National Brands Fight Private Labels

¶ … National Brands Fight Private Labels and How is this Competition

The reported study in this work examines the problem concerning the complexities in understanding precisely how National Brands (NBs) can effectively compete against Private Labels (PLs) in the marketplace and focuses on comprehending exactly how retailer and category characteristics affect competition between the PLs and NBs. Research questions in this study are those of: (1) 1. What factors influence the success of a private label brand?; (2) How do category characteristics moderate the relationship between these factors and National Brand success?; and (3) How do retailer characteristics moderate the relationship between these factors and National Brand success? The methodology employed in this study is one of a qualitative nature and in the form of a review of literature in this area of study. Qualitative study is interpretive and descriptive in nature. This study will conclude by answering each of the questions in this study and will state a summary of the findings and a conclusion followed by recommendations for future research.

HOW CAN NATIONAL BRANDS FIGHT PRIVATE LABELS and HOW IS THIS COMPETITION AFFECTED by RETAILER- and CATEGORY CHARACTERISTICS?

CHAPTER ONE - INTRODUCTION

Statement of the Problem

There are complexities in understanding precisely how National Brands can effectively compete against private labels in the marketplace and comprehending exactly how retailer and category characteristics affect competition between the private label and national brands.

Research Questions

The questions addressed in this research are those as follows:

1. What factors influence the success of a private label brand?

2. How do category characteristics moderate the relationship between these factors and National Brand success?

3. How do retailer characteristics moderate the relationship between these factors and National Brand success?

Methodology

The methodology employed in this study is one of a qualitative nature and in the form of a review of literature in this area of study. Qualitative study is interpretive and descriptive in nature.

Organization of the Remainder of the Study

Chapter two of this study will be comprised by a review of literature while Chapter Three will address the question of 'What factors influence the success of a private label brand?'. Chapter Four will address the question of 'How do category characteristics moderate the relationship between these factors and National Brand success?' And Chapter Five will address the question of 'How do retailer characteristics moderate the relationship between these factors and National Brand success?' Chapter six will conclude this study with a summary, conclusion and recommendations for future research.

CHAPTER TWO -- LITERATURE REVIEW

Literature Review

The work of Steiner (2004) entitled: "The Nature and Benefits of National Brand/Private Label Competition" is a historical study "of the nature of the competition between the leading national brands (LNBs) of manufacturers and the private label brands (PLs) or large retailers. Reported is an upward trend in private labels (PLS) share and that these shares are growing and it is related that the work of Hoch et al. (2002) states findings that "in 86% of the 225 categories sold in these retail outlets, PLs dollar market share had trended upward, on average about 1 percentage point per year during the 1987-1994 period. (Steiner, 2004, paraphrased)

The stated PL share in apparel for 2000 is stated at 36%., (Setlow, 1998, as cited in: Steiner, 2004) and in 1997 through 1998 athletic shoes PL dollar share was 33%. (Steiner, 2004) Categories such as "hard goods" categories are reported much more complex to understand and difficult to locate. It is related that when private labels first entered the supermarkets that they always priced themselves at lower prices than major national brands and that this is interesting because "fifty years later, few if any retailers price their private labels at the same price as their national brands." (Steiner, 2004)

In fact, the average gap between PLs and NBs is approximately 40% "with a wide cross-category range of 20% to 60%." (Steiner, 2004) a survey is reported by Steiner that states findings that when 57 chains were asked concerning their % retail gross margins (RGMs) were noted to have stated that "their RGMs were higher on their PL brands" while four stated that the margins were about the same and none stating that they were actually lower. The studies conclusion was "that RGMS of PLs are systematically higher than those of LNBs." (Steiner, 2004)

The central thesis stated by Steiner (2004) is that the NB/PL competition "is a unique and welfare-enhancing type of rivalry" however in some categories "competition is being replaced by collusion orchestrated by the category captain of the LNB's firm." (Steiner, 2004) Steiner states that category management "is a pervasive, new horizontal/vertical format in which major supermarkets, drug chains, mass merchandisers and other types of retailer appoint a category captain from leading branded manufacturer whose responsibility is to develop a category plan that lays out for the retailer the items he should stock and how to price and display them." (Steiner, 2004) in its 'weakest form' these suggestions are offered as mere advise however in their strongest form these suggestions are in actuality commands and thereby efficiencies are achieved via category management which has simultaneously produced "several types of anticompetitive effects, including taking control of the retailer's private label program." (Spring, 1990, as cited in Steiner, 2004) This is what is often referred to as 'price-fixing'.

