private label products..litr review

8/7/2019 Private Label Products..Litr Review

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Private label products or services are typically those manufactured or provided by one company for

offer under another company's brand. Private label goods and services are available in a wide range

of industries from food to cosmetics to web hosting. They are often positioned as lower cost

alternatives to regional, national or international brands, although recently some private label

brands have been positioned as "premium" brands to compete with existing "name" brands

Private Label as a Marketing and Business Tool

Retailers have extended the concept of private label to identify a brand with a store, a conceptknown as the store brand. This can be a far more profitable business than selling nationallyadvertised brands. A Food Marketing Institute study in the U.S. found that retailers earn a 35percent gross margin on store-branded products compared to 25.9 percent on comparablenationally advertised brands. [5]

Use of Private Label goes well beyond the Store Brands, though certainly this is the mostfrequent situation in which a customer will have contact with one.

Several corporations source an extremely wide range of products from specializedmanufacturers, which may or may not own their brand. The reasons for this business practiceare several. A company, having identified a business opportunity in a new product or groupsof products, may assess that setting up their own production line or facility may require asubstantial investment in equipment, human resources, patents and so forth. In many cases, aviable alternative is to source from a specialized company that has already made suchinvestments and that has spare production capacity. If the two companies find that the marketsituation allows to avoid or minimize direct competition without stealing each other's market

share (cannibalization), then both companies may find an agreement whereby the specializedmanufacturer supplies the goods to the other. The methods to reduce 'cannibalization' are

general marketing practices such as: dedicated distribution channels, different image and

customer perception of the brands, pricing, separate regional presence etc.

This applies, with basically the same basic concepts, to the service industry (for example,customer services help-lines).

Private Label may be behind the decision of some companies to enter the market withproducts that are quite different, but somehow associable, to those that have made themfamous (apparel companies launching perfumes; car companies launching watches and so

on). Private Label may be an extremely profitable business for companies or corporationscommanding an important share of the market with certain products that enjoy a high

customer recognition.

As sophisticated technologies become widespread, and even subsidized, in emergingcountries (generally with export-driven economies), sourcing of a wide range of products canbe made at very low cost. These same products may have prices that allow for net margins toaccount up to several times the cost of the goods sold. Customers may be unaware of thisbusiness practice and be paying higher prices for products that differ little from others withless famous brands. On the other hand, some companies do provide additional guarantees tothese products offering better quality, customer support, additional services.



Customers should know about this business practice and avoid paying high prices unless areal advantage on other products is clearly identifiable.

For the past several decades, manufacturers have been the key creators and builders of branded consumer products. However, this situation has changed more recently as retailershave begun to play a key role in branding. Although aggregate private label share never exceeded 17% before 1993 (Hoch, 1996), it went up to 20% of unit sales in aggregate in1998; that same year, private labels were among the top three brands in 70% of supermarketproduct categories (Sayman et al., 2002). In food and drug stores, unit sales of private labelgoods increased 8.6% during 2002±2003, compared with 1.5% for national brands, and inthe apparel market, private labels represented 36% of the US$163 billion spent in 2002.These figures together imply that private labels have assumed a more prominent position inthe market.Much marketing literature discusses various issues surrounding private labels, includingthe advantages for a retailer to have its own store brand (e.g., Corstjen and Lal, 2000; Corresponding author.

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Narasimhan andWilcox, 1998; Chintagunta et al., 2002), the optimal quality level of privatelabels (Dunne and Narasimhan, 1999;Winningham, 1999; Apelbaum et al., 2003), and hownational brands should confront private labels (Hoch, 1996; Quelch and Harding, 1996; Kimand Parker, 1999; Rao, 1991; Mills, 1999; Lal, 1990). From the manufacturer¶s standpoint

in the literature, private labels appear as competitors for national brands, which me ansnational brands must fight against those private labels. More interestingly, however, somenational brand manufacturers actually provide retailers with private labels (Quelch andHarding, 1996; Dunne and Narasimhan, 1999). Despite the prevalence of this practice, littleliterature has discussed the reason national brand manufacturers might do so.1

In this article, we offer some reasons for why a manufacturer, which has its own nationalbrands, provides private labels that compete against its own products. We build a gametheoreticmodel to show that private labels can mitigate the promotion competition betweennational brand manufacturers; thus, providing private labels to the common retailer can bebeneficial for all the members in the channel.The logic for this claim is as follows: Consider a channel in which two national brandmanufacturers (hereafter denoted NB) sell their products through a monopolistic commonretailer. Each national brand manufacturer constantly has an incentive to promote to gainmore market share. When the promotion expense is not very large (in comparison with the

gain from promotion), both NBs will engage in promotion and thus get caught in a prisoners¶dilemma, because both NBs pay the promotion expense but their promotion effects areneutralized. However, when one of the national brands introduces a lower-quality productas the retailer¶s private label (hereafter denoted PL), the NB¶s subsequent promotion has twoeffects: It grabs market share from the other NB, and it reduces t he retailer¶s persuasivenessin terms of switching consumers to buy the PL. Therefore, the NB that provides the PL willhave less incentive to engage in a promotion than will the other NB.2 Even the NB that doesnot provide the PL has less incentive to promote because the cost of promotion remainsthe same, but the gain from promotion is lessened.3 Therefore, as long as the promotionexpense is greater than a certain critical point, both NBs might avoid promotions when onesupplies a PL to the retailer.There are some indirectly empirical evidences supporting this concept.4 For example,Ward et al. (2002) find that private label entry is correlated with reduced NBs¶ promotionalactivities in processed food and beverage industries; Chintagunta, Bonfrer, and Song (2002)

