Consequences of Competition Between National Brands and Private Labels

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Consequences of competition between national brands and private labelsEmpirical results from different German outlet formatsRainer Olbrich and Gundula Grewe Fakultat fur Wirtschaftswissenschaft, FernUniversitat in Hagen, Hagen, GermanyAbstractPurpose A proliferation of private labels in European food retailing has been evident for several years now. Against this background, the purpose of this paper is to analyse the impact of competition between national brands and private labels on product variety, prices and turnover. Design/methodology/approach Within the empirical study, a product group from the ready-meals category is analysed over a total period of six years (between 2000 and 2005) based on scanner data from different German outlet formats. The empirical study contains time series as well as regression analyses. Findings The empirical results indicate that, in all studied outlet formats, there is evidence of decreasing product variety and increasing prices over time. Moreover, the results show that the turnover in the supermarkets and especially in the hypermarkets is in decline. A positive turnover trend can only be found in the discount stores. Originality/value This empirical study is the rst that covers such a long period of time (six years) and several outlet formats. Previous studies have mostly been static or short-term and predominantly only covered one outlet format. Keywords Brands, Labelling, Retailing, Food products, Retail marketing, Germany Paper type Research paper

Consequences of competition

933Received 30 May 2008 Revised 15 October 2008 Accepted 27 April 2009

1. On the proliferation of private labels For several years now, a proliferation of private labels has been evident in European food retailing (Kumar and Steenkamp, 2007; Olbrich et al., 2009). The proliferation of private labels has been facilitated by the per se ban on vertical price xing (Article 81 EC), regulating the European market by law. The prohibition of resale price maintenance has restricted the pricing policy tools available to manufacturers and has, in its wake, considerably broadened the range of pricing policy options for private labels. Here, price sceneries, i.e. articially generated pricing comparisons for certain goods are playing an ever-increasing role (Olbrich and Buhr, 2004). A topical example from food retailing shows the form in which price sceneries are currently embedded in business practices. Advertising leaets issued by the retailer group REWE showed a direct comparison in the form of illustrations, comparing the price and quality of its own labels and national brands (REWE leaets from week 22/2007 and 23/2007).

International Journal of Retail & Distribution Management Vol. 37 No. 11, 2009 pp. 933-951 q Emerald Group Publishing Limited 0959-0552 DOI 10.1108/09590550910999361

IJRDM 37,11

934

Here, the intended effect of the comparison is not only aimed directly at an increase in sales of private labels, but also at the retailers prole in comparison with other retailers that still sell a considerable number of national brands. In this context, the judgement pronounced by the US Supreme Court on 28 June 2007 regarding vertical pricing agreements is of particular signicance. In it, the US Supreme Court overturned the former per se prohibition of vertical minimum pricing agreements and instead introduced case-by-case assessment (rule-of-reason; US Supreme Court, judgement of 28 June 2007, No. 06-480 Leegin Creative Leather Products, Inc. vs PSKS, Inc.). The court struck down an almost 100 year old precedent from 1911, thereby at least indirectly recognising potential anti-competitive effects of any per se prohibition. Owing to the associated increase in the power for the retailers, current literature on the subject has reiterated the fear that statutory regulation of the market could have effects on ranges of products available in the stores and on pricing policy that will have a detrimental impact from the perspective of national brands manufacturers. Against this background, the objective of this study is, after a discussion of the relevant literature and the hypotheses development (Chapter 2), to demonstrate, on the basis of empirical data from the German groceries sector, selected effects of the proliferation of private labels in the product group studied (Chapter 4), in order to ultimately point out the risks of continued crowding-out of national brands. The utilised data, sample, measures and method will be explicated in detail in Chapter 3. 2. Literature review and hypotheses development In the literature, on the one hand pro-competitive effects are attributed to the proliferation of private labels. On the other hand, however, anti-competitive effects are identied, at least in the long-term (Olbrich et al., 2009). This contradiction in the results can be attributed to the varying lengths of the studies. The effects of the proliferation of private labels in view of the indicators product variety, prices and turnover discussed in the literature are illustrated in the following sections. In some instances, the same authors expect there to be both a reduction and an increase in the range of different products available (Dobson, 1998; Vogel, 1998; Dobson Consulting, 1999; Dobson et al., 2001). By contrast, the following authors or institutions take a clearer stance: Mills (1995) also assumes a reduction in the range of different products as a consequence of the increased distribution of private labels as do the European Commission (1997), the Competition Commission (UK) (2003), the Nordic Competition Authorities (2005) and the Federal Competition Authority of the Republic of Austria (2007). Raju et al. (1995) and Ward et al. (2002) have been able to provide empirical evidence for this position with studies from American supermarkets, Baker et al. (2006) on the basis of questionnaire survey results from Danish producers and retailers from the food sector and Bergstrom et al. (2006) with reference to data from the Swedish food retailing. In contrast to this, however, there are comparatively few (generally older) studies to be found in which there is a reference to a rise in the product variety as an effect of the proliferation of private labels (Call, 1967; National Commission on Food Marketing, 1966; Tager, 1998). Against this background, the following basic hypotheses can be set out in terms of the development of product variety in consumer goods retailing:

H1. Over time, the number of private labels listed continuously increases. H2. Over time, the number of listed national brands continuously declines. H3. Over time, the total number of listed products continuously declines. Assessments also vary concerning the effects of the increase in private labels on the level of prices in the retail sector. Several authors consider (long-term) rising and (short-term) falling prices to be likely or have observed such effects empirically. In the majority of cases, the price level of all products has not been studied, only the prices of national brands. In a few studies, however, the effects on prices of private labels and the level of prices as a whole have also been examined. These results will be explicated in detail in the following paragraphs. Lower prices as a consequence of the proliferation of private labels are mainly expected in older studies and generally in studies that do not include any empirical research (Hoch and Banerji, 1993; Dobson and Waterson, 1997; Dobson, 1998; Vogel, 1998; Dobson Consulting, 1999; Wieser et al., 1999). To justify the assumption of, in particular, short-term (Dobson Consulting, 1999) falling prices, on the one hand reference is made to the fact that national brands have been undercut by competing private labels (Dobson, 1998). The price pressure generated in this way by private labels (Wieser et al., 1999) might lead as a whole to cheaper products on offer (Vogel, 1998). On the other hand, it is also debated whether falling prices could be a consequence of the passing on of more favourable purchasing terms and conditions to consumers (Dobson and Waterson, 1997). It is true that even a few recent sources do report price reductions: According to Bergstrom et al. (2006), a 10 per cent increase in the market share of private labels leads to a 3.4 per cent reduction in price level in the Swedish food retailing (the authors also refer in this context to the Handelns Utredningsinstitut, 2005). The Nordic Competition Authorities (2005) also assume, without any empirical study having been carried out, that a rising percentage of private labels goes hand in hand with a reduction in price levels. It should be emphasised that price level should not be regarded independent of quality. Lower prices are often associated with lower quality (Hoch and Banerji, 1993). That means that related to the previous (higher) quality level, a lower price in absolute terms could still represent a relative price increase. Falling prices in the wake of an increase in private labels have seldom been proven empirically. Cotterill and Putsis (2000), in a study of American supermarkets, discovered lower prices of national brands and private labels where the market shares of private labels were higher. Chintagunta et al. (2002) also studied, among other things, the effects of the introduction of private labels on the prices of national brands and found price reductions of approximately 7 per cent. These authors are the only ones who used a sample period (275 weeks) that is comparable to that in this study (312 weeks). However, they only determine supermarkets of a particular chain and only have a very limited data basis. Furthermore, they only analyse the prices of national brands and total sales. The product variety,