New research by economists at the University of Warwick and the University of Toulouse says the average market share of retailers' 'own label' products has risen to 42% in the UK, partly as a result of increasing concentration in the retailing industry. But the dominance of own labels tends to be in products that are bought frequently - like bakery or dairy products - rather than infrequently - like health and beauty or paper products.
Private labels (known in the UK as own labels) are products sold under retailers’ control and commonly carrying the retailers’ name (like ‘Tesco value’ products). These products are different from well-known brands because they put the retailer’s reputation at risk directly. The researchers examine the characteristics of goods in order to explain why private labels are successful in some areas yet not in others.
In fact, most of the products we buy are what economists call ‘experience goods’: we can only ascertain quality or the characteristics of the goods after consumption.
Taking account of such characteristics of the product and analysing a retailer’s strategy for choosing the quality of its private label products provides insights into why private labels have high market shares in some areas but not in others.
The market shares of own labels in Bakery (63%) and Dairy Products (67%) contrast with Health and Beauty (24%) and Paper Products (19%).
The retailer’s problem is that because the quality of their store brand cannot be ascertained prior to purchase, the retailer puts its reputation at stake in convincing consumers the store brand fulfils expectations.
Where products are purchased infrequently, the retailer has an incentive to neglect the returns from subsequent purchases since these will be further away in time (goods such as shampoo, toothpaste and whisky), and therefore not as important as for products that are replenished each week (bread, milk, etc.). Consumers, recognising this, may distrust private label versions.
Hence, the researchers predict that products in categories that are bought frequently and where there is no strong brand name will be the areas where successful private labels develop. This hypothesis is consistent with the facts.
A second result is that an increase in the bargaining power of the retailer gives it strong incentives to maintain its reputation and thus to introduce a credible private label.
Because the retailing industry is becoming more and more concentrated, retailers’ bargaining strength vis-à-vis manufacturers is increasing, and this could help explain why, on average, private label market shares have risen to 42% in the UK.
For further information please contact
Professor Michael Waterson Department of Economics, University of Warwick
Tel: 024 7652 3427
The research, Professor Michael Waterson of the University of Warwick and Fabian Bergès-Sennou from Tolouse, is to be presented at the Royal Economic Society’s Annual Conference this week.