. For example, Ford Motor Company is a manufacturer-sponsored retail franchise system. Dunkin Donuts, McDonald's, Liberty Tax are examples of service franchises.

Please see the video (cut/paste). Watch here:

Answer the following questions:

1. What is a vertical marketing system? What are the benefits to channel members (manufacturers, wholesalers, retailers)?

2. Pepsico is a manufacturer of syrup and a marketing company - they use bottlers to make, stock, and distribute beverages. Identify the distribution channel members and the types of distribution 'formats' mentioned in the video. How does this distribution system align with Pepsico's market demand?

3. See the attachment for Vertical Marketing Systems. What type of VMS does Pepsico use? Justify your answer based on the reading.

Answer & Explanation

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