Labelling Characteristics and Demand for Retail Grocery Products in Australia*

Abstract

This paper examines whether labelling characteristics affect short-run demand for manufactured foods in Australia. We estimate the effect of common labelling characteristics on demand using data from 92 brands in 12 product categories from major supermarket stores across Australia over the period 2002 to 2005. We find that certain characteristics -such as whether the product is made from recycled materials, certified as being Australian-made, is a private label product, is health-conscious or supports a charity -have a positive effect on demand. However, being an environmentally-friendly good had a negative impact on demand as did products which offer the chance to win a prize and uncertified Australian-made goods. I . I n t r o d u c t i o nCompetition amongst firms is typically driven by strategies designed to extract production efficiencies or through product differentiation. In many product markets, such as staple manufactured foods, increased production efficiencies are difficult to achieve given the maturity of the technology. As a result, many firms rely on product differentiation strategies to attract consumers. In this paper, we look at one such strategy -the use of labelling characteristics by manufacturers of groceries. Specifically, we examine whether firms stimulate demand for their products by applying labels which signal a product's unobservable characteristics such as whether it is environmentallyfriendly, low in fat/salt, made-in-Australia, or made from recycled materials. Although there are a range of issues across the supply chain from farm-gate to retailer, our interest here is on the effects of the manufacturer's decision to include labelling characteristics on demand.To examine this issue, we use pooled monthly data from ACNielsen on a bundle of 92 goods in 12 product categories from major supermarkets across Australia over the period February 2002 to January 2005. To abstract from differences in product quality, only mature product categories the product was substantially homogeneous were selected. 1 To further control for product quality issues, goods within a product category were only selected if they were of a similar quality. 2 In this manner, we controlled for product quality through sample design rather These 12 product categories are bread, canned fruit, tea, tomato sauce, rice, pasta, pasta sauce, milk, toilet paper, frozen chips, laundry detergent and salad dressing. 2 Consider the case of the milk product category, for example. Only brands selling fresh, full cream milk were included in our dataset -skim milk, long life milk, calcium-enriched milk and flavoured milk products were all excluded from our study.

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