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  • 1. The impact of private label brands on customer loyalty and product category profitability Michael S. Pepe Siena College, Ballston Lake, New York, USA Russell Abratt Huizenga School of Business and Entrepreneurship, Nova Southeastern University, Fort Lauderdale, Florida, USA, and Wits Business School, University of the Witwatersrand, Johannesburg, South Africa, and Paul Dion Weis School of Business, Susquehanna University, Selinsgrove, Pennsylvania, USAAbstractPurpose – The purpose of this study is to investigate the influence of private label resources possessed by a supermarket retailer on the shoppingbehavior of loyal customers. The study examines whether or not private label products can help in the overall enhancement of product categoryperformance.Design/methodology/approach – The paper examines the performance of a supermarket retailer in the Northeast United States that operates over100 stores and generates a total yearly sales volume in excess of $3 billion. Data obtained from the Supermarket’s point of sale information were used.The paper then developed a research model from the literature review and used structural equation modeling to analyze the data.Findings – The findings show that overall dollars spent by loyal customers significantly impacted overall profitability.Research limitations/implications – The data collected pertained to the supermarket’s grocery department that is comprised of center store drygrocery products, frozen food products, and refrigerated dairy products. Perishable departments such as deli, seafood, meat, bakery, floral, generalmerchandise, health and beauty care, etc. were not researched in this study. Also, data obtained were from one individual supermarket chain.Practical implications – Although private label products may represent increased profitability for retailers, consumers prefer a full assortment ofmerchandise; an over emphasis on private label brands may result in diminishing category performance.Originality/value – The paper examines the performance of a supermarket retailer in the Northeast United States that operates over 100 stores andgenerates a total yearly sales volume in excess of $3 billion. The use of scanner data has value as it measures actual shopping behavior.Keywords Labelling, Customer loyalty, Retailing, Brands, Profits, United States of AmericaPaper type Research paperAn executive summary for managers and executive 14 percent during the same time period (PLMA, 2004). Inreaders can be found at the end of this article. addition, recent work shows that there is a necessary coexistence between store and manufacturer brands in the consumer packaged goods sector (Gomez and Benito, 2008).Introduction This study examines whether or not private label products can help in the overall enhancement of product categoryThere has been research on how private label brands provide performance and favorably impact loyal customer shoppingleverage to retailers, who buy private label products, and the behavior. The purpose is to investigate the influence of privatecategory and market determinants of private label share label resources possessed by a supermarket retailer on the(Ailawadi and Keller, 2004). However, in an article shopping behavior of loyal customers.summarizing retailing research in the Journal of Retailing,Grewal and Levy (2007) called for additional work on privatelabels and their impact on retail sales and profitability. Private Private brands and consumer loyaltylabel brands comprised an all time high of 21.3 percent of unit Throughout the USA, retailers use store brands to increaseshare and 16.4 percent of dollar share in supermarkets in business as well as to win the loyalty of their customers.2006 (PLMA, 2007). Between 1999 and 2003, private label Whether a store brand carries the retailer’s own name or is partproducts in supermarkets grew at an annual rate of 17.9 of a wholesaler’s private label program, store brands givepercent compared to national brand product sales growth of retailers a way to differentiate themselves from the competition. Private brands supplement a retailer’s image and strengthen itsThe current issue and full text archive of this journal is available at relationship with consumers. In addition, some store brands no longer category killers, but are comparable to national brands (De Wulf et al., 2005). Retailers are aware that consumers can purchase national branded items anywhere, but they can only buy their store brand at their stores. Journal of Product & Brand Management 20/1 (2011) 27– 36 The central thrust of the marketing activities of a firm is often viewed in q Emerald Group Publishing Limited [ISSN 1061-0421] terms of development, maintenance, or enhancement of customers’ loyalty [DOI 10.1108/10610421111107996] toward its products or services (Dick and Basu, 1994). 27
  • 2. The impact of private label brands on customer loyalty Journal of Product & Brand Management Michael S. Pepe, Russell Abratt, and Paul Dion Volume 20 · Number 1 · 2011 · 27 –36Store brand loyalty likely results in increased profits for Building strong customer relationships has been suggestedretailers since consumers purchase a higher percentage of as a way to gain a competitive advantage. The underlyingmerchandise from that retailer (Ailawadi, 2001). Lewison and assumption of much of the existing research is that long-termWesley (1999) stated: customer relationships are preferable to short term Through a store brand program supermarkets might enhance store loyalty relationships because of greater profitability. This and brand loyalty. assumption has been attributed to bigger exchange efficiencies created by customer retention economics (ShethThe majority of retailers in the past based their store brand and Parvatiyar, 1995). Recent advances in informationstrategy primarily on price without adequate attention to technology have provided marketing managers with the toolsquality. However, retailers have recently started to pay more to create a new generation of customer relation tactics. Twoattention to store brand quality. Corstjens and Lal (2000) primary objectives of customer loyalty are to increase salesreported that quality store brands can be a device for retailers revenues by raising purchase/usage levels, and/or increase theto generate store differentiation and store loyalty. range of products bought from the