How do private labels compete? Author 1: John Dawes, University of South Australia 1. Senior Research Associate

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1 How do private labels compete? Author 1: John Dawes, University of South Australia 1 Senior Research Associate Author 2: Magda Nenycz-Thiel, University of South Australia Senior Research Associate Author 3: Anika Nehring, University of South Australia Research Associate 1 All the authors have the same postal address: Ehrenberg-Bass Institute for Marketing Science, University of South Australia, GPO Box 2471 Adelaide SA 5001, Australia. Ph , addresses: John.Dawes@marketingscience.info, Magda.Nenycz-Thiel@MarketingScience.info, Anika.Nehring@marketingscience.info 1

2 Abstract This study examines how buyers of one private label brand (PL) in a product category also buy the private label brands of competing retailers in the same category. The study addresses this question type: Does buying the private label brand Tesco cola heighten or lower the likelihood that a consumer will also buy Sainsbury or Asda cola over time? Examination of consumer cross-purchasing of brands in ten product categories shows heightened competitive intensity among the private label brands in the majority of cases. The findings build on prior work on the purchasing patterns of PL brands, and also the stream of research on the privatelabel prone shopper. The results indicate that PLs compete against national brands (NBs) within the store, but also compete against the PLs of other retailers (across stores) over time. Indeed in many cases the PLs of various retailers form a type of sub-market or partition, within which the PLs compete against each other to a greater extent than they do against the other NBs in the market. Keywords: private label, national brand, competition, Duplication of Purchase 2

3 How do private labels compete? Introduction Companies generally brand their products with a national brand label, or a private label. The owner of a national brand (NB) is generally a producer. Private label brands (PL), also known as home brands or store brands are defined as being owned by retailers, wholesalers, or distributors (Bushman 1993; De Wulf, Odekerken-Schröder, Goedertier and Van Ossel 2005). From a marketing mix point of view, the main differences between the two types of brands are distribution, advertising support and price. NBs tend to obtain more advertising support at the national level than do PLs. Next, NB distribution is wide and often national, while PLs have restricted distribution at the single chains they belong to. Finally, the majority of PLs are still cheaper than NBs. Both brand types appear next to each other on retail shelves and therefore they compete for consumers choice. Over the last two decades PL brands have witnessed significant growth, particularly in grocery products, far outpacing the growth of NBs (Baltas and Argouslidis 2007; Lincoln and Thomassen 2008). To cover the spectrum of consumer demographics, retailers usually carry several tiers of PLs: from value products that compete mostly on price, to premium products that offer the highest quality and unique lines at prices equal or higher than NBs (Kumar and Steenkamp 2007). Many PLs compete against NBs and, given that people shop at different stores, they compete against the PL brands of other retailers. Therefore, research into how PLs compete is important for NB managers, but also managers of PL brands, and retailers in general. In order to understand the full picture of PL competition, the present study focuses not only on the competition between PLs and NBs within a store, but also the competition between the PLs of different stores, since consumers distribute their purchases across different stores over time. The study analyses consumer purchase records to see how in a given category, PL and NBs share consumers with each other. Specifically, we examine which brands the buyers of one retailer s PL buy, when they re-purchase from the same category (either at the same retailer, or at another retailer). The crucial point is to understand the extent to which buyers of one retailer s PL switch to NBs if they visit another store, or stick to PLs but buy the PLs of a rival chain. Furthermore, a consideration of different categories should give us insights whether there are common traits or category specific characteristics. The implications from this research are important for marketers of PLs and NBs. Retailers stock PLs to create a point of differentiation from other retailers (Corstjens and Lal 2000). Insights into how many of the shoppers who buy a PL in a given store also buy a PL in other stores, will give an indication whether retailers have been successful in creating a distinctive PL offer. For NB manufactures, insights into competitive market structure will show how much of their sales are stolen by PLs, therefore showing the real threat PL brands pose. The paper is organised as follows. The next section discusses the literature on PL competition and segmentation. Then the data and analysis method is described, followed by results and discussion. The paper concludes with implications, limitations and areas for future research. 3

