MIT Sloan Management Review

Marketing

When Do Private Labels Succeed?

By Stephen J. Hoch and Shumeet Banerji

July 15, 1993

PRIVATE LABELS OR STORE BRANDS ARE AN IMPORTANT SOURCE OF PROFITS FOR RETAILERS AND A FORMIDABLE SOURCE OF COMPETITION FOR NATIONAL BRAND manufacturers. Market share of private labels, however, varies dramatically across categories. The authors propose and test a framework to explain this variation in order to understand the determinants of private label success in the U.S. supermarket industry. They find that private labels perform better in large categories offering high margins. Private labels also do better when competing against fewer national manufacturers who spend less on national advertising. Surprisingly, high quality is much more important than lower price.

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In 1989, private labels or store brands accounted for 65 percent of sales of frozen green and wax beans and for 25 percent of sales of liquid bleach but for only 1.1 percent of sales of personal deodorants. As shown in Table 1, private label market share (in terms of both dollar sales and units sold) varies significantly across supermarket merchandise groups. What factors account for this variation? Private labels traditionally have been merchandised on the basis of price. The conventional wisdom has been that store brands should offer acceptable quality relative to national brands, but they should emphasize price. Recently, however, some retailers have been emphasizing quality over price; they have received a great deal of attention in the trade press and caused alarm among national brand manufacturers. For example, A&P is aggressively introducing a high-end line of private label products under the Master Choice label, reportedly under the influence of its German parent, Tengelmann.1 In this paper, we propose and test a framework to explain variation across categories in private label dollar share. We try to isolate the determinants of success and examine the roles of relative price and quality. Such understanding appears particularly timely in light of recent highly publicized price rollbacks by national... To read the complete article, login or sign-up using the form below.

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