supplier. A second The most important element for a private label brand in objective is building a closer bond between the brand andestablishing loyalty is the brand’s ability to fulfill promises to current customers to maintain the current customer base.its consumer base. The continued fulfillment of promises Past research has confirmed that store satisfaction is stronglyusually results in a long-term profitable relationship between associated with re-purchase intentions. Berry and Greshamthe retailer and consumer and is related to the utilitarian (1986) contend that “relationship retailing” is particularlybenefits offered by the brand (Carpenter, 2003). relevant in today’s marketplace because it has the potential to The total lifetime profits for a typical retailer can increase simultaneously increase sales to current customers whileby 75 percent by retaining an additional five percent of reducing the chances of losing those customers toexisting customers as loyal customers refer other shoppers to competitors. Interpersonal relationships exist betweenthe retail store thereby building word-of-mouth reputation salespeople and customers in retailing, but customers alsoand potentially expanding the customer base (Huddleston establish relationships with the stores themselves and with theet al., 2004). Loyal customers to a particular store are less brands that stores carry.likely to patronize a competitor. Commonly used measures of Increased customer retention, as a result of increasedstore loyalty in prior research studies have incorporated loyalty, has two important effects for retailers. First, it canvariables such as percentage of purchases at a particular store, lead to a gradual increase in the firm’s customer base which isdollars spent, frequency of patronage, and degree of store particularly necessary in an era of low sales growth. Second,switching. Food Business News defined customer loyalty as the longer the customer remains loyal to the firm, the larger“creating the strongest possible relationship between the the profits earned from each individual customer. Withretailer and customer, so that people feel they will miss enhanced loyalty, the prevailing practice of offering costly losssomething if they go to another store” (Huddleston et al., leaders to generate store traffic may become less necessary2004). (Rose, 1990). Shoemaker and Lewis (1999) define truly loyal customers Without resulting in profitability, customer loyalty holds noas customers “who feel so strongly that you (the company) significance for a company. Customer loyalty can be a double-can best meet his or her relevant needs that your (the edged sword. If mismanaged, it can seriously hurt thecompany’s) competition is virtually excluded from the company’s bottom-line by compromising profitability forconsideration set; these customers buy almost exclusively loyalty. If customer loyalty is managed wisely and infrom you” (Kumar and Shah, 2004). Attitudinal loyalty has conjunction with profitability, it could be the most potentbeen defined in the perspective of a particular brand as it weapon against competition in the company’s marketingcaptures the affective and cognitive aspects of brand loyalty, arsenal (Kumar and Shah, 2004). To determine if a customersuch as brand preference and commitment. Attitudinal loyalty relationship is profitable, a company needs to be able tois an important concept since it indicates propensity to show quantify this relationship. Dowling and Uncles (1997)certain behaviors, such as the likelihood of future usage or cautioned that the contention that loyal customers arehow likely it is that customers would recommend the always more profitable is a gross to their friends or a colleague. Therefore, firmsneed to concurrently focus on building both behavioral and Development of category management inattitudinal loyalty to achieve “true” loyalty (Reichheld, 1996).For any company, customer loyalty becomes more meaningful supermarketsonly when it translates into purchase behavior. Therefore, it is In the early 1990s, US grocery retailers were prepared for anvital for a firm to build behavioral loyalty. Pure attitudinal improved way to run their business. Profit margins of aboutloyalty of a customer without behavioral loyalty may provide one percent at that time were unacceptable and new productsonly limited or no tangible returns to the firm. Corstjens and were proliferating, while consumers were becoming moreLal (2000) demonstrated that premium quality store brands diverse and demanding. Alternative classes of trade such asplay a role in building store loyalty. Guenzi et al. (2009) found warehouse clubs were emerging and Wal-Mart was gettingthat customer trust in store branded products has an ready to roll out its supercenter format that combined theinfluence on store patronage, since it positively affects retailer’s traditional general merchandise store with a full-linecustomer trust in the store, perceived value and store loyalty grocery store under one roof (AC Nielsen, 2006). Groceryintentions. The use of point of sale (POS) data obtained from retailers wanted to ensure that their shelves were stocked withthe database of retailers provides invaluable knowledge of the products that consumers wanted to buy given the endlesstransactional behaviors of consumers. variety of new products pouring into the marketplace. 28
  • 3. The impact of private label brands on customer loyalty Journal of Product & Brand Management Michael S. Pepe, Russell Abratt, and Paul Dion Volume 20 · Number 1 · 2011 · 27 –36Predominantly, grocery stores wanted to stay in business (AC Category management processes may be developed andNielsen, 2006). substantiated according to the basic assumption that its Traditional retail trade channels have blurred as retailers credibility relies on higher profitability, increased returns,scramble to offer the convenience of one-stop shopping. reduced spoils, higher returns, increased customer traffic andNumerous retailers have increased the variety of their many other typical business oriented benefits. This supportsmerchandise offering to appeal to a broader group of the view of Farris and Kusum (1992) and Johnson (1999) thatconsumers. A retailer offering merchandise not typically retailers cannot push store brands too much at the expense ofassociated with that store is called scrambled merchandising national brands as national brands continue to