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Why Store Brand Penetration Varies by Retailer

Listed author(s):
  • Sanjay K. Dhar

    (Graduate School of Business, University of Chicago, Chicago, Illinois 60637)

  • Stephen J. Hoch

    (The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

Registered author(s):

    Our objective in this paper is to explain across-retailer variation in private label performance. Although retailers have lots to gain by better understanding the determinants of successful store brand programs, this knowledge also is very valuable to manufacturers. Lessons learned from competing with other national brands may not transfer one-to-one to the store brand case because, quite simply, a popular private label program changes the status of the retailer from being solely a customer to also a competitor. When customers are competitors, standard predatory tactics may not be appropriate; instead there is a premium on creating a successful basis for coexistence. Our findings from this study are therefore expected to have a broad based appeal both to practitioners and academics working in the evolving area of store brands. Store brands are the only brand for which the retailer must take on all responsibility—from development, sourcing, and warehousing to merchandising and marketing. Unlike decisions retailers take about national brands, which in large measure are driven by the manufacturer's actions, the retailer plays a more determinant role in the success or failure of its own label. Based on data from 34 food categories for 106 major supermarket chains operating in the largest 50 retail markets in the U.S., we use regression-based analyses to show that variation in store brand performance across retailers is systematically related to underlying consumer, retailer, and manufacturer factors. The key insights provided by our analysis are as follows: (1) Overall chain strategy in terms of commitment to quality, breadth of private label offerings, use of own name for private label, a premium brand offering, and number of stores consistently enhance the retailer's store brand performance in all categories. Also, the extent to which the retailer serves a customer base containing less wealthy and more elderly households and operates in less competitive markets improves the performance of the store brand. (2) The everyday low price (EDLP) positioning benefits the store brand but only in lower quality categories where the value positioning of the store may be better aligned with the price advantage of the store brand. (3) Supporting recent statements in the popular press, our analysis suggests that retailer promotional support can significantly enhance private label performance. (4) Retailers often use national brands to draw customers to their stores. Retailers who pursue this traffic building strategy usually carry more national brands, deeper assortments, and offer better everyday (lower price gap) and promotional prices on national brands. Each of these actions works against the retailer's own brands, highlighting the important balancing act the retailer must perform to profitably manage the sales revenue and margin mix in each of their categories. At the same time, adding a higher quality premium store brand program may mitigate this tradeoff. (5) Unlike cross-category studies, our within-category across-retailer analysis shows that the national brand—private label price differential exerts an important positive influence on store brand performance. (6) When retailers obtain more than their fair share of a category (high category development index), they also do much better with private labels. (7) From the national brand's perspective, encouraging the retailer to carry more brands and deeper assortments may be the most effective way to keep store brands in check. The importance of these variables, however, may depend on the national brand's market position. For example, a category leader may be glad to see a rise in store brand share if it comes at the expense of one of its secondary national brand competitors. (8) The exact impact of most of the variables depends on the underlying quality of store brands in a category. When store brand quality is high, competition at the retail and brand level is more important, as are variables capturing economies of scale and scope enjoyed by the retailer. In contrast, demographics associated with consumer price sensitivity and EDLP pricing matter more in low quality categories. (9) Finally, premium store brands offer the retailer an avenue for responding to the national brand's ability to cater to heterogeneous preferences. This appears more likely in categories where store brands already offer high quality comparable to the national brands. We argue that private labels threaten national brands most in categories when there is high variance in share across categories (as opposed to high average share per se). In high variance categories, store brand share could increase dramatically if the poor performing retailers imitate best practices. Future research can extend this work in several ways both on the substantive and methodological fronts.

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    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 16 (1997)
    Issue (Month): 3 ()
    Pages: 208-227

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    Handle: RePEc:inm:ormksc:v:16:y:1997:i:3:p:208-227
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