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George Baltas: Marketing and Strategic Management Group, Warwick Business School, University of Warwick
Introduction
In recent years consumer goods markets, and frequently bought categories in particular, witnessed an increasing presence of private label products. Own label products are defined as consumer products produced by, or on behalf of, retailers and sold under the retailers' own name or trade mark through their own outlets.
This extensively discussed and documented trend in both practitioner and academic oriented literature, characterizes most western economies in Europe and North America. In the UK, own-label grocery products have risen their market share by an average of nearly 1 percent yearly, from 22 percent in 1977 to the current 39 percent. There appears to be an upsurge within this trend as in the past six years alone the private-label market share has grow by 8 percent.
Most own labels are not actually produced by the retailer. Manufacturers may elect to produce own-label products for retailers in order to achieve scale economies in production and distribution, utilization of excess capacity, sales increase without marketing cost, as well as price discrimination because of image differentiation between branded and private-label products. Originally, private labels were only produced when capacity allowed it. Increasingly, entire factories are dedicated to production of private label products. Nevertheless, it appears that most own-label suppliers are small regional players not coincidentally playing on the major manufacturers' field (Hoch, 1996).
The producer of private-label products acts like the perfectly competitive firm of economic theory. The supplier faces a fixed and typically very tight product specification and a fixed price with no returns for innovation or differentiation. Therefore attention is concentrated in cost minimization.
The most obvious benefit to consumers afforded by own brands is lower prices. On average, private labels are 10-30 percent cheaper than national brands in grocery product classes. Lower self prices for the consumer and better gross margins for the retailer clearly require a considerably lower supply price, compared with equivalent manufacturer brands. As discussed above, the power of large retailers to demand terms based on suppliers' marginal costs and tight product specification are main contributory factors. Similarly, lower advertising and promotion cost and quality differences contribute to the formation of a lower supply price for own-label. In fact,...