be majorthat has led to an increase in intertype competition. This traffic builders and reducing their presence may make theintensifying of competition has resulted in making it more store less attractive to its most profitable shoppers. Yavas anddifficult for retailers to identify and monitor their Babakus (2009) stated that national brands are trafficcompetition. Examples of the increasing diversity of retail builders, boost sales and a reduction in the portfolio offormats are food stores expanding into mass merchandise, national brands offered may render a store less attractive tomass merchandisers expanding into food, and drug stores profitable customers. Category management is essentiallyexpanding into mass merchandise and food. Attracting comprised of determining what shoppers want and providingcustomers to stores and brands has become increasingly it better than competition. In this regard, the categorydifficult for retailers as competition has intensified. Due to the management process solves the key issue of shopper erosion.vast amount of shopping choices facing them, today’s savvy If retailers offer the correct products for target customers andshoppers often view retailers as interchangeable which has then merchandise and price the products appropriately, themade consumer behavior less predictable than ever. To result should be a satisfied consumer who remains loyal to thecombat this trend, retailers need to identify ways to store (AC Nielsen, 2006). Hence, it is hypothesized that:differentiate themselves from competitors (Levy and Weitz, H2. There is a significant positive relationship between2007). department private label sales penetration and Research shows that certain consumers will buy certain department customer count.products from specific stores despite the general demand forone-stop shopping. This result portrays the fact that shoppers Private label brands can be used to increase store loyalty andhave been conditioned to look for deals in certain categories to differentiate a retail chain from other chains. Private labelsand often select their choice of retailers based on the were originally introduced and positioned as “best-value”availability of such deals. A common example is finding products, but retail chains have increasingly improved theirconsumers shopping both high-end and low-end outlets in private label product quality in order to raise the image of theorder to save money on certain items in order to better afford chain and to encourage consumer loyalty to the chain ratherluxury items (AC Nielsen, 1992). This trend has resulted in than to national brands (Dekimpe and Steenkamp, 1997).increasing the pressure on retailers to differentiate their Consumers may benefit from the increasing achievement ofoffering from competitors by developing a reputation as the private label brands in various ways:place to shop for certain product categories. If implemented . a wider variety of high-quality products is available fromsuccessfully, differentiation can equate a retailer’s name with which to choose;brand equity by establishing a clear connection in consumers’ . total dollar expenditure for their shopping basket may beminds between the name and the fulfillment of certain needs lower; and(AC Nielsen, 1992). Although category management results . for consumers who have established store loyalty, thein merchandising programs customized to individual stores, presence of a store brand label with a consistently highits ultimate goal is to unite these programs to support a quality across a wide range of product categories cancompany’s mission, image and strategic objectives (AC considerably facilitate the shopping experience (DekimpeNielsen, 1992). and Steenkamp, 1997). Corstjens and Lal (2000) found that store loyalty that isTheoretical model supported by a quality store brand can improve retailer profitability even when the store brand does not have a marginLewison and Wesley (1999) stated: advantage over national brands. They also found a positive Through a store brand program supermarkets might enhance store loyalty correlation between store brand use and behavioral store and brand loyalty. loyalty using purchase data from a scanner panel. Ailawadi et al. (2001) found that, after controlling for otherCorstjens and Lal (2000) reported that quality store brands psychographic correlates of store brand use, store loyaltycan be a device for retailers to generate store differentiation has a positive relationship with store brand use.and store loyalty. The most important element for a private Private label products for supermarkets impact consumerlabel brand in establishing loyalty is the brand’s ability to behavior. If customers consume and are satisfied with afulfill promises to its consumer base. The continued private label product, they must return to the same store tofulfillment of promises usually results in a long-term purchase it again. According to Jacoby and Chestnut (1978),profitable relationship between the retailer and consumer the success of a brand in the long term is not based on theand is related to the utilitarian benefits offered by the brand number of consumers that buy it once, but on the number of(Carpenter, 2003). Hence, it is hypothesized that: consumers who become regular buyers of the brand. In aH1. There is a significant positive relationship between study of consumers in Greece, Baltas and Argouslidis (2007) department private label sales penetration and found that consumers who shop more frequently are more department sales. store-brand prone. This comment signifies the importance of 29
