by Rong Luo
Grocery retailers rank store brands as the most important factor that differentiates them from their competitors. Retailer competition should have a stronger impact on the more substitutable national brands than the more differentiated store brands. However, the literature has not studied the impacts empirically. In this paper, I quantify the different impacts of retailer competition on national brands and store brands using the scanner data of a U.S. chain retailer. I estimate a structural demand and supply model that incorporates the differentiation effect and retailer competition. The results show that national brand consumers are more likely to switch stores than store brands consumers. By analyzing two counterfactual cases, I find that 1) if the retailer did not sell store brands, its profit would decrease, and the loss would be greater in markets with more competitors; and 2) if the retailer competition had increased, then the national brands’ retail prices would decrease more than the store brands’ prices.
The following section is a Q&A with Professor Rong Luo
1. Please briefly describe the main results of your paper.
In this paper, I study the benefits of selling store brands and the different impacts of retailer competition on national brands and store brands, by using the scanner data of a U.S. chain retailer. I estimate a structural demand and supply model that incorporates the differentiation effect and retailer competition. Estimation results show that national brand consumers are more likely to switch stores than store brands consumers. Counterfactual analyses show that 1) if the retailer didn’t sell store brands, its profit would decrease, the loss would be greater in markets with more competitors, and consumer welfare would drop slightly; and 2) if the retailer competition increased, then the national brands’ retail prices would decrease more than the store brands and consumer surplus would improve.
2. What first got you interested in the topic of retail competition and its impact on national and store brands?
Store brands have been increasingly successful around the world. According to the Private Label Manufacturers Association, the total sales of store brands in U.S. supermarkets were $62.5 billion in 2015, with a unit share at 22.9%. Meanwhile, store brands’ sales market share is 38.3% in Europe, 51.8% in the UK, 34.1% in France, and more than 40% in Germany. One important incentive of the retailers introducing store brands is to create differentiation from competitors. As reported in the 2015 Annual State of the Store Brands Industry report, grocery companies rank “to serve as a differentiator that drives traffic to stores and builds customer loyalty” as the most important role of store brands. That is, the cross-retailer differentiation is the most important role of store brands, but this effect has not been empirically studied in the literature. This paper is the first to empirically analyze the differentiation effect.
3. How does your focus differ from previous explorations of this topic?
The empirical literature on store brands has studied three other types of incentives of retailers’ to sell store brands. First, many researches have focused on whether the introduction of store brands increases a retailer’s bargaining power against national brand manufacturers. The second type of retailer incentive is to create product differentiation within its product set and increase national brands’ markups. The third type of incentive is to increase consumers’ store loyalty by introducing good quality store brands. In this paper, I focus on the cross-retailer differentiation effect of introducing store brands.
4. Why is data on the ready-to-eat cereal category particularly useful for addressing this topic?
I focus on the ready-to-eat category because not only is it the largest breakfast industry, but also competition in this industry is intense, with hundreds of national brands and store brands. Most chain retailers have their own ready-to-eat cereal brands, so the results could have wide applications.
5. What directions might you suggest for further research?
There are several interesting directions in which to extend the current research. If richer data on all grocery retailers in different geographic markets are available, then one can analyze the retailers’ decisions on introducing store brands while considering the cross-retailer competition and within-retailer interbrand competition effects. Another direction is to study the national brand manufacturers’ responses to store brands entering the market, such as product differentiation and adjusting the vertical contracts with retailers.