4 Background How do private labels compete? Consider a consumer in a retailer s store making a purchase. The consumer can usually choose from either a range of NBs or a PL offered by that specific retailer. Competition within the store is therefore principally NBs versus PL. PL brands face restricted availability for example, Tesco private label cola is not available in Sainsbury, but Coke and Pepsi are available in almost every retailer. Restricted availability should constrain the tendency of the PL buyers in one retailer to also buy the PL brands of other retailers. Indeed the competitive environment for PLs has been examined principally in relation to NBs (e.g. Parker and Kim 1997; Quelch and Harding 1996; Steiner 2004). While PL brands face restricted availability, evidence shows that shoppers shop at multiple stores over time (Uncles and Hammond 1995; Uncles and Ellis 1989). Therefore, consumers encounter the PLs of different stores at different times. The result is that consumers buy multiple PL brands (of various retailers) just as they do for NBs. Indeed Uncles and Ellis (1989) and Bound and Ehrenberg (1997) examined the buying patterns of PL and NB consumers, and found that PLs share customers with other NBs and also with other PLs, approximately in line with their respective market shares. However, it is possible that further investigation could enhance the state of knowledge on this issue. Firstly, studies such as Bound and Ehrenberg (1997) have reported aggregated results for PL brands this aggregation might mask a tendency for PLs to compete more intensely in some categories and less so in others. A category-by-category analysis could therefore reveal specific categories in which PLs compete especially intensely. Secondly, PLs have continued to grow and evolve over the past ten years (Kumar and Steenkamp 2007), therefore the extent to which consumers cross-buy various PL labels may have changed. Thirdly, shopper behaviour may have changed to some extent, such that more shoppers exhibit a tendency to be private-label prone. We briefly discuss private-label proneness and contextualise our research in relation to that topic. The private-label prone shopper As the term suggests, a private-label prone shopper buys PL brands to a greater extent than would be expected given the market shares of that PL brand. Identifying the characteristics of the PL-prone shopper is one of the oldest research topics in the PL literature, with 26 studies published between 1965 and 2004 (Sethuraman 2006). The rationale for academic interest in this topic is that since PLs tend to be low priced the people who buy them must comprise a price sensitive segment. Indeed in the majority of the studies in this area, those who buy PLs have been found to be price sensitive (e.g. Ailawadi, Neslin and Gedenk 2001; Baltas 1997). However, there is also a strong evidence that those who buy PL are equally quality sensitive (e.g. Batra and Sinha 2000). Those mixed results lead to an opinion in the literature that the direct effect of demographics and psychographics on PL usage is relatively weak (Ailawadi, Neslin et al. 2001; Baltas and Argouslidis 2007). It is worth noting that the private-label prone shopper concept does not distinguish between a propensity to simply buy many private label products from the same retailer, versus a propensity to buy the PLs of different retailers over time. Specific investigation of the latter may assist in understanding the broader idea of private-label proneness. Therefore, the present study builds on these following points: 4