  • 4. The impact of private label brands on customer loyalty Journal of Product & Brand Management Michael S. Pepe, Russell Abratt, and Paul Dion Volume 20 · Number 1 · 2011 · 27 –36developing consumer loyalty to private label brands. Samli growth of their private label products. The grocery(1989) showed that consumer loyalty can serve as a distinctive department consists of center store dry grocery, dairy andadvantage for companies in a highly competitive industry such frozen foods sections and formed the sample for whichas retailing. Hence, we formulated the following two secondary data for the research model was collected. Thehypotheses: supermarket retail chain has over 100 stores dispersed overH3. There is a significant positive relationship between New England states and is representative of typical US department private label sales penetration and national grocery markets. Category management is behavior of loyal customers. implemented at this supermarket with the groceryH4. There is a significant positive relationship between department divided into 157 distinct and measurable department sales and department profitability. product categories. The categories are divided based on consumer purchase patterns of similarities among productsFor grocery retailers, not only do loyal shoppers allocate and the key objectives of each category manager is to increaseproportionally more of the food budget to their “first choice” sales or profits of each category along with private label salesstore, they also spend more on groceries than other shoppers. penetration.This combined effect means that loyal shoppers can spend upto four times as much in their “first choice” store as theirswitcher counterparts (Knox and Denison, 1999). Hence, it is Data collectionhypothesized that: The hypotheses were tested using information from theH5. There is a significant positive relationship between supermarket’s consumer database. In order to personalize this department customer count and department information about 50 percent of grocery store retailers have profitability. implemented card-based electronic customer loyaltyLoyal customers spend substantially more money in their first programs aimed at targeting services toward their bestchoice store than customers that switch stores. Since these customers (Blair, 1999). The supermarket retailer used inloyal customers are likely to be no more expensive to serve, this study segments their customer base into groups based onloyal customers are potentially more profitable to retailers projected sales, profits, and frequency of visits. This study(Knox and Denison, 1999). Loyal customers can establish a analyzed the transactions of the top two tiers of consumersignificant competitive advantage for businesses in many segments as these 20 percent of consumers account forways. Truly loyal customers form a market share base that is approximately 80 percent of chain sales. The top twoimpregnable to the competition. segments of customers are labeled as gold and silver groups Store brand loyalty likely results in increased profit for the of customers. The top decile is classified as gold customersretailer due to consumers purchasing a higher percentage of and the second decile is classified as silver customers.merchandise from the retailer (Corstjens and Lal, 2000;Ailawadi, 2001). The success of a store brand loyalty strategy Measurement of variablesis dependent upon several factors with the most critical factorbeing the company’s (brand’s) ability to fulfill its promises to A three-year history from fiscal year 2004 through 2006consumers. This continued fulfillment of promises usually representing 39 periods was analyzed. This information isleads to a long-term, profitable relationship between a retailer total grocery department private label sales penetrationand consumer. The retailers private label products are related aggregated from the volume of the 157 product the benefits (i.e. utilitarian and hedonic) that the brand Department private label sales penetration is calculated asoffers to consumers and these benefits are derived by the total department private label sales divided by totalconsumer with each purchase of the brand (Carpenter, 2003). department sales (comprised of national brand and private Some studies have found a weak correlation between loyalty label sales). Department sales are comprised of both privateand profitability. Reinartz and Kumar (2002) found a weak label and national brand sales. Total customer count iscorrelation between customer loyalty (behavioral loyalty) and calculated by the number of transactions at the supermarketprofitability in their research of four companies operating in retailer during each four-week period. Gold and silverdifferent industries. The correlation between behavioral customers represent the top two customer segments forloyalty, as measured by the respective firms and profitability, sales, profitability and frequency of shopping trips for thewas less than 0.5 for all four companies. Knox and Denison supermarket retailer. Average transaction dollars represents(1999) determined that loyal customers represent the most the average dollar transaction per period for the gold andprofitable foundation of shoppers in the UK, a fact that has silver customer segments of the supermarket retailer. Thebeen recognized already in industry sectors outside retailing. average number of transactions is calculated by the averageHence, it is hypothesized that: number of transactions for gold and silver customer segments for each time period. This variable is measured by the totalH6. There is a significant positive relationship between amount of gold and silver customer dollars spent in each time loyal customer behavior and department profitability. period. Customer loyalty behavior is a latent variable and isFigure 1 shows the research model. measured in this study by the following four indicator variables: 1 Total gold and silver customer count.Methodology 2 Gold and silver customers average transaction dollars.A supermarket retailer located in the northeast was used for 3 Gold and silver customers average number ofthis research. This supermarket has annual sales exceeding transactions.$3.0 billion annually and places a major emphasis on the 4 Total gold and silver customer dollars spend. 30
