ERRT - The economic benefits of retailer own-brands

The economic benefits of retailer own-brands

A retailer own-brand is a product or service that either carries the brand of the retailer or a separate brand name that is controlled by the retailer. Over time, own-brands have become increasingly sophisticated. Rather than simply adding labels to generic products, many grocery retailers design, develop and market-test their own-brand products before contracting out the final production, in much the same way as many branded-goods manufacturers do.

This report, commissioned by the European Retail Round Table (ERRT), approaches the issue of own-brands from the perspectives of consumers, retailers and suppliers. Using publicly available sources of evidence, supplemented with information provided by ERRT members, this report identifies the benefits of grocery retailers’ own-brands and addresses common misperceptions about them (a full cost–benefit analysis is beyond the scope of this report).

Key findings of the report include:

In addition to the direct benefits to consumers of own-brands, consumers of other brands benefit indirectly where increased competition from own-brands forces branded alternatives to compete more vigorously
Own-brands help to stimulate competition and innovation between retailers and allow retailers to work more closely with their suppliers to source the products that consumers demand
Retailer own-brands provide new routes to market for small suppliers. Whilst own-brands may give retailers additional bargaining power, retailers have no interest in forcing efficient suppliers out of the market from which the benefit.

EXECUTIVE SUMMARY

Understanding own-brands

A retailer own-brand is a product or service that either carries the brand of the retailer or a separate brand name that is controlled by the retailer. Historically, own-brands were sometimes referred to as ‘private labels’, with typical examples being generic grocery items simply labelled with the grocery retailer’s branding. Over time, own-brands have become increasingly sophisticated. Retailers began by expanding their own-brand ranges to offer a range of ‘good, better, and best’ price/quality combinations and later added further subbrands and niche ranges. Rather than simply adding labels to generic products, many grocery retailers design, develop and market-test their own-brand products before contracting out the final production, in much the same way as many branded-goods manufacturers do.

The role of this report

This report contributes to the debate on grocery retailers’ own-brands. Grocery retailers play an important role in the shopping routines of most Europeans, with grocery sales representing around half of all retail sales in the European Union. A significant proportion of these sales are supplied by large grocery retailers. Various government, regulatory, and industry organisations have expressed views about the impacts of own-brands, in some cases highlighting the vigorous competition that they can help to create for branded products; in other cases, raising concerns about their impacts on other retailers and suppliers.

Impact on consumers

The dynamics of the grocery supply chain in Europe, as elsewhere, are driven by the demands of consumers. Overall, the economic theory and evidence reviewed for this report suggest that own-brands provide benefits to consumers, for example, by helping to deliver new products and value for money. In addition to the direct benefits to consumers of ownbrands, consumers of other brands benefit indirectly where increased competition from ownbrands forces branded alternatives to compete more vigorously in terms of offering higher quality, increased levels of innovation, or lower prices.

The report also considers whether retailers could use own-brands to harm competition (for example, by forcing branded rivals out of the market), allowing retailers to raise prices or lower quality, range or service. Retailers are considered to face fierce competition and this suggests that the balance of branded goods and own-brands in stores will continue to be driven by what consumers demand.

Impact on retailers

Own-brands help to stimulate competition and innovation between retailers, for example, by providing an additional dimension on which retailers can compete with each other. Ownbrand innovation, such as the introduction of niche sub-brands, allows retailers to win customers by differentiating their offerings from rival chains. Own-brands allow retailers to work more closely with their suppliers to source the products that consumers demand. They can also help retailers to achieve better terms and lower input prices from both own-brand and branded suppliers. In the case of own-brand suppliers in particular, lower input prices for retailers may be the result of improved retailer bargaining power, but may also result from reduced supplier costs, such as scale efficiencies and the absence of brand development costs. To the extent that retailers can achieve better terms from suppliers, it is likely to be of benefit to retailers and ultimately consumers.

Impact on suppliers

From the perspective of the supplier, the picture is more complex. The existence of retailer own-brands provides new routes to market for small suppliers to produce for mass markets which they may otherwise struggle to access given the costs and risks involved in developing a brand. On the other hand, own-brands can help to give retailers additional bargaining power in relation to their suppliers, the exercise of which may be perceived negatively by suppliers where it allows retailers to negotiate more favourable terms. However, in general, while retailers have an interest in getting the best deals from suppliers they have no longterm interest in forcing efficient suppliers out of the market because this would tend to harm the retailer’s own interests. For example, retailers benefit from healthy competition at the supplier level because it keeps their input costs low.