The work of Sinha and Batra (1999) entitled: "The Effect of Consumer Price Consciousness on Private Label Purchase" relates that there have been several explanations given to support the success and growth of PLBs or 'private label brands' as they have been remarkable in Western Europe and North America however, they state as well that one important factor has "not been adequately highlighted…the role of consumer price consciousness and consequent consumer resistant to the prices of national brands." (Sinha and Batra, 1999)

The work reported by Sinha and Batra (1999) is one that formulates a framework which assists in gaining comprehension the price consciousness of consumers and specifically in terms of the variations that ensue "across product categories" and how this ultimately affects the consumer purchase and finally reports calibration of that model on the basis of "category-level field data." (Sinha and Batra, 1999) Sinha and Batra state that private label brand "(PLB) penetration is quite high in many Western European countries, particularly in the UK, Switzerland and Germany" and they cite the work of Steenkamp and Dekimpe (1997).

Additionally it is related that in these locations the market shares fall in a range of 30% and 40%. (Sinha and Batra, 1999) Record highs in the U.S. For sales of PLBs "in supermarkets and drugs stores…." (Sinha and Batra) Lewis (1998) reports that the market share rose to 20% in 1997. (as cited in Sinha and Batra, 1999) Recent support has been stated for the belief that factors including "improved PLB product quality, increased retailer power and decreased national brand innovation and advertising" are the reasons for the PLBs success. (Hoch and Banerji, 1993; Krishnan and Soni, 1997; Mela, et al., 1998 as cited in: Sinha and Batra, 1999)

These are important factors it is true in understanding the growth of PLBs however "…one relatively less researched factor in this academic literature has been the possible role of greater price consciousness among consumers. PLBs are typically 15% -- 40% cheaper than national brands" according to Sinha and Batra (1999) and cited in the work of Ashley (1998). Added is that PLB growth "arguably suggests greater price consciousness among consumers." (Sinha and Batra, 1999)

Omar (1994) reported industry survey from British consumers relating to the British industry in which consumer skepticism toward national brand prices were expressed as well as a preference "for cheaper store brands." (as cited in Sinha and Batra, 1999) British supermarket prices have been reported by MacShane (1998) to be the reason for consumer "outrage and resentment" due to high prices. (Sinha and Batra, 1999; paraphrased) Price consciousness has been shown to clearly vary across categories therefore Sinha and Batra report examining "several consumer-level antecedent factors, instead of on factors from the supply side." (1999)

It is necessary to define price consciousness in this study and this is stated by Sinha and Batra (1999) to be defined "…in the marketing literature in slightly different ways, including a buyer's 'unwillingness' to pay a higher price for a product' citing Lichenstein et al. (1993)." Sinha and Batra relate that since the focus or concern is with "inter-category variations in such price consciousness, and the possible reasons for these variations" the definition to be used is "a consumer's reluctance to pay for the distinguishing features of a product is the price difference for these features is too large." (Monroe and Petroshius, 1989, as cited in Sirha and Batra, 1999) This definition is preferred since the "phrase 'too large' suggests that the consumer 'trades off' the higher price with potential benefits such as the increase in quality or the reduction in risk that might accompany that higher price." (Sinha and Batra, 1999) Additionally the phrase "distinguishing features" is stated to possibly be inclusive of the 'brand name of the national brand'." (Sinha and Batra, 1999)

Sinha and Batra state that "most researchers now content that a generalized price -- quality relationship does not exist" although the "degree to which a higher price implies higher quality" has been examined and as well has been the "topic of considerable research in marketing." (1999) Therefore for the purpose of this study this antecedent relating to price consciousness will not be a variable in understanding the questions posed in this study.