  • 5. The impact of private label brands on customer loyalty Journal of Product & Brand Management Michael S. Pepe, Russell Abratt, and Paul Dion Volume 20 · Number 1 · 2011 · 27 –36Figure 1 Loyal customers and department performanceBehavior of loyal customers is aggregated grocery department the critical ratios. Critical ratios more than 1.96 are significantdata from the 157 grocery product categories. This at the 0.05 level.information is total grocery department dollar profits across Standardized regression weights indicate the relativethe 157 grocery product categories. contributions of each predictor variable to each outcome variable. The standardized estimates are also contained in Table I. The results indicate that as department private labelModel testing and data analyses sales penetration increased, overall department sales andThe model and hypotheses for this study was tested using department customer count decreased. As department privatestructural equation modeling (SEM). Structural equation label sales penetration increased, the average number ofmodeling is a multivariate technique that combines aspects of transactions by loyal customers decreased. There was amultiple regression and factor analysis to estimate a series of significant positive influence between the average number ofinterrelated dependence relationships simultaneously (Hair transactions by loyal customers and the total dollar amountet al., 1998). AMOS software was utilized to test if the model spent by loyal customers. There was also a significant positivefits the data and was valid. Modifications needed to be made influence between the average number of transactions by loyalto establish a good fitting model to the sample data. Figure 2 customers and overall department sales.portrays the final model that has acceptable goodness-of-fit The results indicate a significant positive relationshipusing standardized estimates. Figure 2 also shows the between the total dollar amount spent by loyal customersstandardized coefficients. and department profitability. There was a significant negative The results of the model show the fit indicators being above relationship between the total dollar amount spent by loyalthe criterion value of 0.90 with an AGFI amount of 0.934, customers and overall department sales.GFI of 0.975, and NFI of 0.966 indicating that this finalmodel provides an acceptable fit to the data. The SEM output Tests of the research hypothesesproduced a probability value over 0.05 at 0.929 indicatingthat the model fits the data. The low Chi-square amount of H1 hypothesized that there is a significant positivethe model is 3.081, close to the degrees of freedom of 8 also relationship between department private label salesindicates that the model fits the observed co-variances well. penetration and department sales. The results indicate thatThe SEM output shows that 61 percent of the variance in H1 is supported with a t-value of 2 2.194, a standard loadingtotal department profitability was accounted for by the final of 2 0.299, and the p-value was significant at the 0.05 level.model. Therefore, the results indicate that there is a significant Table I indicates the hypothesized relationships. Hair et al. negative correlation between department private label sales(1998) indicated that a t-value of 1.96 is equal to a 0.05 penetration and department sales. Increasing overallsignificance level and a t-value of 2.58 is equal to a 0.01 department private label sales penetration negativelysignificance level. Table I contains the maximum likelihood impacted overall department sales. The results of thisestimates of the regression weights that are the estimated path research indicate that as private label sales penetrationcoefficients for the arrows in the model. Standard errors are increased for the grocery department overall departmentalso provided for the path coefficients in Table I along with sales decreased. These results indicate that national brands 31
  • 6. The impact of private label brands on customer loyalty Journal of Product & Brand Management Michael S. Pepe, Russell Abratt, and Paul Dion Volume 20 · Number 1 · 2011 · 27 –36Figure 2 Final SEM model resultsTable I Final SEM model: path results and standardized regression weights Estimate S.E. C.R. PFinal path resultsTran ˆ PLPEN 2 51.943 25.819 22.012 0.044Spent ˆ Tran 520738.542 83300.029 6.251DeptSales ˆ PLPEN 21502877155.703 685118091.527 22.194 0.028CUSTCoun ˆ PLPEN 271824354.307 35388293.319 22.030 0.042Profit ˆ Spent 2.377 0.310 7.674DeptSales ˆ Spent 2 29.258 7.576 23.862DeptSales ˆ Tran 17764961.461 5684189.708 3.125 0.002Standardized regression weightsTran ˆ PLPEN 20.310Spent ˆ Tran 0.712DeptSales ˆ PLPEN 20.299CUSTCount ˆ PLPEN 20.313Profit ˆ Spent 0.780DeptSales ˆ Spent 20.713DeptSales ˆ Tran 0.592are key brands for enhancing overall sales and focusing on private brands will result in overall sales volume keeping unitincreasing private label sales beyond a certain level may result volume constant. Category managers need to be aware of thein less overall sales. The reason is that private labels represent impact of various brands in their portfolio on overall categorylower retail sales prices than national brand items. Switching sales. By placing too much emphasis on increasing private labelconsumer purchases from national brands to lower priced sales, a negative impact may result on overall category sales. 32
  • 7. The impact of private label brands on customer loyalty Journal of Product & Brand Management Michael S. Pepe, Russell Abratt, and Paul Dion Volume 20 · Number 1 · 2011 · 27 –36 H2 hypothesized that there is a significant positive hypothesis is supported indicating there is a significantrelationship between department private label sales positive relationship between loyal customer behavior andpenetration and department customer count. The results department profitability. The original research model used theindicate that H2 is supported with a t-value of 2 2.030, a following four constructs to measure the behavior of loyalstandard loading of 2 0.313, and the p-value was significant at customers: customer count, average transaction dollars,the 0.05 level. Therefore, there is a significant negative average number of transactions and total dollars spent. Thecorrelation between department private label sales penetration results indicated there is a significant relationship betweenand department customer count. total dollars spent by loyal customers and overall department Increasing overall department private label sales penetration profitability. The results support the notion of the 80-20negatively impacted overall department customer count. The principle as increasing sales by loyal customers’ results inresults of this research indicate that as private label sales increased profitability. Although not hypothesized, the resultspenetration increased for the grocery department overall indicate a positive correlation between average transactiondepartment customer count decreased. These results indicate dollars spent by loyal customers and overall department sales.that national brands are key brands for enhancing overall The t-value is 3.125 with a standard loading of 0.592. Thecustomer traffic into supermarkets and focusing on increasing findings indicate that category managers should seek to findprivate label