Why Store Brand Penetration Varies by Retailer

Long known as the titans of the grocery industry, national brands have experienced rising pressure from an old competitor -- the store brand -- since the beginning of this decade. In a new study, “Why Store Brand Penetration Varies by Retailer,” Sanjay K. Dhar of the University of Chicago Graduate School of Business and former Chicago faculty member Stephen Hoch, now at the Wharton School, University of Pennsylvania, examine sales data from 34 food categories for 106 major supermarket chains operating in the largest 50 retail markets in the United States to explain why store brand performance varies by retailer. Although retailers have much to gain by better understanding how to successfully market their store brand products, the authors' findings also provide valuable information for national brand manufacturers interested in extending their dominance of supermarket shelves.

In the packaged goods world, store brands, also known as private labels, such as the products sold by Chicago's Dominick's Finer Foods which carry the Dominick's label, behave much the same as any other brand. They face downward sloping demand with respect to price and upward sloping demand with respect to quality. Display and feature activity magnify the effects of temporary price reductions. But store brands are also very different from national brands. They 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 make about national brands which are driven mainly by the manufacturers' actions, retailers play the key role in the success or failure of their own labels.

Previous research has focused on explaining variation across product categories in store brand performance. Researchers have a good understanding, for instance, why store brands constitute 65 percent of sales of canned green beans but only 1 percent of deodorants. But until now, no research has considered variation across retailers in private label sales within a single category such as packaged pasta, a more relevant issue to national manufacturers interested in their own brands.

In their study, Dhar and Hoch organize the determining variables of store brand performance into the three categories that make up the retail chain: manufacturers, retailers, and consumers. Using regression-based analyses, they show that variation in store brand performance across retailers is directly related to important underlying strategies within these three variable groups. They present several key findings:

• Overall chain strategy -- the use of everyday low pricing (EDLP), commitment to quality, breadth of private label offerings, use of own name for private label, a premium brand offering and a greater number of stores -- consistently enhances the retailer's private label share performance in all categories. The extent to which the retailer serves a customer base containing less wealthy and more elderly households improves the performance of the store brand, and operating in less competitive markets also improves performance. In addition, retailer promotional support can significantly enhance private label performance.
• 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 lower everyday 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 its categories. At the same time, adding a higher quality premium store brand program may mitigate this trade-off.
• Unlike cross-category studies, this within-category, across-retailer analysis shows that the national brand/private label price differential boosts store brand performance.
• When retailers obtain more than their fair share of a category -- such as offering several different store brands of packaged pastas -- they also do much better with private labels.
• 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,” says Dhar, “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.”
• 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 are more important, as are variables capturing economies of scale and scope enjoyed by the retailer. In contrast, when store brand quality is low, demographics associated with consumer price sensitivity & EDLP pricing matter more.
• 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.

Know the Competition

“Although understanding `best practices' is generally important to any industry, we would argue that it is even more important in retailing,” says Dhar. “The reason is that retailers can easily observe each other's actions, assess the impact of those actions, and quickly imitate successful strategies.”

For retailers, arguably the most important practices are those that successfully build store traffic and produce significant shifts in market share, such as new store formats, store appearance, perimeter departments and advertising. Leading manufacturers must be alert to these changing practices, but in general, they will get their fair share of category sales irrespective of which retailer makes the sale. On the other hand, retailer imitation of successful store brand programs is more threatening to national manufacturers because within-store loss of share to the retailer's store brand (or for that matter another national brand) is not likely to be made up with a sale at a different retailer. As European retailers with high-powered corporate branding programs, such as Sainsbury, continue to acquire regional chains in the U.S., the threat to national brands becomes more immediate.

According to Dhar and Hoch, this implies that national manufacturers need to (a) identify which of their products are most vulnerable to retailer investments in private labels, and (b) understand what actions they can take to limit store brand encroachment in key retail accounts.

National brands are most vulnerable in product categories where there is a high variation in private label share across retailers. It is here that imitation of best practices could result in substantial increases in store brand share. When average private label share also is high, these categories pose “big current threats” if low share retailers start doing as well as the best performers.

When average private label share is low, categories pose a “future threat,” mainly because poor performers are starting from scratch and will imitate in the high threat categories before allocating resources here. National brands should spend less time worrying about how retailers manage their store brands in categories where there is less variation across retailers.

“Private labels are going to exist for a long time,” says Dhar, “and manufacturers of national brands must realize that private labels will be a threat to their share in the marketplace. It is to their advantage to understand what conditions allow for the success or failure of these store brands.”