Sirha and Batra (1999) state that this inference "is widely accepted as being context-specific, moderated by situational characteristic such as the extensiveness of a consumer's cognitive schemes and his/her product class knowledge" and cite the work of Peterson and Wilson (1985). Therefore, it can be understood that while the consumer might believe that a higher price being paid obtains the same equal receipt of quality in some categorical purchases but yet not in others. Each consumer is required to make trade-offs relating to price-quality factors and the category might well impact the consumer's decision to make certain trade-offs or alternatively the category might serve to dissuade the trade-off in which quality is reduced due to a reduction in price for that product.

The first hypothesis stated by Sinha and Batra is: "All else being equal, consumers will be more price consciousness in product categories where they perceive a lower perceived price -- quality association." (2008) the second hypothesis stated is: "All else being equal, consumers will be more price consciousness in product categories where they perceive greater risk" and Hypothesis Two a is stated as: "All else being equal, the negative effect of a consumer's perceived price -- quality association in a category on his or her category price consciousness will be moderated by his or her perceptions of category risk, being stronger as category risk increases and weaker as risk decreases." (Sinha and Batra, 1999) Other stated hypotheses in the study of Sinha and Batra (1999) are the following:

Hypothesis 3: All else being equal, consumers will be more price consciousness in product categories where they perceive price unfairness by national brands.

Hypothesis 4. All else being equal, the degree of a consumer's category price consciousness will positively affect his or her purchase of PLBs in that category

Hypothesis 5. All else being equal, a consumer's perceived category risk will have a negative effect on his or her private label purchase.

Hypothesis 6. All else being equal, a consumer's perceived price -- quality association will have a negative effect on his or her PLB purchases.

Hypothesis 6A. All else being equal, the direct _negative. Effect of a consumer's perceived price -- quality association in a category on his or her PLB purchases will be moderated by his or her perceptions of category risk, being stronger as category risk increases and weaker as risk decreases.

Hypothesis 7. All else being equal, perceived price unfairness will have a positive effect on PLB purchases in a category.

Sinha and Batra report in their findings that their study served to highlight the "…role of perceived quality" and the roles of "consumer's perceptual factors concerning prices, a perspective that is missing from the literature." (1999) Additionally they report having "studied these effects using data from several product categories, explicitly modeling the perceived differences in these categories on dimensions of category risk." (Sinha and Batra, 1999)

The results of the study reported by Sinha and Batra (1999) are of the nature which support "…several of the hypothesized antecedents" and specifically stated in the findings are "that consumers are less price conscious in categories where perceived risk is deemed to be high" and that this finding is "consistent with previous research" however it is stated to be demonstrated "at the category level utilizing data from multiple categories with explicit modeling of perceptions of category risk." (Sinha and Batra, 1999)

Stated as a second result that is interesting is the fact that the perceptions of consumers regarding national brand pricing unfairness within specific categories of products results in consumers becoming more price conscious in those very categories. Sinha and Batra relate that previous studies in the area of consumer behavior and economic psychology has failed to account for the "significant role of perceived price fairness/unfairness on consumer price consciousness" and that this finding appears to make the provision of "empirical support to the 'dual-entitlement theory of Kahneman et al. (1986) which stipulates that community standards of fairness act as a constraint to a firm's quest for profits, and price increases that result not from increases in costs but from higher profit motive and/or market dominance are judged as being unfair and subsequently 'punished' by consumers." (Sinha and Batra, 1999)

Additionally resulting from the study of Sinha and Batra (1999) is the finding that a "consumer's category price consciousness is a highly significant predictor of his/her purchase of PLBs." (Sinha and Batra, 1999) This appears to support the claims of Stern (1997) relating to increasing price consciousness is the reason for recent growth in PLB sales and that PLBs have made quality improvements recently. Sinha and Batra state that they have "…observed a significant negative effect of category price -- quality association on PLB purchases -H6., demonstrating that individuals with such category-specific "price -- quality schemas" tend to gravitate toward more expensive national brands." (1999)

Even more important according to Sinha and Batra is that this primary effect is found to be "…significantly moderated by the degree of perceived category risk." In regards to Hypothesis 6A it is stated that "the significant negative interaction term indicate that as perceived category risk increases, consumers with price-quality schemas increasingly shy away from PLBs. This is an important finding, as it implies that the role of perceived price -- quality association on PLB purchase is significantly stronger in risky categories." (Sinha and Batra, 1999)