sales beyond a certain level may result in less methods to increase average transaction dollars by loyalcustomer traffic. The reason is that private label brands may customers as these methods may result in increasing overallnot be major brands to entice consumers to visit stores. sales volume. The final research model indicated a positiveNational brands should be used to attract consumers to stores correlation between average transaction dollars spent by loyaland, once there, private label products may be used for customers and total dollars spent by loyal customers. Theincremental sales dollars. t-value is 6.251 with a standard loading of 0.712. The findings H3 hypothesized that there is a significant positive indicate that category managers should seek to find methodsrelationship between department private label sales to increase average transaction dollars by loyal customers aspenetration and customer loyalty behavior. The final SEM these methods may result in increasing overall spendingmodel only incorporated average transaction dollars spent and amounts of loyal customers. It also indicated a negativetotal dollars spent by loyal customers. Therefore, the correlation between the total amount spent by loyal customershypothesis is not supported indicating there is not a and overall department sales. The t-value is 2 3.862 with asignificant positive relationship between department private standard loading of 2 7.13. The results are very surprising aslabel sales penetration and customer loyalty behavior. The there should be a positive relationship between the totalresults indicate that overall private label sales penetration does amount spent by loyal customers and overall departmenthave a significant negative impact on the average dollar sales.transaction amount of loyal customers. Similar to the findingsin H1, the retail price for private label brands is lower than Conclusionsnational brand counterparts so consumers switchingpurchases from national brands to private label brands will The results indicated there is a significant negativehave lower average transaction amounts. relationship between department private label sales H4 hypothesized that there is a significant positive penetration and overall department sales. There also was arelationship between department sales and department significant negative relationship between department privateprofitability. The final SEM model did not incorporate this label sales penetration and customer count. There were norelationship. Therefore, the hypothesis is not supported significant relationships in the final model between overallindicating there is not a significant positive relationship department sales and overall customer count on departmentbetween department sales and department profitability. profitability. Two of the four constructs used in the proposed Periods with high department sales may not have resulted in model (average dollar transaction and overall dollar amountincreased profitability due to lower gross margins from the spent by loyal consumers) were incorporated into the finalproducts sold. SEM model. The overall dollar amount spent by loyal H5 hypothesized that there is a significant positive consumers had a significant positive influence on overallrelationship between department customer count and department profitability. The findings indicated that overalldepartment profitability. The final SEM model did not dollars spent by loyal consumers significantly impacted overallincorporate this relationship. Therefore, this hypothesis is not profitability.supported indicating there is not a significant positiverelationship between department customer count and Limitations of the studydepartment profitability. The overall customer count in aspecific time period for this supermarket did not significantly The data collected pertained to the supermarket’s groceryimpact overall profitability. This may be due to lower overall department that is comprised of center store dry grocerydollar amounts of transactions and lower gross margins of the product, frozen food products, and refrigerated dairypurchases. products. Perishable departments such as deli, seafood, H6 hypothesized that there is a significant positive meat, bakery, floral, general merchandise, health and beautyrelationship between loyal customer behavior and care, etc. were not researched in this study and thesedepartment profitability. The latent variable behavior of departments represent approximately 45 percent of total storeloyal customers from the original model was impacted by four sales. This research was the collection of data from oneindicator variables. The final SEM model only incorporated individual supermarket chain. This supermarket utilizes atotal dollar amount spent by loyal consumers and average promotional pricing strategy (high-low strategy) and thetransaction dollars by loyal customers. Therefore, the results may differ from a supermarket chain that employs an 33
  • 8. The impact of private label brands on customer loyalty Journal of Product & Brand Management Michael S. Pepe, Russell Abratt, and Paul Dion Volume 20 · Number 1 · 2011 · 27 –36everyday low price strategy. Also, private label sales Berry, L. and Gresham, L. (1986), “Relationship retailing:penetration and consumer perceptions of private label transforming customers into clients”, Business Horizons,brands varies between different regions of the USA, limiting Vol. 29, pp. 43-7.the inferences obtained from this study to other supermarket Blair, A. (1999), “Supermarket technology, the big picture”,chains throughout the country. The supermarket retailer used Supermarket News, Vol. 47, pp. this research has a maturely developed private label Carpenter, J. (2003), “An examination of the relationshipprogram. Also, the private label sales penetration for this between consumer benefits, satisfaction, and loyalty in theretailer is higher than other competitors in their trading area. purchase of retail store branded products”, unpublishedConclusions from this study may not be consistent with a doctoral dissertation, University of Tennessee, Knoxville,supermarket whose private label program has not reached a TN.mature level or is underdeveloped compared to competition. Corstjens, M. and Lal, R. (2000), “Building store loyalty through store brands”, Journal of Marketing Research, Vol. 37, pp. 281-91.Managerial implications Dekimpe, M. and Steenkamp, J. (1997), “The