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A Review of Analytical Models of National Brand vs. Store Brand Competition

A Review of Analytical Models of National Brand vs. Store Brand Competition. Raj Sethuraman Marketing Science Conference Atlanta June 17, 2005 Project originally funded by Pease Foundation. Background/Motivation.

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A Review of Analytical Models of National Brand vs. Store Brand Competition

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  1. A Review of Analytical Models of National Brand vs. Store Brand Competition Raj Sethuraman Marketing Science Conference Atlanta June 17, 2005 Project originally funded by Pease Foundation

  2. Background/Motivation • Store brand an important topic of managerial interest to manufacturers and retailers • Academic research on private labels growing • Hence, need for review to identify/integrate research contributions and suggest future research directions. • Pease Foundation grant

  3. Analytical Models (25%) Empirical Aggregate (35%) Empirical Experimental Consumer (40%) Compilation of Literature (Academic Research)1965 - 2005 Online – Lexis-Nexis, ABI Inform, Search Engines Offline – Citations, Library Search, conference presentations, working papers from colleagues Over 100 papers collected (still growing)

  4. Objective of this Paper • Review analytical (mathematical) models of national brand vs. store brand competition • Identify/integrate key insights obtained from those studies as they relate to national brand, store brand strategies • Identify gaps in the literature and suggest directions for future research

  5. Framework Costs Focal NB Manufacturer Competing NB Manufacturers Supplier (SB) Manufacturer/Supplier Prices, quality, promotions (advertising) (NB, SB) Focal Retailer Competing Retailer Retail price, retail promotion (NB, SB) Consumer Segment 1 Consumer Segment 2.. Purchase/Demand (NB, SB)

  6. Model Structure/Assumptions

  7. Study Profiles (n = 25) Econ field Mfr. competition Retail competition Costs considered SB supplier NB advertising Consumer segments SB quality Non linear demand 9 8 3 7 4 6 14 10 5

  8. Decision-Oriented Perspective for Obtaining Insights Retailer Strategies NB price Price differential SB quality SB supplier SB price promo SB non price promo External Factors NB-SB comp. NB-NB comp. NB-SB cost Number of NB Retail competition NB advertising/effect SB quality Category size Leading NB share SB Intro Manufacturers Strategies (NB) NB price Advertising Trade deal Dual branding Coupon/other Coop marketing

  9. Seeking “Analytical Generalization”

  10. Analytical Generalization AG1:(NB-SB Price Substitutability) When (i) cost of procuring the store brand equals (or is less than) the cost of manufacturing the national brand, and (ii) store brand and national brand are competing in the same market, the greater the price substitutability (relative quality of store brand with national brand), the higher is the (profit) incentive for a retailer to introduce a store brand.

  11. Supporting Evidence from Analytical Models

  12. Intuition for AG1 (NB-SB Price Substitutability) • High Margin. Retailer gets higher margin from SB than from NB. High price substitutability increases quantity of private labels sold. Therefore, switching to higher margin private labels increases total retailer profits. • Bargaining Power. High price substitutability makes national brand less indispensable – reduces incremental contribution of national brand to total channel profits, thus reducing manufacturer’s bargaining power. • Store Loyalty. Even if there is a cost disadvantage for store brand, high quality private label increases store loyalty and thus its profits.

  13. Empirical Support for AG1 - Price Substitutability) • Fox Marketing News (1987) • Wall Street Journal (1993) • Gallup Poll (1999) • PLMA ROI report (2000) • Meyers Research (2005) Many others emphasize the growing “equivalence” between NB and SB.

  14. NB–SB comp SB quality NB–NB comp NB retail price SB Intro SB cost Price differential Number of NB SB supplier SB price promo Retail competition NB advertising Leading NB share Key Insights (Dominant Relationships) from Analytical Models Retailer Strategies -(*) +(**) -(*) -(**) + -(**) ? +(?) 0 (no promo) (?) +(?) -(*) -(?) +(?) NB wholesale price +(**) ? NB advertising +(*) Category size +(*) Dual branding + positive relationship - negative relationship ** High confidence * Medium confidence ? questionable NB trade deal Manufacturer Strategies

  15. Future Research Directions and Corresponding Model Structure

  16. Structure of Future Analytical Models To incorporate as many of the following characteristics: • Multiple (at least two) asymmetric NB • Multiple (at least two) asymmetric retailers • Multiple consumer segments • NB advertising • NB and SB price promotions • Cost of manufacturing NB and SB • Non-linear (in price) demand function • Store brand quality as a decision variable • Store brand supplier as a strategic player Future Possible Research Methods: • Large-scale simulations • Decision Support Systems

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