The work of Ailawadi, Pauwels and Steenkamp (2008) entitled; "Private-Label Use and Store Loyalty" reports a study in which an "econometric model" of the relationship existing between a "household's private-label (PL)share its behavioral store loyalty" is developed. This model is one that not only includes "major drivers of these two behaviors" but as well includes "controls for simultaneity and nonlinearity in the relationship between them." Of Ailawadi, Pauwels and Steenkamp relate that private labels (PLs) in the consumer packaged goods industry have experienced a worldwide surge in availability and market share in recent years." (2008) Additionally related is the fact that PLs presently account "for one of every five items sold everyday in U.S. supermarkets, drug chains and mass merchandisers, and the market share in Western Europe is even larger." (Ailawadi, Pauwels and Steenkamp, 2008) in fact, the conclusion recently stated by Planet Retail (2007) is noted in the work of Ailawadi, Pauwels and Steenkamp which predicts that PLs are "…set for accelerated growth, with the majority of the world's leading grocers increasing their own label penetration." (2008)

Stated as the primary reasons that there is a desire among retailers to grow their private labels are those as follows:

(1) higher retail margins on PL;

(2) negotiating leverage with national brand (NB) manufacturers; and (3) higher consumer store loyalty." (Ailawadi, Pauwels and Steenkamp, 2008)

The first two reasons are stated to be supported in the literature and cited is the work of Ailawadi and Harlam (2004), Hoch and Banerji (1993), Narasimham and Wilcox (1998), Pauwels and Srinivasan (2004). Of Ailawadi, Pauwels and Steenkamp state that the focus of their study is on reason number three or 'higher consumer store loyalty'.

The work of Richardson, Jain and Dick (1996) entitled: "Household Store Brand Proneness: A Framework" states that "store brands help retailers increase store traffic and customer loyalty by offering exclusive lines under labels not found in competing stores" and according to Ailawadi, Pauwels and Steenkamp "conventional wisdom maintains that PL use is associated with higher store loyalty." Accordingly it is stated by the Private Label Manufacturers Association (2007) website that "retailers use store brands to increase business as well as to win the loyalty of their customers." (Ailawadi, Pauwels and Steenkamp, 2008) There is stated to be a mixed review of the empirical evidence on the subject however for example "on the one hand, a positive correlation between PL use and store loyalty has been observed in some studies" including those of Ailawadi, Neslin and Gedenk (2001), Kumar and Steenkamp (2007). The analytical model proposed by Corstjens and Lal (2000) is stated to provide support to the ability of PLs in building store loyalty. Additionally, it is reported by Sudhir and Talukdar (2004) support, although indirectly for PLs' "store differentiating ability." (Ailawadi, Pauwels and Steenkamp, 2008)

While customers may fail to differentiate "between different retailers' PLs; that is, PL users may be loyal to PL products in general, not to the PL or a particular retailer" according to the research of Richardson (1997) therefore, there is some difficulty in understanding "how PL use would increase store loyalty." (Ailawadi, Pauwels and Steenkamp, 2008) the work of Singh, Hansen and Blattberg (2006) demonstrated that heavy PL users among the customers of a retailer "are more likely to switch to Wal-Mart when it enters the area. Thus, the questions still remains whether PL use is associated with greater store loyalty." (Ailawadi, Pauwels and Steenkamp, 2008)

The question is made more complex by two other issues according to Ailawadi, Pauwels and Steenkamp who state that "even if there is a positive correlation between PL use and store loyalty, the causality may be reversed; consumers who are loyal to a store may be more likely to buy its PLs, not the other way around. The process of spending a large portion of time and money in the chain increases a consumer's familiarity with the chain's PL across multiple categories. Such familiarity with the chain's PL is an important predictor of PL proneness." (2008) Furthermore, for those consumers who shop consistently at the chain instead of shopping with its competitors are "more likely attribute this shopping behavior to the chain's quality and may be more positively disposed to its PL." (Ailawadi, Pauwels and Steenkamp, 2008)