increasing power of store brands: building loyalty and market share”,Many studies have researched the impact of private label Long Range Planning, Vol. 30, pp. 917-30.brands on either category performance or consumer loyalty. De Wulf, K., Odekerken-Schroder, G., Goedertier, F. andThis study incorporates an analysis of both profitability and Van Ossel, G. (2005), “Consumer perceptions of storeloyalty behavior, two major objectives businesses have for brands versus national brands”, Journal of Consumerenhancing their private label brand programs. Businesses Marketing, Vol. 22 No. 4, pp. 223-32.need to assess both overall profitability of private label brands Dick, A. and Basu, K. (1994), “Customer loyalty: toward anand impact on consumer loyalty to ensure the long-term integrated conceptual framework”, Journal of the Academy ofhealth of the organization as private label brands, being Marketing Science, Vol. 22, pp. 99-113.proprietary to retailers, offer a unique selling proposition to Dowling, G.R. and Uncles, M. (1997), “Do customer loyaltyconsumers. programs really work?”, Sloan Management Review, Another managerial implication is the importance of data Summer, pp. 71-82.mining used in this research to find hidden or unexpected Farris, P. and Kusum, A. (1992), “Retail power: monster orpatterns in data. Due to information technology advances, the mouse?”, Journal of Retailing, Vol. 68, pp. 351-69.amount of information that is provided to managers in an Gomez, M. and Benito, N.R. (2008), “Manufacturersorganization is enormous. Data mining techniques can assist characteristics that determine the choice of producing storemanagers in uncovering hidden meaning in the piles of data brands”, European Journal of Marketing, Vol. 42 Nos 1/2,they are presented. Most managers today are confronted with pp. 154-77.having too much data at their disposal and sifting through this Grewal, D. and Levy, M. (2007), “Retailing research: past,abundance of information can be challenging. 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  • 9. The impact of private label brands on customer loyalty Journal of Product & Brand Management Michael S. Pepe, Russell Abratt, and Paul Dion Volume 20 · Number 1 · 2011 · 27 –36Private Label Manufacturers Association (PLMA) (2004), Raju, J., Sethuraman, R. and Dhar, S. (1995), “The PLMA’s 2004 Private Label Yearbook, Private Label introduction and performance of store brands”, Manufacturers Association, New York, NY. Management Science, Vol. 41, pp. 957-78.Private Label Manufacturers Association (PLMA) (2007), Richardson, P., Jain, A. and Dick, A. (1996), “Household PLMA’s 2007 Private Label Yearbook, Private Label store brand proneness: a framework”, Journal of Retailing, Manufacturers Association, New York, NY. Vol. 72, pp. 159-85.Reichheld, F. (1996), The Loyalty Effect, Harvard Business Sayman, S. and Raju, J. (2004), “Investigating the cross- School Press, Boston, MA. category effects of store brands”, Review of IndustrialReinartz, W. and Kumar, V. 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(1999), “Executive outlook: consumer reports”, in the consumer markets: antecedents and consequences”, 66th Annual report of the Grocery Industry, Supplement to Journal of the Academy of Marketing Science, Vol. 23, Progressive Grocer Magazine, April, pp. 17-22. pp. 255-71. Tosh, M. (1999), “Hitched or ditched?”, 66th Annual reportShoemaker, S. and Lewis, R. (1999), “Customer loyalty: the of the Grocery Industry, Supplement to Progressive Grocer future of hospitality marketing”, Hospitality Management, Magazine, April, pp. 23-30. Vol. 18, p. 349.Yavas, U. and Babakus, E. (2009), “Retail store loyalty: a comparison of two customer segments”, International Corresponding author Journal of Retail & Distribution Management, Vol. 37 No. 6, Russell Abratt can be contacted at: pp. 477-92.Further reading Executive summary and implications for managers and executivesAilawadi, K. and Bari, H. (2000), “The effect of store brands on retailer profitability: an empirical analysis”, Tuck School This summary has been provided to allow managers and executives working paper, Dartmouth College, Hanover, NH. a rapid appreciation of the content of this article. Those with aBlattberg, R. and Fox, E. (1995), Category Management: particular interest in the topic covered may then read the article in A Series of Implementation Guides, Food Marketing Institute, toto to take advantage of the more comprehensive description of the Washington, DC. research undertaken and its results to get the full benefits of theBonfrer, A. and Chintagunta, P. (2004), “Store brands: who material present. buys them and what happens to retail prices when they are In the last decade or so, the USA has experienced strong introduced?”, Review of Industrial Organization, Vol. 24, growth in the volume and sales of private brands. And within pp. 195-218. certain periods during this time, sales of such products haveCorstjens, J. and Corstjens, M. (1995), Star Wars, John Wiley expanded at a significantly faster rate than sales of national & Sons, Chichester. brand alternatives.Dunne, D. and Narasimhan, C. (1999), “The new appeal of Supermarkets in the USA consider own label brands key to private labels”, Harvard Business Review, Vol. 77, pp. 41-52. their aims of increasing business and the number of loyalGlement, F. (1995), “How profitable are arm brand customers. Private brands help reinforce a retailer’s identity products?”, McKinsey Quarterly, Vol. 3, pp. 173-5. and differentiate the store from its competitors. TheGrant, R. (1996), “Towards a knowledge-based theory of the inclination for retailers to diversify into other product areas firm”, Strategic Management Journal, Vol. 17, pp. 109-22. in order to provide greater convenience for the shopper hasHoch, S. and Banerji, S. (1993), “When do private labels intensified competition and made differentiation more succeed?”, Sloan Management Review, Vol. 34, pp. 57-68. difficult yet more important to achieve. Despite this generalHoch, S. and Lodish, L. (1998), “Store brands and category trend, some consumers do still prefer to buy certain products management”, working paper, The Wharton School, from certain stores. What retailers must do is make sure their University of Pennsylvania, Philadelphia, PA. store is the one that can best fulfill these needs. TheLaverty, K. (2001), “Market share, profits and business importance of this is