A Review of Analytical Models of National Brand vs. Store Brand Competition

1
A Review of Analytical Models of National Brand
vs. Store Brand Competition

• Raj Sethuraman
• Marketing Science Conference
• Atlanta
• June 17, 2005
• Project originally funded by Pease Foundation

2
Background/Motivation

• Store brand an important topic of managerial
  interest to manufacturers and retailers
• Academic research on private labels growing
• Hence, need for review to identify/integrate
  research contributions and suggest future
  research directions.
• Pease Foundation grant

3
Compilation of Literature (Academic
Research)1965 - 2005

• Online Lexis-Nexis, ABI Inform, Search Engines
• Offline Citations, Library Search, conference
  presentations, working papers from colleagues

Over 100 papers collected (still growing)
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Objective of this Paper

• Review analytical (mathematical) models of
  national brand vs. store brand competition
• Identify/integrate key insights obtained from
  those studies as they relate to national brand,
  store brand strategies
• Identify gaps in the literature and suggest
  directions for future research

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Framework
Costs
Focal NB Manufacturer
Competing NB Manufacturers
Supplier (SB)
Manufacturer/Supplier Prices, quality, promotions
(advertising) (NB, SB)
Focal Retailer
Competing Retailer
Retail price, retail promotion (NB, SB)
Consumer Segment 1
Consumer Segment 2..
Purchase/Demand (NB, SB)
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Model Structure/Assumptions
Label Description Code
nbc National brand manufacturing cost considered? 0 no 1 yes, linear 2 yes, non linear
sbc PL supply cost considered 0 no 1 yes, linear 2 yes, non linear
nmf Number of national brand manufacturers 1 single mfr 2 multiple symmetric 3 multiple asymmetric
fri PL supplied by fringe firm (non-strategic player)? 1 fringe firm 2 nb mfr or fringe firm
nrt Number of retailer 0 no retailer 1 single retailer 2 multiple symmetric 3 multiple asymmetric
con Consumer segments explicitly considered? 0 no (aggregate) 1 yes
nba National brand advertising (non price promo) considered? 0 no 1 Yes
sba Store brand non price promo considered 0 no 1 yes
sbq Store brand quality considered explicitly 0 no 1 yes
dem Demand function linear in price 0 no 1 yes
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Study Profiles (n 25)
Econ field Mfr. competition Retail
competition Costs considered SB supplier NB
advertising Consumer segments SB quality Non
linear demand
9
8
3
7
4
6
14
10
5
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Decision-Oriented Perspective for Obtaining
Insights
Retailer Strategies NB price Price
differential SB quality SB supplier SB price
promo SB non price promo
External Factors NB-SB comp. NB-NB comp. NB-SB
cost Number of NB Retail competition NB
advertising/effect SB quality Category
size Leading NB share
SB Intro
Manufacturers Strategies (NB) NB
price Advertising Trade deal Dual
branding Coupon/other Coop marketing
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Seeking Analytical Generalization
Analytical Generalization - Refers to the probability that an analytical result will generally hold true in the real world Analytical Generalization - Refers to the probability that an analytical result will generally hold true in the real world
Criteria for evaluating generalizability of Analytical Result Criteria for evaluating generalizability of Analytical Result
Robustness Analytical validation of results under different market conditions
Intuition Rational explanation for the result
Empirical Validation Empirical observations that are consistent with analytical results
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Analytical Generalization AG1 (NB-SB Price
Substitutability)

• When
• (i) cost of procuring the store brand equals (or
  is less than) the cost of manufacturing the
  national brand, and
• (ii) store brand and national brand are competing
  in the same market,

• the greater the price substitutability (relative
  quality of store brand with national brand), the
  higher is the (profit) incentive for a retailer
  to introduce a store brand.

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Supporting Evidence from Analytical Models
1st Author Year Operationalization nmf nrt nbc sbc sup nba sba con sbq dem
Sethuraman 1991 Cross-price sensitivity 1 1 0 0 0 1 0 0 0 1
Raju 1995 Cross-price sensitivity 2 1 0 0 0 0 0 0 0 1
Mills 1995 Price substituability 1 1 0 0 0 0 0 1 0 1
Caprice 1998 SB quality 1 1 1 1 0 1 0 0 1 2
Narsimhan 1998 size of switching segment 1 1 0 0 0 0 0 1 0 1
Bontems 1999 SB quality 1 1 1 1 0 0 0 1 1 1
Horowitz 2000 SB quality 1 2 0 1 0 0 0 0 1 2
Corstjens 2000 SB quality 1 2 1 1 0 0 1 1 1 2
Scottmorton 2002 Fraction of NB utility 1 1 0 0 0 0 0 1 0 1
Sayman 2002 Cross-price sensitivity 2 1 0 0 0 0 0 0 1 1
Sayman 2004 Cross-price sensitivity 2 1 0 0 0 0 0 0 1 1
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Intuition for AG1 (NB-SB Price Substitutability)

• High Margin. Retailer gets higher margin from SB
  than from NB. High price substitutability
  increases quantity of private labels sold.
  Therefore, switching to higher margin private
  labels increases total retailer profits.
• Bargaining Power. High price substitutability
  makes national brand less indispensable reduces
  incremental contribution of national brand to
  total channel profits, thus reducing
  manufacturers bargaining power.
• Store Loyalty. Even if there is a cost
  disadvantage for store brand, high quality
  private label increases store loyalty and thus
  its profits.

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Empirical Support for AG1 - Price
Substitutability)

• Fox Marketing News (1987)
• Wall Street Journal (1993)
• Gallup Poll (1999)
• PLMA ROI report (2000)
• Meyers Research (2005)
• Many others emphasize the growing equivalence
  between NB and SB.

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Key Insights (Dominant Relationships) from
Analytical Models
Retailer Strategies
-()
()
-()
-()

-()
?
(?)
0 (no promo) (?)
(?)
-()
-(?)
(?)
NB wholesale price
()
?
NB advertising
()
Category size
()
Dual branding
positive relationship - negative
relationship High confidence Medium
confidence ? questionable
NB trade deal
Manufacturer Strategies
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Future Research Directions and Corresponding
Model Structure
Future Research Questions Model Structure Requirements
1 How does retail competition influence store brand introduction and strategies Incorporate multiple asymmetric retailers (even two retailers may be sufficient)
2 Does NB advertising suppress or stimulate store brand intro Incorporate NB advertising in the demand function and as a decision variable
3 Who should supply the private label for the retailer own, outside or NB manufacturer? Incorporate fixed and non-linear variable cost function for national and store brands and include quality as a decision variable and store brand supplier as a strategic player
4 Reason for retail price promotion is it a reactive or proactive strategy. Multiple consumer segments, multiple (two) national brands, and possible asymmetries in cross-price sensitivity between NB and SB.
5 What conditions are conducive for premium private labels Multiple consumer segments, store brand quality as a decision variable, include supply cost of SB.
6 Can national brand and store brand complement each other in a cooperative manner Multiple consumer segments, cost function and total channel profit maximization
7 How to model NB-SB competition in non-grocery products? Would results be different? Explore institutional/market structure in non-gracery products market such as apparel, appliances.
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Structure of Future Analytical Models

• To incorporate as many of the following
  characteristics
• Multiple (at least two) asymmetric NB
• Multiple (at least two) asymmetric retailers
• Multiple consumer segments
• NB advertising
• NB and SB price promotions
• Cost of manufacturing NB and SB
• Non-linear (in price) demand function
• Store brand quality as a decision variable
• Store brand supplier as a strategic player
• Future Possible Research Methods
• Large-scale simulations
• Decision Support Systems