It is not difficult to explain the determinants of these stylised facts. There is indeed
theoretical and empirical evidence on the benefits that private labels offer retailers.
The literature documents that store brands typically carry higher retailer margins in
comparison to those on manufacturers’ brands contributing to increase retailers’
profits (Mills, 1995; Ailawadi and Harlam, 2004; Narasimhan and Wilcox 1998).
Moreover, it is well- known that store brands enable retailers to strengthen their
bargaining position vis- à- vis manufacturers of national brands. In general, the
bargaining power of the retailer is believed to increase as a result of the adoption of
store brands programs. Store brands may allow the retailer to negotiate lower
wholesale prices on national brands leading to higher unit margins on the national
brands (Mills 1995; Scott- Morton and Zettelmeyer 2001).
Last but not least, private labels may help retailers to differentiate their stores,
creating store loyalty and protecting retailers from price competition, allowing
potential benefits in terms of increased store traffic and store revenues. Retailers can
use several instruments to differentiate their stores. They can increase and improve
service, extend opening hours, enlarge assortments. But all these measures have a
limit: they can be cancelled out by competing retailers. Store brands are an effective
instrument of store differentiation just because, by definition, they are store specific
(the other competing stores cannot carry them), and given that they are ‘brands’, they
create repeated purchases with the result that repeated purchases of store brands
contribute to develop store loyalty.
Even if the contribute of private labels to chain differentiation is not yet well
documented, there is empirical evidence that store brands represent an effective way
to create store loyalty (Brady, Brown and Hulit, 2003). Corstjens M. and R. Lal (2000),
through a game theoretic analysis, show that quality store brands can be an
instrument for retailers to generate store differentiation and store loyalty, making it
more costly for consumers to switch stores. Recent empirical research suggests that
store brands increase store image and store loyalty by improving store differentiation
vis- à- vis other retailers .4
Despite the growing literature on the phenomenon of private labels, one topic area
regarding the impact of vertical competition on the upstream incentives to innovate
and differentiate has so far received little attention. An idea often put forward is that
the increasing bargaining power of retailers and higher vertical competitive pressures
can have negative effects on upstream incentives to adopt nonprice strategies such as
product innovation as well as horizontal and vertical product differentiation
The argument is that buyer power lowers suppliers’ profits inducing them to decrease
R&D expenditures (see, for example, Dobson, 2005; and Noll, 2005). One further
argument is that since technological appropriability conditions are very weak in the
4 Corstjens and Lal (2000) empirical findings indicate that store brand penetration and
the resulting differentiation lead to increased consumer loyalty for the four major
grocery chains in the UK. Sloot and Verhoef (2004) have suggested that store brands
are associated with higher store loyalty though other researchers argue that heavy
users of store brands are loyal to store brands in general, not necessarily to the store
brand of a particular retailer (Ailawadi and Harlam, 2004). For the growing importance
of retail branding and its ability to influence customer perceptions and drive store
choice and loyalty, see Ailawadi and Keller (2004).