The Impact of National Brand Introductions
onHard-Discounter Image and Share-of-Wallet
Carlos J. S. Lourenço
Assistant Professor
Rotterdam School of Management
Erasmus University of Rotterdam
P.O. Box 1738
3000 DR Rotterdam
The Netherlands
Email:
Tel.: +31 10 408 8964
Fax: +31 10 408 9011
Els Gijsbrechts
Professor of Quantitative Marketing
Tilburg University
P.O. Box 90153
5000 LE Tilburg
The Netherlands
Email:
Tel.: +31 13 466 8224
Fax: +31 13 466 8354
April 15,2013
The authors are indebted to GfK Belgium and AiMark for providing the data used in this study. They also thank Marnik Dekimpe and Inge Geyskens, as well as the IJRM Guest Editor – Jan-Benedict Steenkamp –, the Area Editor, and the three anonymous reviewers, for their very helpful comments and suggestions.
1
Abstract
Hard-discounters (HDs) such as Aldi and Lidl are increasingly introducing national brands (NBs) into their private label (PL) dominated assortments. While there is evidence that this enhances sales in the categories where such NBs are added, little is known about how it affects consumers’overall perceptions of the HD and consequently its share of the customers’ wallet. Using a unique data set that combines longitudinal information on a HD’s perceptions, with that chain’s assortment composition, we investigate the impact of NB introductions on the chain’s overall value and assortment image, and spending share.
We show that introductions of NBs, in particular category leaders, may significantly contribute to a more favorable perception of the HD store. For positive value-imageeffects to materialize, HDs must offer these NBs at low-enough pricesto maintain a reasonable price gap with the current private label offer. For the NB entry to enhance the HD’s assortment perception, it must come with a sufficiently deep product line.
However, there are limits to this approach. Introductions gradually lose effect as the share of NBs at the HD goes up. More importantly, ill-selected NB additions may backfire on the HD. Listing NBs that are not category-leaders, at prices too far above its private labels, deteriorates the HD’s favorable value positioning– cutting into its core competitive advantage, and leading to notable reductions in share-of-wallet. We discuss the academic and managerial implications of these findings.
Keywords: Store Image, Consumer Perceptions, National Brands, Hard-Discounters, Share-of-wallet
1
1. Introduction
Sales of the top-10 discounters in the world are expected to grow by 50% from 2010 to 2015 (PlanetRetail 2010). By then, the German-based retailers Aldi and Lidl, pioneers of the hard-discount concept and ranking number one and two on the top-10 discounter chart, are both expected to hit the $100 billion mark (PlanetRetail 2010). This remarkable success of hard-discount retailers is rooted in their ability to practice low prices –15 to 20% lower than those of large discounters like Wal-Mart (Wall Street Journal 2009). Compared to traditional retailers, hard-discount stores (HDs) focus on minimal assortments (Food Marketing Institute 2012), rely heavily on own brands, and use a simplified ‘no-frills’ store format with little promotional activity – strategic options that translate into cost efficiencies in the supply-chain. Not surprisingly, these HDs have acquired a substantial share of grocery sales at the expense of mainstream retailers in Western Europe, and are growing consistently in the U.S. (Steenkamp and Kumar 2009,Cleeren, Verboven, Dekimpe and Gielens 2009,PlanetRetail 2010).
Nonetheless, hard-discount chains have realized that growth strategies based on prices are not without limits, and that an overreliance on price-based competition makes them vulnerable to incoming discounters. Partly due to this realization, HDs are increasingly introducing national brands (NB) into their merchandize offer. At Lidl, 30% of the assortment is now composed of NBs, roughly the same percentage as their contribution to total sales (Steenkamp and Kumar 2009). Aldi, which not long ago had only private labels (PL) in its assortment, now lists well-known manufacturer brands in several product categories and markets, such as PepsiCo’s Quaker Oats, Kraft’s Oscar Mayer hot-dogs or Dole’s fresh fruit in the U.S., or Ferrero’s Nutella and Danone’s yogurts in Germany and eastern Europe – to name just a few. Even in countries where it stuck to the ‘strict PL’ policy to date, Aldi now announces the introduction of major NBs into its assortment (Distrifood 2012) and “in a major break from tradition, [Aldi] is preparing to introduce brands across its entire global network” (Research Farm 2012). For manufacturers, presence on the HDs’ shelves is a way to alleviate their dependency on mainstream retailers, who have extensively developed their own private label lines (Ailawadi, Pauwels, and Steenkamp 2008) and put increased pressure on national brand margins to compete with the discounters’ success (Bloom and Perry 2001).