illustrated by research in the grocery strategy”, Management Decision, Vol. 39, pp. 607-17. sector showing that loyal customers spend a high percentageMills, D. (1995), “Why retailers sell private label”, Journal of of their food budget in their preferred store. It additionally Economic Management Strategy, Vol. 4, pp. 509-28. claims that their overall spending on groceries is higher thanMorgan, R. and Hunt, S. (1994), “The commitment-trust other shoppers. theory of relationship marketing”, Journal of Marketing, Analysts have found that greater loyalty to both brand and Vol. 58, pp. 20-8. store is a feasible outcome for supermarkets that focus on ownNarasimhan, C. and Wilcox, R. (1998), “Private labels and label products. It is equally possible that consumers who are the channel relationship: a cross-category analysis”, Journal loyal to store brands buy additional merchandise from the of Business, Vol. 71, pp. 573-600. retailer and generate extra profits as a result. 35
  • 10. The impact of private label brands on customer loyalty Journal of Product & Brand Management Michael S. Pepe, Russell Abratt, and Paul Dion Volume 20 · Number 1 · 2011 · 27 –36 The potential for private brands to positively influence Pepe et al. explore the issues raised in a study using a UScustomer loyalty has increased since retailers began to pay supermarket chain that strongly focuses on its own labelgreater attention to the quality of many own label goods. In products. The supermarket has a grocery departmentthe main, the focus beforehand was on price. But the incorporating 157 “distinct and measurable” productrelevance of quality is now widely acknowledged, as different categories whose division is determined by consumerstudies have noted. Evidence suggests that providing purchase patterns. Research data was acquired from theconsumers with superior own label products can increase supermarket’s consumer database containing personalizedtheir trust in both brand and store. There are also positive consumer information generated by loyalty schemes. Sales,implications for store patronage and, in the longer term, profits and purchase frequency are used by the retailer toloyalty when consumers perceive value to be high. segment its customer base. The study focused on the top two Securing loyalty is acknowledged as important as such tiers as this 20 percent of consumers are responsible forrelationships are more profitable than those that endure over around 80 percent of sales. The transactions analyzed coveredthe short term. Various scholars have identified attitudinal the three-year period from 2004 to 2006.and behavioral components of loyalty. Most agree that the The findings suggested that increasing private brand salesattitudinal form can be more valuable as it often leads to above a certain level:consumer recommendation or engagement in other activities . may result in lower overall sales;to support the firm. Others argue that loyalty in the shape of . can lead to a lower number of visitors to the store; andpurchase behavior is at least equally important as this . has a markedly negative impact on how much loyal consumers spend.dimension has a greater direct effect on profitability. In thiscontext, retailers with more loyal customers can earn higher The authors attribute this to the lower retail price of own labelprofits while reducing the need to offer “costly loss leaders” in products compared to national brand alternatives.order to increase store traffic. It was additionally indicated that high department sales and Extant literature illustrates the importance of effective high customer numbers would not necessarily increase profitmanagement of product categories. This basically involves levels. However, profitability was significantly influenced byidentifying and meeting customer needs more effectively than the purchase behavior of loyal customers.rivals can manage. Different authors have pointed out the In the opinion of Pepe et al. supermarkets must recognizesignificance of category management to the supply of private the impact of national brands on both sales and visitorbrands. In their view, retailers should be cautious about numbers. Retailers are therefore urged to use national brandspromoting store brands to the extent that national brands are to as a means to entice shoppers to their stores and privateignored or even removed from the product portfolio. The brands for attaining “incremental sales” once they are there.justification for this view is that national brands entice many The impact of loyal customers on profitability demands thatconsumers to the store in the first place and their absence managers devise strategies for increasing the average spend ofmight make it a less appealing place to visit. these consumers. Appropriate initiatives can help increase the Notwithstanding this scenario, a well-managed private total spending of such consumers and boost total sales as abrand program can prove attractive to the consumer because result. The authors also note the significance of data miningof its potential to: in the study and assert that store managers should use similar. offer a expanding range of first-rate products; techniques in order to better understand complex consumer. lower the total cost of their shopping; and information.. simplify the shopping experience once the own label brand That the present study excluded data from many is associated with consistent high-quality that spans departments in the supermarket is acknowledged as limiting various product categories. the findings, as does confining research to a single retail chain. Future investigation of these issues may also considerGiven that brand success is determined more by the number supermarkets that employ different pricing strategies, whileof customers who make regular purchases, these benefits can examining varying levels of own label sales penetration ishave significant implications for loyalty. One study even another avenue to explore.suggests the possibility of a virtuous circle based on its ´ (A precis of the article “The impact of private label brands onfindings that consumers display a greater inclination towards customer loyalty and product category profitability”. Supplied bystore brands if they shop more frequently. Marketing Consultants for Emerald.)To purchase reprints of this article please e-mail: reprints@emeraldinsight.comOr visit our web site for further details: 36