Kalpana Heliya
Par 100 posts (V.I.P)
Does private-label use drive store loyalty? This question is important to retailers, as they decide how much to push private labels over national brands, and to national brand manufacturers, as they look for effective ways to both cooperate with and compete with retailers. However, empirical evidence of the association between private-label use and store loyalty is both limited and mixed. This study develops an econometric model of the relationship between a household’s private-label share and behavioral store loyalty. The model includes major drivers of these two behaviors and controls for simultaneity and nonlinearity in the relationship between them. The authors estimate the model using a unique data set that combines complete purchase records of a panel of Dutch households with demographic and psychographic data. They estimate the model for two retail chains in the Netherlands—Albert Heijn, the leading service chain with a well-defined private-label strategy and higher private-label share, and C1000, the leading value chain with lower private-label share.
The authors find that private-label share significantly affects all three measures of store loyalty in the study: share of wallet, share of items purchased, and share of shopping trips. Furthermore, store loyalty has a significant effect on private-label share. For the service chain, both effects are strongly nonmonotonic in the form of an inverted U. Share of wallet increases with private-label share up to a certain point and then declines. The inversion point is at approximately 40% private-label share. Private-label share also increases with share of wallet, but only up to a certain point. The effect becomes negative at approximately 50% share of wallet. For the value chain, the effects are positive and nonlinear but do not exhibit nonmonotonicity, because private label share has not yet reached high enough levels.
The managerial implications of this research are important. Retailers can reap the benefits of a virtuous cycle; greater private-label share increases share of wallet, and greater share of wallet increases private-label share. However, this virtuous cycle operates only to a point because heavy private-label buyers tend to be loyal to price savings and private labels in general rather than to the private label of any particular chain. Therefore, retailers with a high-quality, well-differentiated private label face a conundrum. What can they do to grow their private label while avoiding the downside? They can focus on medium private-label buyers and (1) develop specialty private-label products to increase the perception of choice (e.g., Tesco) or (2) imbue their private labels with emotion and imagery to encourage use in categories in which consumers are otherwise reluctant to buy them (e.g., Target). Chains without a well-differentiated private-label program face a different challenge—namely, improving the actual and perceived quality of their private-label and convincing shoppers to try them. Their ability to build a virtuous cycle is also limited by the small reverse effect of store loyalty on private-label share.
Author: KUSUM L. AILAWADI, KOEN PAUWELS, & JAN-BENEDICT E.M. STEENKAMP
The authors find that private-label share significantly affects all three measures of store loyalty in the study: share of wallet, share of items purchased, and share of shopping trips. Furthermore, store loyalty has a significant effect on private-label share. For the service chain, both effects are strongly nonmonotonic in the form of an inverted U. Share of wallet increases with private-label share up to a certain point and then declines. The inversion point is at approximately 40% private-label share. Private-label share also increases with share of wallet, but only up to a certain point. The effect becomes negative at approximately 50% share of wallet. For the value chain, the effects are positive and nonlinear but do not exhibit nonmonotonicity, because private label share has not yet reached high enough levels.
The managerial implications of this research are important. Retailers can reap the benefits of a virtuous cycle; greater private-label share increases share of wallet, and greater share of wallet increases private-label share. However, this virtuous cycle operates only to a point because heavy private-label buyers tend to be loyal to price savings and private labels in general rather than to the private label of any particular chain. Therefore, retailers with a high-quality, well-differentiated private label face a conundrum. What can they do to grow their private label while avoiding the downside? They can focus on medium private-label buyers and (1) develop specialty private-label products to increase the perception of choice (e.g., Tesco) or (2) imbue their private labels with emotion and imagery to encourage use in categories in which consumers are otherwise reluctant to buy them (e.g., Target). Chains without a well-differentiated private-label program face a different challenge—namely, improving the actual and perceived quality of their private-label and convincing shoppers to try them. Their ability to build a virtuous cycle is also limited by the small reverse effect of store loyalty on private-label share.
Author: KUSUM L. AILAWADI, KOEN PAUWELS, & JAN-BENEDICT E.M. STEENKAMP