find similar phenomenon in their dataset about oats and frozen pasta categories.In addition, in terms of equilibrium, the quality of the PL plays an important role in thegame. The literature about PL (e.g., Mills, 1995; Sayman et al., 2002) u sually suggests thatit is to the retailer¶s best benefit to obtain the highest -quality PL as possible to be competitiveand comparable with the leading national brand and thereby obtain terms of trade. Does thissuggestion imply that NBs should suppress the PL quality as much as they can?We concludethat when the other NB is involved in an interaction relationship between an NB and itsretailer, this scenario is not the case. Because the NBs¶ incentive for engaging in promotiondecreases with the quality of the PL, in some circumstances, the NB that provides the PLwill sacrifice some of its benefits to elevate the quality to soften the promotion competition.We organize the rest of the article as follows: In Section 1, we review the literature,



then in Section 2, we lay out the model. In Section 3, we analyze the equilibrium of The literature devoted to PLs tends to discuss the reasons retailers introduce private labels,

the factors that favor the development of private labels, and the consequences of their development for the relationship between the manufacturer of a national brand and itsretailer. For the retailer, introducing a quality PL successfully not only increases its totalprofit but also provides it some strategic advantages. For example, it can distinguish itself from other competing retailers and cultivate the store loyalty of consumers (Corstjen and

Lal, 2000); obtain an improved position for getting better terms of trade from the NBsagainst which the PL competes (Narasimhan and Wilcox, 1998; Chintagunta et al., 2002);and employ the PL, when it is carried by competing retailers, as an implicit coordinationmechanism (Chintagunta et al., 2002). Therefore, there are significant incentives for retailersto introduce PLs as much as possible.How do NBs deal with this strong inclination? In recent years, retailers have tendedto elevate their PL quality (Dunne and Narasimhan, 1999; Winningham, 1999; MarketingWeek, 2000; Apelbaum et al., 2003), and in turn, PLs have attained greater market share(Hoch and Banerji, 1993). If NBs do nothing but justwait and see, they will suffer decreasingprofits and lose market share as the PL quality continues to get higher (Sayman et al., 2002;Ailawadi and Harlam, 2004). The literature has suggested several ways manufacturers cancope with these trends, which can be categorized into three types of strategies.First, by refusing to supply the retailer with a PL, the manufacturer can fight against PLsby itself, for example by introducing a value flanker (Hoch, 1996; Quelch and Harding,

1996; Mills, 1999), distancing itself through quality innovations (Hoch, 1996; Quelch andHarding, 1996; Mills, 1999), managing the price gaps (Hoch, 1996; Quelch and Harding,1996), investing in brand equities (Quelch and Harding, 1996; Kim and Parker, 1999), or exploiting sales promotion tactics (Rao, 1991; Quelch and Harding, 1996; Mills, 1999).However, these options fail to consider competition or the implicit collaboration between

NBs, as though there were only one NB in the market. Second, if NBs decide to alternatetheir promotion occurrences, they can achieve an implicit collusion that enables them todefend their market shares from possible encroachments by a PL(Lal, 1990). In this scenario,however, though they limit further invasion by the PL, they lose profits because of promotionexpenses. Third, as suggested by Dunne and Narasimhan (1999), an NB can join the gameand supply the retailer with a PL as a substitute for its own brand, in which case the supply of the PL functions as a strategic role. That is, the PL provides economic protection to the NBwhen the NB wants to raise the price on its brand, because the NB does not have to worryabout the loss of its customers to another national brand rival. In addition, supplyin g thePL can keep pure PL manufacturers from entering the category, capturing price-sensitiveshoppers, and gradually growing. Furthermore, the NB can use the PL to attack leadingcompetitors. Dunne and Narasimhan (1999) similarly suggest a switch from competingwith a PL to co-opting the PL as a strategic tool to fight against national brand rivals and

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pure PL manufacturers. Supplying the retailer with a PL solely as a strategic function isattractive, but we propose that the NB also can us e the PL to mitigate competition rather than to compete with its national-brand rival. Furthermore, we extend the strategic role of PL as a commitment not to promote, which offers a way out of the prisoners¶ dilemmacreated by NBs¶ promotion competitions, in addition to that proposed by Lal (1990).In light of the ideas suggested by Dunne and Narasimhan (1999), we propose that the NBshould consider the broader competitive environment, which includes interactions amonganother national brand competitor, the common retailer, and itself, when thinking about PLissues. In addition to the competitive perspectives just described, whether competing witha PL or other NBs, supplying the private label also might be considered as a co mmitmentto relieve the often harsh promotion battles between national brands. In this study, we show

that in certain circumstances, the NB can mitigate the competition and benefit all firms inthe game by supplying the PL in the context of a category with two national brand rivals of equal strength that have a common retailer.

private label products..litr review

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