Stated to be in agreement is the work of Bonfrer and Chintagunta (2004) who state findings that "store-loyal consumers are more likely to buy PLs." (in: Ailawadi, Pauwels and Steenkamp, 2008) the causality manner of operating between PL use and store loyalty results in a difference in the implications for retailers. State second is that there may be a nonlinear relationship or even a nonmonotonic relationship. The work of Ailawadi and Harlam (2004) is related to have stated findings that "…medium PL users contribute more than light users or nonusers of PLs to retailer sales and profits, but heavy PL users contribute less than medium users." (Ailawadi, Pauwels and Steenkamp, 2008) Corstjens and Lal (2000) relates that the PLs ability to increase loyalty to the store is a model that id "predicated on a 'balance' between consumers who prefer PLs and those who prefer NBs." (Ailawadi, Pauwels and Steenkamp, 2008) Therefore it is important to comprehend the "nature of nonlinearity in the effects of PL use on store loyalty and vice versa, if retailers are to make smart decisions about whether and how much to push PL." (Ailawadi, Pauwels and Steenkamp, 2008)

Findings stated in the report of Ailawadi, Pauwels and Steenkamp (2008) include that the challenge faced by value retailers "…is to develop a strong PL assortment. The first step is to improve actual quality through better sourcing and innovation, but it is equally important to convince consumers of the quality of the PL. Value chains often suffer from an unfavorable gap between actual and perceived PL quality." Additional findings are stated to include the finding that for chains that do not have a "well-differentiated PL program" that the challenge faced is "…convincing shoppers to increase their PL buying intensity. Their PL share threshold for achieving loyalty benefits is higher than that for their well-differentiated competitors, so they need to increase PL share more among their light PL users and nonusers." (Ailawadi, Pauwels and Steenkamp, 2008)

The work of Sethuraman (2000) entitled: "What Makes Consumers Pay More for National Brands than for Store Brands -- Image or Quality?" states the findings as follows: (1) National brand managers should maintain and increase their brand's equity through frequent and effective advertising and other equity-enhancing strategies; (2) Retailers should recognize the importance of national brand equity and set their price differential appropriately; (3) Just because retailers have closed the quality gap does not mean that they can close the price gap and maintain a low price differential. They should also not set the price differential too high and charge a low price for store brands since low prices may create negative brand associations for the store brand." (Sethuraman, 2000)

Sethuraman (2000) states that a 'key qualitative insight' in the study he reports is that "perceived quality differential and non-quality utility or brand image dominate in different stages of the purchase process. Perceived quality differential or acceptable store brand quality is the primary driving force in a consumer's decision to participate in or consider store brand purchase. However, when it comes to deciding how much more to pay for national brands over store brands, brand image or brand equity is the dominant factor." Sethuraman (2000) additionally relates that the consumer will in fact "…pay a reasonable premium for national brands even if they perceive the national brand and store brand to have the same quality. This finding represents good news for national brand managers because it allows them to command a reasonable price premium even when retailers close the quality gap." (Sethuraman, 2000) the national brand manager is advised to increase the equity of their brand through "frequent and effective advertising' along with other strategies that serve to enhance equity. (Sethuraman, 2000)

The work of Lamey, Deleersnyder, Dekimpe and Steenkamp entitled: "How Business Cycles Contribute to Private-Label Success: Evidence from the United States and Europe" states that various factors attributed to the growth of private labels over the past few decades and that private-label products "now account for more than 20% of global grocery sales and are expected to grow to 30% by 2020." (2005) Stated additionally is that various studies have linked "private-label performance to economic conditions." (Lamey, Deleersnyder, Dekimpe and Steenkamp, 2005) This includes the work of Quelch and Harding (1996) and Nandan and Dickinson (1994).

