Private label special post

The share of private label brands, also known as store brands, is growing in almost all markets. Long gone are the days of no-frills bulk products intended only for those looking for a bargain. Today private label brands are increasingly high-quality products that fulfil consumer needs from budget to premium segments. Let's dig into what the research says about private labels and how they work!

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There is an ∩-shaped relation  between private label share and consumer loyalty

Research shows that there is an ∩-shaped relationship between the consumers’ private label share in a chain and their loyalty to that chain. At first the chain loyalty increases with private label share, but the effect turns negative at private label shares around 35–40%. Retailers should therefore strive to identify the optimal private label share of their chain and use targeted promotions to ensure individual customers purchases at that level.

External brands help attract new customers to the store and ensures that the assortment is perceived as relevant. Whereas private label brands typically provide better margins and means of differentiation. If you can get a dedicated private-label customer they will keep coming back because that's the only place they can get that brand.

NA-KD is a fast growing Swedish fashion retailer that excels at providing a competitive mix of external brands, private labels and co-operations with trending social influencers and up-and-coming fashion brands. What really impresses with NA-KD is their ability to identify an influencer and set-up as well launch a new collection in just a few weeks!

Consumers are willing to pay a price premium for external brands

Research suggests that at least for grocery products, consumers are willing to pay a price premium for national brands even when the quality of the national brands and the store brands is the same. We can think of this premium as a brand image premium or a reputation premium. The average image premium has been estimated at 26%. With this said, the private label continuum is continuously being stretched and many retailers are moving from the budget end through to premium brands. This trend is particularly visible in the grocery sector with successful premium private labels such as Tesco's Tescos Finest, Wal-Mart's Sam's Choice, Marks & Spencer's St. Michael, Albert  eijn's AH Select and ICA's ICA Selection. We believe retailer's in all sectors should take inspiration from this.

The strength of the chain brand impacts the attractiveness of its private labels

For obvious reasons, the strength of the store brand will have a big impact of the attractiveness of the private label brands. Consumers will purchase more store brands if those consumers perceive that the store brand quality is higher. Retailers with weak or irrelevant store brands typically tend to obscure the relation to the private label brands so these can compete in their own right. For example, Amazon has quietly debuted a range of more than 40 private label brands the past year(s) including Presto! and Mama Bear (apparel), Happy Belly (food and beverage), NuPro (accessories), Rivet, Stone & Beam, Strathwood, Pinzon (household products). Amazon however has been been notorious for not promoting an attachment to its brands online

Private label quality and category share

Overall quality is an important consideration for private label purchases, sometimes even more important than price. Therefore retailers should generally emphasize the quality in their  promotions of private labels as well in their product development. Research shows that for grocery products, a decrease in the perceived quality differential between a national brand and a store brand increases the store brand’s unit market share. According to one study, a 10% decrease in perceived quality differential between national and store brands increases store brand market share by 3%.

The British sports retailer Wiggle is a great example of how a retailer can reduce the perceived quality gap between it's private labels (DHB for sport cloths, Cosine for carbon fiber wheels, and Eastway for road racing bikes) and external brands. Notably, Wiggle has a very active comments and rating sections where users review products on the site. This has helped showcase the objective quality of Wiggle's private labels and thereby reduce the perceived quality difference.

That was everything we had to say about private labels for this time! If you are interested in learning more about private label brands we recommend the following articles!

/the Formulate team

Ailawadi, Kusum L., Koen Pauwels, and Jan-Benedict E.M. Steenkamp (2008), “Private-Label Use and Store Loyalty.” Journal of Marketing 72 (6), 19–30

Dekimpe, Marnik G., Jan-Benedict E.M. Steenkamp, Martin Mellens, and Piet Vanden Abeele (1997), “Decline and Variability in Brand Loyalty.” International Journal of Research in Marketing 14 (5), 405–20

Hoch, Stephen J., and Shumeet Banerji (1993), “When Do Private Labels Succeed?” Sloan Management Review 34 (4), 57–67

Sethuraman, Raj (2006), “Private-Label Marketing Strategies in Packaged Goods: Management Beliefs and Research Insights.” Cambridge, Mass.: Marketing Science Institute Report No. 06–108

Arvid Stenback Lund