Brand Loyalty (BL)
Fig. 1 Retailer’s margin as a function
of brand loyalty
The ‘Steiner curve’, as an inverse relationship between the retailer’ s margin and the
strength of a brand (measured by its degree of brand loyalty), is the first building
block of our framework and is depicted in Fig. 1) where RM = p - w is the retailer’s
margin. The retailer receives the margin p- w per unit of sales. Manufacturer's brand
advertising exerts a margin depressing effect. Accordingly, retailers sell the leading
advertised brands at narrower margins. As indicated previously, this permits
manufacturer to enjoy increasing returns to advertising in the dual- stage
advertising/sales response.
Suppose now that the retailer is active in launching and selling private labels. The
retailer tries to keep its customers loyal to its stores and to this purpose launches
private label programs. Following Scott Morton and Zettelmeyer (2004), we assume
that the retailer’ s shelf space is a limited and scarce resource. Clearly, the retailer
needs shelf space for stocking its private labels. To obtain it, the retailer has to delist
some manufacturers’ brands.
Strong brands, and firms with a portfolio of strong brands, are able to face vertical
pressures better than weak brands. The reason is that in making shelf- space
decisions, the retailer will rank manufacturers’ brands in relation to their strength (e.g.
brand loyalty) and will compare the brand loyalty (BL) of each brand to the retailer’ s
own store loyalty (SL).
Retailers would like delisting strong brands given that the retailer’s margin on these
brands is lower. The problem is that strong brands can contrast vertical pressures
better than weaker brands and cannot be delisted. In making shelf- space decisions,
rational retailers will recognise that they can delist only the brands whose brand
loyalty is lower than their store loyalty. On the contrary, retailers cannot delist brands
for which brand loyalty is greater than store loyalty. This implies that manufacturer
brands operate in a two- region environment. We refer to these two regions,
respectively, as the ‘listing region’ (L), and the ‘delisting region’ (D). The demarcation
point between them is given by the level of retailer’ s store loyalty (Fig. 2).
The retailer can delist brands whose brand loyalty is lower than retailer’ s store loyalty.
This possibility arises because, in the case of ‘weak’ brands, consumers are more likely
to switch brands within the store than to switch the store. Thus, retailers can delist
these brands since that has only a minor impact on their sales. Hence, a
manufacturer’ s brand characterized by BL < SL risks to be delisted. On the contrary,
retailers cannot delist brands for which BL > SL because of losing sales caused by
consumers who remaining loyal to their preferred brands go and by them in
competing stores. The switching behavior of consumers and their propensity to switch
stores is affected by the strength of a brand. This means that it is vital for
manufacturers willing to remain sellers of branded products to build and maintain
brands strong enough. Precisely, they have to keep BL of their brands at a level higher
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