What's Behind the Labels - The Economics of Quality-Equivalent Store Brands

A significant shift in the retail environment in recent years has been the growth of lower-priced quality-equivalent store brands or own label products. However, this does not necessarily lead to more retail competition or lower prices. The authors explain the phenomenon of quality equivalent store brands using a model where a national manufacturer uses store brands, introduced by retailers, to price discriminate between consumers who like advertised brands and those who do not.

by David Soberman,Philip Parker
Last Updated: 23 Jul 2013

For the average consumer, a visible form of competition in retail stores is the increased availability of store brands and own label products. They are often of equal quality to nationally advertised brands but are sold at relatively lower prices. But do these products really signal higher levels of competition between stores and increased choice for consumers? There is also the opinion that a major manufacturer will resist supplying store brands to distributors or retailers. Is this actually the case?

A working paper by David Soberman, Associate Professor of Marketing and Philip Parker, The Eli Lilly Chaired Professor of Innovation, Business and Society and Professor of Marketing, uses a model to demonstrate that store brands can often lead to less choice for consumers and higher prices across a product category. They also show how a manufacturer gains from supplying a retailer with quality equivalent store brands.

Driven initially by Sainsbury and Tesco in the UK, Carrefour in France and Loblaws in Canada, high quality store brands are now widely available. Despite speculation that these brands should place downward pressure on the retail prices of the national brands, empirical evidence suggests the reverse can be true: major manufacturers increase advertising expenditures and retailers increase the price of both the national brands and the store brands. These trends are often accompanied by retailers de-listing weaker brands that are not supported by national advertising. Ultimately, this leaves consumers with a choice of fewer options: one or two national brands and the store brand.

The model, which is explained in detail in the working paper, is designed to represent two specific aspects of store brand marketing. First, store brands are attractive to retailers because they allow them to charge different prices to consumers who are influenced by advertising and to those more concerned with product characteristics. Second is the effect of advertising in a specific segment in terms of consumers' willingness to pay more for the national brand. This may be due to familiarity or pleasurable associations with the national brand and is the basis for a perspective known as the adverse view of advertising.

The model assumes quality equivalence of both the national and the store brand. Instead of accepting a cost-based rationale for store brands, the authors' interest is how they facilitate price discrimination and affect retail prices and profits.

To summarise, the model provides an explanation for the fact that, on average prices rise despite the appearance of lower priced store brands. It also shows that the launch of store brands stimulates higher advertising expenditures by the major manufacturer. Furthermore, the vast majority of advertising in categories where brands have tangibly equivalent qualities consists of non-price, persuasive or image messages.

The authors' analysis indicates that business reports of fierce competition between store brands and national brands are highly likely to be exaggerated. In fact, they find that a store brand can increase the profitability of a national brand manufacturer even when the volume and share of the national brand decline

INSEAD 2004

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