How Should National Brands Think about Private Labels?

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Throughout the 1990s, interest in private label brands in the U.S. grocery industry has increased. Store brands currently account for slightly less than 15 percent of total dollar sales. In several European markets, private labels have been even more influential — for instance, in the United Kingdom, they accounted for 20 percent of sales in 1971 and 36 percent in 1994.1 With current demographics guaranteeing low growth in consumer spending on food and packaged goods far into the next century, private labels can be a formidable force in an already highly competitive grocery environment. The disposable diaper market suggests that, when not supported by a continuous stream of product innovations, categories can turn into commodities, rendering the retailer’s built-in distribution an even more valuable resource. Retailers get quick, cheap sales feedback that allows them to mimic what works for national brands while avoiding more costly mistakes. For example, being close to the customer has helped Starbuck’s turn a long-declining commodity into a value-added, distinctive store brand. Consequently, national manufacturers have become more alert to the threat of private labels, most retailers have taken steps to exploit the opportunity, and many smaller (and a few larger) manufacturers have begun to supply private label alternatives.

In this paper, I focus on the food retailing industry, where private labels are the dominant “brand” in about 20 percent of the more than 350 product categories that supermarkets carry.2 In the fresh produce and meat departments, which account for about 25 percent to 30 percent of total store sales, virtually all products are sold with the retailer’s name on a variable-weight package (like meat) or carry no brand name at all, so the retailer is the provider by default. Retailers make higher gross profit margins on private labels, usually about 20 percent to 30 percent on a percentage basis, which at times translates into higher profits on a dollar basis. Private label performance varies widely across product categories and items.3 For example, 65 percent of dollar sales in frozen green and wax beans accrues to the private label, whereas, in deodorants, private labels have only a 1.1 percent market share. Historically, private labels have had a greater presence in the frozen and refrigerated categories (20.4 percent and 15 percent, respectively, in 1989) than in health and beauty aids (4.4 percent).

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1. “Private Labels Reign in British Groceries,” Wall Street Journal, 3 March 1994, p. B1.

2. “The Rebirth of Private Label,” Progressive Grocer, advertising supplement, January 1990, pp. 75–82.

3. S.J. Hoch and S. Banerji, “When Do Private Labels Succeed?,” Sloan Management Review, Summer 1993, pp. 57–67.

4. G. Day, Market-Driven Strategy: Processes for Creating Value (New York: Free Press, 1990).

5. C.A. Montgomery and B. Wernerfelt, “Risk Reduction and Umbrella Branding,” Journal of Business 65 (1992): 31–50; and

M. Sullivan, “Brand Extensions: When to Use Them,” Management Science 38 (1992): 793–806.

6. C. Narasimhan and R.T. Wilcox, “Private Labels and the Channel Relationship: A Cross-Category Analysis” (St. Louis, Missouri: Washington University, Olin School of Business, working paper, 1995).

7. M. Sullivan, “Slotting Allowances” (Chicago: University of Chicago Graduate School of Business, working paper, 1994).

8. M. Abraham and L. Lodish, “Getting the Most Out of Advertising and Promotion,” Harvard Business Review, May–June 1990, pp. 50–60; and

R.C. Blattberg and A. Levin, “Modeling the Effectiveness and Profitability of Trade Promotions,” Marketing Science 6 (1987): 124–146.

9. I estimated category-level price elasticities for each store, separately for each product category, using Hoch et al.’s methodology. In addition, I computed private label market shares (in dollars) for each category. Detailed information describing the demographic composition (1990 census) and the competitive environment were available for the trading areas surrounding each of the store locations. See:

S.J. Hoch, B.D. Kim, A.L. Montgomery, and P.E. Rossi, “Determinants of Store-Level Price Elasticity,” Journal of Marketing Research 31 (1995): pp. 17–29.

