Channel Arrangements: Dependent
Under this arrangement a channel member feels tied to one or more members of the distribution channel. Sometimes referred to as "vertical marketing systems" this approach makes it more difficult for an individual member to make changes to how products are distributed. However, the dependent approach provides much more stability and consistency since members are united in their goals. The dependent channel arrangement can be broken down into three types:
Under this arrangement a supplier operates its own distribution system in a manor that produces an integrated channel. This occurs most frequently in the retail industry where a supplier operates a chain of retail stores. Starbucks is a company that does this. They import and process coffee and then sell it under their own brand name in their own stores. It should be mentioned that Starbucks also distributes their products in other ways, such as through grocery stores and mail order. As we will see in more detail later, Starbucks is using a multi-channel structure to market their products.
Under this arrangement a legal document obligates members to agree on how a product is distributed. Often times the agreement specifically spells out which activities each member is permitted to perform or not perform. This type of arrangement can occur in several formats including:
- Wholesaler-sponsored – where a wholesaler brings together and manages many independent retailers including having the retailers use the same name
- Retailer-sponsored – this format also brings together retailers but the retailers are responsible for managing the relationship
- Franchised – where a central organization controls nearly all activities of other members
In certain channel arrangements a single member may dominate the decisions that occur within the channel. These situations occur when one channel member has achieved a significant power position. This most likely occurs if a manufacturer has significant power due to brands in strong demand by target markets (e.g., Procter &Gamble) or if a retailer has significant power due to size and market coverage (e.g., Wal-Mart). In most cases the arrangement is understood to occur and is not bound by legal or financial arrangements. (More discussion on channel power can be found below.)