When it comes to ice cream, grocery retailers’ primary use of private label is to take margin from national brands, a recent study finds. That observation should hold true for other product categories as well, one of the study’s authors tells PL Buyer’s eReport. Plus, there are other benefits to offering a strong private label product, he says.
“The assumption is the private label benefit comes from a higher margin on the private label units sold. But it’s more complex than that,” says Timothy J. Richards, Morrison Chair of Agribusiness in the Morrison School of Management and Agribusiness, Arizona State University, Mesa. “The retailer, for example, also gains tremendous bargaining power with the national brand maker, to reduce prices and provide services.”
Additional possible retailer uses for private label are for differentiation from other retailers and for building loyalty to retail banners.
National brands responded to the private label threat by increasing investment in innovation for new products and packaging, Richards' study further observes. But that may not be enough to stop additional private label gain. Because the study found the retailer’s share of total margin – retail price less production cost – is higher for private labels than national brands when retailers choose to imitate national brands offerings.
The study, “Spatial Competition and Private Labels,” analyzed data obtained from Fresh Look Marketing Inc., Chicago. Data included weekly price, volume and promotional information for all ice cream UPCs for all retail accounts in the Visalia, Calif., market for a two-year period. The study will soon appear in the Journal of Agricultural and Resource Economics.
For a number of reasons, ice cream provides an appropriate and interesting case study of the role of private labels. “We assume that the results of the study can be generalized across a range of product categories,” says Richards. “To do this research for every category would be prohibitive. Ice cream is pretty normal.”
Private label is important to retailers, the paper says, because it increases retailers’ power over suppliers in the vertical channel and facilitates horizontal differentiation among retailers. The analysis identified the relative importance of each role based on the location of both private labels and national brands of ice cream in attribute space.
“The brand manufacturers are in a difficult position. What we’ve seen is more and more of them using excess capacity to produce private label themselves. In the ice cream space, only a few makers remain who refuse to do this. The strategy of the retailers has to be maximizing their private label. Some are already speaking of 80 percent private label where to date they may be only 30 percent,” Richards says.