National vs. Store Brands: When Helping the Big Boys Makes Sense

When retailers have to choose between a national brand and their own brand, price concerns often take a back seat
store brand cosmetics

The essentials

Responsive retailers gather a stream of information on consumer tendencies and demands, and those that carry both national and store brand products are often willing to share this intelligence with national brand competitors. Improving their own store brand equity is not always beneficial for retailers because doing so could prompt national manufacturers to increase prices, thereby reducing the retailers’ strategic value of inventory, says Queen's School of Business Assistant Professor Arcan Nalca.

In the war for revenue and market share, retailers have at least one significant advantage over national brand manufacturers. They have direct contact with consumers, who potentially can supply a flow of up-to-date information about their spending habits, tastes, and needs.

If this vital data can be captured, how should retailers who carry both national brands and their own competing store brands best capitalise on the opportunity? “Should retailers create an advantage for their store brands or are there any incentives to share this information with the manufacturers?” asked Queen's School of Business Assistant Professor Arcan Nalca during a research presentation.

Store brands such as Insignia (Best Buy’s private label) and President’s Choice (Loblaw’s hugely successful label) are owned, controlled, and sold exclusively by retailers, and they’re good at it: in 2009, about 36 percent of North American shoppers bought more store brands than they had the previous year.

National brands can never be bullied out of the market, however, because their reputation, advertising power, and alluring products bring consumers into the stores. What helps retailers is simply putting their own versions of products on the shelves beside the major labels — it adds healthy competition and they may be able to gobble up niche segments of the market.

A game of give and take

But, Nalca says, experience shows that retailers cannot push too hard with their store brands. Selling store brand merchandise and therefore carrying less national brand inventory from period to period may reduce the retailer’s demand for national brands, which can be a good bargaining chip for lowering wholesale prices. But there’s a danger that the manufacturer will react by cutting the incentives they provide retailers to carry national brand inventory.

The big question is whether retailers should use their information advantage to improve their own products or those of their national competitors. Showing manufacturers the flaws in their products and strategies means that demand for store brands will eventually fall. But, says Nalca, it is important to consider that in a retail setting, in-house and national labels are often more in a symbiotic relationship than in competition with one another.

“When we together have a better product, we can charge [the consumer],” says Nalca. “And that margin wins.”

Almost counterintuitively, then, there is an incentive for retailers with private labels to share information with manufacturers about consumer tastes and behaviours. In fact, the benefits of this transfer of information are even greater the weaker the store brand equity, says Nalca. At the end of the day, the strong performance of big-name brands is more valuable to the retailer.

The low cost of price matching

Nalca’s specialty is operations management. Much of his research is aimed at how operational decisions — from inventory levels and supply chain design to information sharing and new product development — are adjusted in the development of ever more sophisticated ways of attracting and keeping customers. Such “demand management mechanisms” include individually customised products, personalised shopping experiences, and price matching guarantees.

Price matching guarantees, in particular, are widespread. Of the top 20 electronics stores in North America, says Nalca, 15 offer some sort of price matching. Certain provisions apply: Sears Canada’s website notes that while the retailer will price match, the item must not only be identical and the advertisement correct, it must also be in stock at the competitor’s local store.

Price matching studies show that consumers tend to skip the fine print, and even if they are aware of special conditions, they care more about getting the perceived best price on their preferred brands than about wider inventory availability.

That’s not to say there is no consumer benefit to the “in stock” condition. “These price matching guarantees can be beneficial for customers,” says Nalca, “by enhancing the competition between the retailers and thereby lowering the prices, even if the inventory condition looks like a hassle for consumers.”

Alan Morantz

PDF icon Nalca presentation.pdf7.41 MB

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