5 Some consumers at least, may be private-label prone; This PL-proneness may manifest not only in a heightened tendency to buy PLs across different categories from one retailer, but to unduly purchase PLs from any retailer the shopper visits; Such private-label proneness may be more evident in certain product categories than in others, therefore a category-by-category examination is warranted. Method The analysis method is to examine the tendency of consumers to cross-purchase brands (PL or NB) over time, and determine if buying one PL increases the tendency to buy a different retailer s PL in the same category. While the focus of the study is PL brands, NBs are included in the analysis as a comparison. The overall approach is purchase duplication analysis: the extent to which buyers of one brand also appear as buyers of another brand are duplicated - in both brand s customer base over a time period. The method first calculates the proportion of consumers who buy a brand in a time period. This confirms the brand s penetration. Consumers buy multiple brands in a time period (Ehrenberg and Goodhardt 1970), therefore a proportion of the buyers of brand A also buy brand B, C, D and so on. The proportion of A buyers who also buy brands B, C, D is the purchase duplication for these respective pairs of brands, and the purchase duplication between any pair of brands in a market can be readily calculated from consumer panel data. A widespread empirical generalisation is that the proportion of A buyers who also buy B, C, D is in-line with the brand size of B, C, D. That is, a brand will share more of its customers with bigger brands than with smaller brands (Ehrenberg Uncles and Goodhardt 2004). Likewise, the average proportion of any brand s buyers who also buy any particular brand such as B should be similar. Exceptions to this general sharing pattern are extremely useful as they indicate certain pairs of brands that compete more intensely against each other, or less intensely against each other, than against the rest of the market. A brand subset such as this is called a partition (e.g. Kalwani and Morrison 1977). Partitions are important for managers to know about because sales gains by one brand in a partition will come unduly at the expense of the other brand or brands in the partition. The study utilises the purchase duplication approach to identify how buyers of PLs and NBs also buy other PLs and NBs (in the same category), and the extent of competitive intensity between these groups of brands, which are identified as market partitions. The extent of competitive intensity is identified using a statistic called the duplication coefficient (D-coefficient), calculated as average brand duplication / average brand penetration. A duplication coefficient of 2, for example, estimates the expected proportion of A buyers who also buy B, is 2 times the penetration of brand B. To take the example further, consider four brands A, B, C, D. The first two (A, B) are both PLs, each one the PL of a different retailer. Brands C and D represent NBs. If the D-coefficient for the pair of PL brands (% of A buyers who buy B, and vice versa) is 4.0; and the D-coefficients for PL brand buyers who also buy NBs (% of A buyers who buy C, & D; the % of B buyers who buy C, & D and vice versa) is 2.0, then this indicates the competition between the PLs is two times stronger than the competition between the PLs and the NBs given the market shares of all the respective brands. Note, if a retailer offers multiple PLs in the form of sub-brands (such as Tesco, Tesco Finest and Tesco Value), the sub-brand is not included in this analysis otherwise it would inflate the estimate of PL cross-buying. 5

6 Data, Analysis and Results The analysis covers 10 categories over a 52-week time period. Data were kindly provided by TNS from its UK Superpanel, a 15,000 member panel in which consumers electronically record their purchases. All ten categories contain multiple NBs and also the PLs of different stores. The first step of analysis is to prepare a duplication table. An example is provided in Table 1. The brands are split into two groups, NBs and PLs. The purchase duplications within and across each of the two groups form four quadrants: NB buyers who also buy other NBs ; NB buyers who also buy PLs; PL buyers who also buy other PLs; PL buyers who also buy NBs. The brands are arranged descending market share order within each group. This tabular method enables us to investigate the competitive interplay between, and within, the two brand groups, PL and NB. Note, the fact that we are especially interested in the buying behaviour across different stores means that we exclude the cross-purchasing of PL sub-brands (e.g. the purchase duplications between Tesco and Tesco Value are not included). To clarify the meaning of the table, consider Diet Coke, the biggest NB. Reading across the row for Diet Coke, we see that over a 1-year period 35% of consumers bought Diet Coke. Of those Diet Coke buyers, 48% also bought Pepsi, 44% also bought Coca Cola, and so on, down to 3% also buying Freeway and 3% also buying Tesco Value. Those figures represent the purchase duplications for Diet Coke, and they follow a pattern called the Duplication of Purchase Law (Ehrenberg Uncles et al. 2004), namely that brands share their customers with competing brands in-line with the size (market share) of those competing brands. Turning to the PL brands more specifically, we see that of the consumers who bought Tesco cola, 48% also bought Diet Coke, 50% Pepsi, and so on to the PL brands, 22% also bought Asda, 14% Sainsbury and so on. The key issue is, the buyer of any brand has an expected probability of buying any other particular brand, and that probability is largely dictated by the size (penetration) of that other brand. That said, is a PL buyer more likely to buy another PL than would be expected, given the penetrations of those other PLs? This question is what the purchase duplication analysis answers. To address the question of whether buyers of one PL are more likely than expected to buy the PL of another retailer, Duplication (D) coefficients are calculated for the PL and NB brand groups. These D-coefficients are indicated in bold in Table 1. The D-coefficients indicate the intensity of competition between the groups of brands. We have two D-coefficients for the purchase duplication within each brand group one for PL (D PL-PL ), one for NB (D NB-NB ). Likewise we have two D-coefficients illustrating the purchase duplication between the brand groups (D PL-NB, D NB-PL ). For the Cola category, the D coefficient for PLs is 3.1. This indicates that the proportion of PL brand buyers who buy another PL in a different store is 3.1 times the average penetration for the group of PLs sold at different stores. In contrast, the D coefficient for PL buyers to also buy NBs is 1.4, in other words 1.4 times the penetration of NBs. The difference in the coefficients is statistically significant at p<0.05. The higher D coefficient for PLs indicates stronger competition between the group of PL brands than should occur a PL buyer is 122% more likely to buy the PL of a competing retailer compared to an NB, than what should be the case, given the respective penetrations of the PLs and the NBs. Results across the ten product categories indicate there are a number of product categories that show a similar result (Table 2). However, there are also some instances where the pattern 6