The work of Gabrielsen and Sorgard (2006) entitled: 'Private Labels, Price Rivalry and Public Policy" examines:

(1) Why low-quality private labels are introduced in some product categories and not in others,

(2) How the existence of a low-quality private label affects the pricing of a competing national brand, and (3) How consumers' surplus and welfare are affected by private labels. Findings state that "the potential for private label introduction may -- in return for national brand exclusivity in that particular retail store -- lead to price concession from the producer of the national brand." (Gabrielsen and Sorgard, 2006)

In the case where the national brand produces makes a decision not to offer an exclusivity contract, a private label is introduced" which "may lead to higher retail prices on national brands, which can be detrimental to consumer welfare well as total welfare." (Gabrielsen and Sorgard, 2006)

The work of Choi and Coughlan (2006) entitled: "Private Label Positioning: Quality vs. Feature Differentiation from the National Brand" reports an investigation of the "retailer's problem of positioning her private label against two national brands in terms of both product quality and product features." (Choi and Coughlan, 2006) a demand function is used "derived from consumer utility" which illustrates that the private labels' "best positioning strategy depends on the nature of the national brand's competition and its own quality. When national brands are differentiated, a high quality label should position closer to a stronger national brand, and a low quality private label should position closer to a weaker national brand. When the national brands are undifferentiated, the private label should differentiate from both national brands." (Choi and Coughlan, 2006)

The work of Bontemps, Orozco, Requillart and Trevisiol (2005) entitled: Price Effects of Private Label Development" reports a study of the price response of national brands to the development of private labels." (Bontemps, Orozco, Requillart and Trevisiol, 2005) Study results illustrate that the development of private labels has a positive effect on national brand prices however the effects are differentiated depending on the type of private label. Findings additionally relate that "the increase in private label market share is consistent with a strategy of product repositioning by national brand manufacturers." (Bontemps, Orozco, Requillart and Trevisiol, 2005)

The work of Hoch and Banerji (1993) entitled: When Do Private Labels Succeed" states that private labels or store brands "are an important source of profits for retailers and a formidable source of competition for national brand manufacturers." (Hoch and Banerji, 1993) This study reports findings that consumer drive determinants of private label success are the factors of: (1) product quality; and (2) quality consistency. (Hoch and Banerji, 1993) Retailer driven determinants of private label success are: (1) category retail sales; and (2) category gross margin. (Hoch and Banerji, 1993) National manufacturer driven determinants of private label success are the factors of: (1) the number of national manufacturers; and (2) national advertising per manufacturer. (Hoch and Banerji, 1993) Additionally stated in the findings is the fact that the availability of "high quality products for private label programs affords a serious threat to national manufacturers." (Hoch and Banerji, 1993) Advertising can serve to "safeguard against private label success." (Hoch and Banerji, 1993) the presence of "a large number of competitors…does appear to deter retailer entry." (Hoch and Banerji, 1993

CHAPTER THREE -- WHAT FACTORS INFLUENCE the PL BRAND SUCCESS?

- FINDINGS

Findings in this study include the fact that store brands support retailers in increasing store traffic and customer loyalty (Richardson, Jain and Dick, 1996, and Private Label Manufacturers Association, 2007)

A positive correlation between PL and store loyalty was reported observed in the studies of Ailawadi, Neslin and Gedenk (2001), Kumar and Steenkamp (2007), Corstjens and Lal (2000), Sudhir and Talukdar (2004), and Ailawadi, Pauwels and Steenkamp, (2008).

The customer's differentiation between various retailers may not be the same for PL as consumers may be loyal to the PLs and not to the specific store or retailer. However, the consumer may, if loyal to the store then use its PLs and become loyal to the PLs as well. (Richardson, 1997, Ailawadi, Pauwels and Steenkamp, 2008)

Findings show that "store loyal consumers" are more likely to purchase PLs (Bonfrer and Chintagunta, 2004, and Ailawadi, Pauwels and Steenkamp, 2008) the causality manner of operating between PL use and store loyalty results in a difference in the implications for retailers.

Other findings show that a nonlinear relationship exists between store loyalty and PL use showing that medium PL use consumers contribute more than light or nonusers of PLs to the retailer's profits. Increasing profits on the PLs ability to increase loyalty to the store is dependent on consumers preferring NBs and PLs.

The category price consciousness of the consumers is significant predictor of the consumer's purchase of PLBs. (Sinha and Batra, 1999)

Price consciousness of consumers is the reason for PLB sales and recent growth. (Stern, 1997)

"Store brands help retailers increase store traffic and customer loyalty by offering exclusive lines under labels not found in competing stores." (Richardson, Jain and Dick, 1996)

"Retailers use store brands to increase business as well as to win the loyalty of their customers." (Private Label Manufacturers Association, 2007)