10. This is easily accommodated within Becker’s household production model of consumer behavior if one considers attained education level as a proxy for opportunity costs. See:

G. Becker, “A Theory of the Allocation of Time,” Economic Journal 75 (1965): 493–517.

11. Updated data from Hoch and Banerji (1993).

12. More specifically, Hoch and Banerji found that disposable income exerts both a coincident (same year) and lagging (one year later) influence on private label performance.

13. P.R. Messinger and C. Narasimhan, “Has Power Shifted in the Grocery Channel?,” Marketing Science 14 (1995): 189–223.

14. Hoch and Banerji (1993).

15. P. Kotler, Marketing Management: Analysis, Planning, Implementation and Control (Englewood Cliffs, New Jersey: Prentice-Hall, 1994).

16. “Advertising Factbook,” Advertising Age, 4 January 1993, p. 20.

17. J.P. Morgan, “Private Label: Cornerstone of the New Supermarket Architecture” (New York: J.P. Morgan Securities, industry report, 31 January 1994).

18. R. Lal, “Manufacturer Trade Deals and Retail Price Promotions,” Journal of Marketing Research 27 (1990): 428–444.

19. “Private Label: Poised For Performance,” Progressive Grocer, advertising supplement, April 1991, pp. 85–98.

20. Hoch and Banerji (1993).

21. Ibid.

22. Raju, Sethuraman, and Dhar also observed this phenomenon. See:

J.S. Raju, R. Sethuraman, and S. Dhar, “National-Store Brand Price Differential and Store Brand Share,” Pricing Theory & Practice: An International Journal 3 (1995): pp. 17–24.

23. M.E. Parry, “Procter & Gamble: The Wal-Mart Partnership” (Charlottesville, Virginia: Darden Graduate School of Business Administration case study, UVA-M-0452, 1994).

24. See X. Drèze, S.J. Hoch, and M.E. Purk, “Shelf Management and Space Elasticity,” Journal of Retailing 70 (1994): 301–326;

S.J. Hoch, X. Drèze, and M.E. Purk, “EDLP, Hi-Lo, and Margin Arithmetic,” Journal of Marketing 58 (1994): 16–29;

and Hoch et al. (1995).

25. R. Rosenthal, Meta-Analytic Procedures for Social Research (Beverly Hills, California: Sage, 1991).

26. G.M. Allenby and P.E. Rossi, “Quality Perceptions and Asymmetric Switching Between Brands,” Marketing Science 10 (1991): 185–204;

R.C. Blattberg and K. Wisniewski, “Price-Induced Patterns of Competition,” Marketing Science 8 (1989): 291–309; and

R. Sethuraman, “Is Price Differential a Major Factor in Private Label Sales? An Analysis of Grocery Products” (Iowa City, Iowa: University of Iowa, College of Business Administration, working paper, 1994).

27. B.G.S. Hardie, E.J. Johnson, and P.S. Fader, “Modeling Loss Aversion and Reference Dependence Effects on Brand Choice,” Marketing Science 12 (1993): 378–394.

28. Hoch, Drèze, and Purk (1994).

29. Ibid.

30. R.J. Dolan, “Eastman Kodak Company: Funtime Film” (Boston: Harvard Business School, case 9-594-111, 1995).

31. The sourcebook is billed as “the most comprehensive reference guide in the private label industry.” There are approximately 1,400 different manufacturers listed as private label suppliers in one or more of the product categories sold in grocery stores. Along with two experienced retail buyers, I identified all the firms listed that also manufactured national brands. See:

Product Label Product News, Supplier Source Book 5 (New York: Certified Publishers, 1991).


The author thanks Dominick’s Finer Foods for cooperation in the design and execution of the pricing experiments, Information Resources, Inc. for supplemental data, and Xavier Drèze and Mary Purk for their invaluable help. Mary Sullivan and Sanjay Dhar gave helpful comments. The Micro-Marketing Project at the Graduate School of Business, University of Chicago, provided funding for this work.

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