7 is reversed or non-existent. Indeed, in the liquid bleach category, those who buy a bleach PL at one retailer are slightly less likely than expected to also buy a bleach PL at a different retailer. Summary and Implications This paper examined the competition between PLs and NBs in ten consumer goods categories in the UK. The findings indicate that it is quite common for buyers of the PL of one retailer to be at least as likely, indeed in many cases more likely, to also buy the PL of another retailer in the same category than would be expected given the overall popularity of that other PL. The fact that a shopper must buy the other PL in a different retailer does not necessarily dampen the probability they will buy it in the course of a year. The results provide important managerial and academic implications. First the findings imply that competition between PLs and NBs is not confined to a particular store but is spread across the various stores the shopper buys from over time. Therefore, future studies on PL competition or image should be conducted across stores, and not just within a store. Looking at competition in a narrow way by focussing on one retailer hampers the ability to detect the full extent of competition between all NBs and all PLs. A better comprehension of market structure and buyer behavior would enable managers to consider appropriate competitors while mapping out their own strategy. The fact that in some categories PLs compete more intensely with other PLs than with NBs, suggests that in certain cases PL growth may hurt other PLs more so than NBs. This result highlights the importance of PL marketers looking at competition between the two types of brands across stores, and regarding PLs from other retailers as close competitors. Likewise, for the manager of a NB worried about how a particular PL is growing in the category, these results may indicate that in some cases, other PLs may bear the brunt of that PL growth. Finally, the fact that in some categories consumers will buy a PL regardless of the store it belongs to, implies that PLs are not differentiated from each other in consumers eyes. Rather, consumers perceive PLs as comprising a sub-category with little difference between the various PLs it comprises (as per Nenycz-Thiel and Romaniuk 2009). Hence, if one of the main reasons for retailers to stock PL is to increase the loyalty to the store, marketers of PLs should focus on out-of-store marketing activities for their PL to increase their brand s salience and build a distinctive PL offer. This finding also provides a recommendation for PL branding strategy. Even though using a store name in the name of a PL may be risky, such strategy allows differentiation of the PLs of one retailer from another, and provides a link for the consumer to associate a PL to a particular store. 7

8 Limitations and Future Research The main limitation of this research is that it includes only supermarket PLs and uses data from only one country. In order to establish a sound generalisation, replications across sectors and countries are needed. Furthermore, given the current three-tiered PL strategy in the majority of retailers, future research should investigate whether the competition between PLs from different stores is between the same price-quality PL tiers. Finally, supplementary analysis has so far not revealed category characteristics that correspond with this heightened PL competitive intensity. More work on additional categories may show category specific traits, which lend themselves to more intensive competition among PLs. 8

