Retailer Private-Label Margins: The Role of Supplier and Quality-Tier Differentiation

Abstract

The authors show how new realities in the private-label (PL) landscape, including differential PL-sourcing relationships and differentiated, three-tiered PL portfolios, affect the gross margins that retailers realize on their PLs. In addition, they examine the moderating role of the identity of the PL supplier (dual brander vs. dedicated supplier). Retailer PL margins are lower for stockkeeping units from PL suppliers with whom the retailer shares a more intense relationship, as reflected in their relationship breadth and depth, but this negative effect can be countered through multisourcing. Building prolonged relationships with PL suppliers also results in lower retailer PL margins, but only for more national brand-oriented suppliers. Dedicated PL suppliers have little to gain by building long-term retailer relationships, but they are less vulnerable to the retailer's practice of multisourcing than dual branders. Although economy PLs may appeal to conventional supermarkets to keep (hard) discounters at bay, they result in lower margins (percentage-wise and absolute) than the standard PLs they cannibalize. Premium PLs, in turn, offer the retailer a higher margin, but only when produced by suppliers with a sufficient extent of national brand focus. However, the higher promotional support often given to premium PLs tends to mitigate the actual margin advantage.

Does private-label production by national-brand manufacturers create discounter goodwill?

“…We focus on discounters, and therefore contribute to the (thus far) limited empirical literature (Cleeren et al, 2010;Deleersnyder et al, 2007) on this fast-growing retail format. As such, our study also differs substantially from ter Braak, Dekimpe, and Geyskens (2013), who study the implications of dual branding on retail profit margins in the context of a conventional supermarket, which follows a very different business model than discount stores.…”

“…Moreover, unlike the aforementioned tools (such as slotting allowances and promotional support) which entail a direct monetary transfer from the manufacturer to the retailer (Scott Morton & Zettelmeyer, 2000), PL production, when instrumental in securing NB shelf access, contributes positively to the manufacturer's bottom line in various ways: (i) revenues from the NB(s) sold through the discount channel, (ii) revenues from the PLs (which could, potentially, take place through otherwise unused, and therefore costly, over-capacity), and (iii) positive margin implications that may result from the more intense relationship with the retailer (ter Braak et al, 2013).…”

“…In spite of this concern, PL production can be an attractive opportunity to innovation-oriented manufacturers as well. Apart from the aforementioned financial benefits, they can use such production as "a chance to try out product ideas at much lower costs" (Dunne & Narasimhan, 1999, p. 42;ter Braak et al, 2013). Indeed, launching a new product is risky and costly.…”

Are they always promising? An empirical analysis of moderators influencing consumer preferences for economy and premium private labels

“…The results of an experimental consumer study provide valuable implications for managers: First, premium private labels are more promising for highpriced grocery stores such as EDEKA (or REWE) than for lowpriced grocery stores such as ALDI and LIDL. Thus, the strategy of EDEKA and REWE to substantially increase their premium private label contingent within the last years seems to be justified especially since premium private labels are more profitable (i.e., realize higher margins) and influence consumers' retailer loyalty more favorably than economy private labels (Kumar and Steenkamp, 2007;Martos-Partal and González-Benito, 2011;Ter Braak et al, 2013). However, low-priced grocery stores such as LIDL have recently increased their premium private label contingent and the corresponding marketing support as well (e.g., by introducing premium private labels such as Deluxe) which seems to be questionable based on the results of this study despite the higher profitability of premium private labels.…”

“…They seem to be more promising compared to economy private labels for two reasons: First, premium private labels are more profitable since they typically require only marginal additional production and marketing costs compared to economy private labels but simultaneously allow for setting considerably higher prices and hence realize higher margins (Kumar and Steenkamp 2007;Ter Braak et al, 2013). Thus, a potential cannibalization of established standard private labels by more profitable premium private labels should be beneficial for the profitability of the retailer within the category while an according cannibalization by less profitable economy private labels should affect the profitability of the retailer within the category negatively (Ter Braak et al, 2013). Second, existing research suggests that high-quality private labels (i.e., premium private labels) have a more favorable impact on consumers' retailer loyalty compared to low-quality oriented private labels (i.e., economy private labels; Martos-Partal and González-Benito 2011).…”