9 References Ailawadi KL, Neslin SA, Gedenk K. Pursuing the Value-Conscious Consumer: Store Brands Versus National Brand Promotions. Journal of Marketing 2001; 65(January): Baltas G. Determinants of store brand choice: a behavioral analysis. Journal of Product & Brand Management 1997; 6(5): Baltas G, Argouslidis PC. Consumer characteristics and demand for store brands. International Journal of Retail & Distribution Management 2007; 35(5): Batra R, Sinha I. Consumer-level factors moderating the success of private label brands. Journal of Retailing 2000; 76(2): Bound J, Ehrenberg A. Private Label Purchasing. Admap 1997; 32(7): Bushman BJ. What's in a name? The moderating role of public self-consciousness on the relation between brand label and brand preference. Journal of Applied Psychology 1993; 78(5): Corstjens M, Lal R. Building Store Loyalty Through Store Brands. Journal of Marketing Research 2000; 37(3): De Wulf K, Odekerken-Schröder G, Goedertier F, Van Ossel G. Consumer perceptions of store brands versus national brands. Journal of Consumer Marketing 2005; 22(4): Ehrenberg ASC, Goodhardt GJ. A model of multi-brand buying. Journal of Marketing Research 1970; 7(February): Ehrenberg ASC, Uncles MD, Goodhardt GG. Understanding brand performance measures: using Dirichlet benchmarks. Journal of Business Research 2004; 57(12): Kalwani MU, Morrison DG. A Parsimonious Description of the Hendry System. Management Science 1977; 23(5): Kumar N, Steenkamp J-BEM. Private label strategy: how to meet the store brand challenge. Harvard Business Press, Lincoln K, Thomassen L. Private label: turning the retail brand threat into your biggest opportunity. Kogan Page Publishers, Nenycz-Thiel M, Romaniuk J. Perceptual categorization of private labels and national brands. Journal of Product & Brand Management 2009; 18(4): Parker P, Kim N. National brands versus private labels: An empirical study of competition, advertising and collusion. European Management Journal 1997; 15(3): Quelch JA, Harding D. Brand Versus Private Labels: Fighting to Win. Harvard Business Review 1996; (January-February):

10 Sethuraman R. Private-label marketing strategies in packaged goods: Management beliefs and research insights. Working Paper Series. Cambridge, MA, Marketing Science Institute: Steiner RL. The nature and benefits of national brand/private label competition. Review of Industrial Organization 2004; 24(2): Uncles M, Hammond K. Grocery Store Patronage. The International Review of Retail, Distribution & Consumer Research 1995; 5(3): Uncles MD, Ellis K. The Buying of Own Labels. European Journal of Marketing 1989; 23(No. 3):

11 Table 1: Purchase duplication table for Colas % who also bought NB NB Pen D P CC CZ T A S M F TV Dt Coke (D) Pepsi (P) Coca Cola (CC) Coke Zero (CZ) Ave. Duplication Ave. Penetration D-coefficient 1.5 (D NB-NB ) 1.4 (D NB-PL ) Tesco (T) Asda (A) PL Sainsbury (S) Morrisons (M) Freeway Lidl (F) Tesco Value (TV) Ave. D * Ave. Pen D-Coefficient 1.4 (D PL-NB ) 3.1 (D PL-PL ) Pen. = Penetration, D = Average Duplication/ Average Penetration * PL-PL Duplication does not include Tesco - Tesco Value duplications. PL 11

12 Table 2: Private label Competition in 10 categories Duplication coefficient: Duplication coefficient: NB PL PL PL Product category Average of D D PL-NB and D PL-PL NB-PL How much more likely are buyers of one PL brand to buy the PL of another retailer, compared to buyers who switch between NB and PL? 1 Porridge %* 2 Colas %* 3 Fresh Soup %* 4 Baked Beans %* 5 Yoghurt %* 6 Washing powder %* 7 Seasoning %* 8 Cat Food % 9 Mineral water % 10 Liquid Bleach % * indicates statistically significant at the p<0.05 level. 12