Despite the strategic importance of NB introductions for both manufacturers and retailers (ter Braak, Deleersnyder, Geyskens and Dekimpe 2013), little is known about their impact at hard-discount stores. In an interesting study, Deleersnyder, Dekimpe, Steenkamp and Koll (2007) show that such introductions may entail a win-win situation: NBs grow their share relative to competing brands and hard-discounters gain share in the product category. However, the question remains how NB introductions – so directly at odds with the core positioning of the hard-discounter format – affect consumers’ overall perceptions of these chains, and, ultimately, the chains’ share-of-wallet (SOW). As research analysts put it: will brands become a major loyalty driver and tie in shoppers that are currently trying out the discounter? (Research Farm 2012). If carrying more NBs changes the hard-discounters’ value positioning or assortment image, NBs’ impact is likely to extend to other categories in the store (where no NBs are offered). Specifically, to the extent that increased presence of NBs (at prices above the HD’s typical PL offer) jeopardizes the HD’s reputation of providing excellent value-for-money across-the-board, this may deteriorate overall store performance. Indeed, consumer perceptions are shown to be key drivers of store choice and spending (e.g. Cox and Cox 1990, Srivastava and Lurie 2004, van Heerde, Gijsbrechts, and Pauwels 2008), which seems to be particularly true for hard-discounter shoppers (Lourenço and Gijsbrechts 2010). If, as advocated in a recent Nielsen report, “Good Value is a Matter of the Mind” (Nielsen 2008, p.6), then HDs have an interest in tracing the effect of higher NB presence on their assortment and value perceptions – making sure their discount positioning does not blur (Deleersnyder et al. 2007).
This papersets out to address these issues. In so doing, we add to the work of Deleersnyder et al. (2007), who are the first to study NB introductions and the characteristics that make for their success at hard-discounters. Our research complements theirs, in that we take a different perspective and bring different outcome metrics to the table. Specifically, while Deleersnyder et al. (2007) identify NB listings that meet the ‘joint’ interests of the manufacturer and the retailer and consider brand- and category sales as the focal variables, we take the perspective of the hard-discounter and consider implications for the chain as a whole in terms of image and share of wallet. As such, our work fits into the recent call of Srinivasan, Vanhuele and Pauwels (2010) to study the effect of marketing actions on mindset metrics and subsequent ‘hard’ performance measures. Not only does the inclusion of mindset metricsenhance the explanatory power of response models, it may also lead to a richer understanding and more actionable managerial recommendations (Srinivasan et al. 2010).
We focus on the following research questions. First, how do national brand introductions in HD stores affect the assortment and value positioning of these stores? Second, do these effects depend on the characteristics of NBs and of the category where they are introduced? Third, what are the effects of these NB additions, and their ensuing image consequences, on the HD’s share-of-wallet? We empirically test for the presence and size of these effects using a unique data set for the Belgian market, obtained from GfK. The data set combines (i) information on the HD chain’s assortment composition over time (i.e. NB introductions and deletions), with (ii) longitudinal information on its assortment and value perceptions among individual households, along with (iii) those same households’ weekly purchases at the HD and competing chains.
The remainder of the paper is organized as follows. In the next section, we briefly review the relevant literature and develop the conceptual framework. Section 3 describes the methodology, data, and variable operationalizations. The empirical results are presented in Section 4. Section 5 discusses the findings, implications, and limitations, along with suggestions for future research.
2. Conceptual framework
2.1. Background
Store image plays a pivotal role in retailers’ strategies (Steenkamp and Wedel 1991, Ailawadi and Keller 2004), and has been shown to strongly influence consumer store choice and spending (e.g.Nielsen 2008,vanHeerde et al. 2008,Lourenço and Gijsbrechts 2010).Defined as the way the store is perceived in the shopper’s mind (Martineau 1958), store image is typically seen as a multidimensional construct, with price, quality and variety of the assortment as its most important dimensions (Mazursky and Jacoby 1986,Hildebrandt 1988). The formation of a retailer’s image is a dynamic process (Mazursky and Jacoby 1986,Büyükkurt 1986,Nyström, Tamsons, and Thams 1975)– perceptions being updated as new information comes in. Given the complexity of stores’ offers, consumers have incomplete information and are uncertain about retail stores, thus resorting to available perceptual cues when inferring or updating retailers’ overall positioning(Feichtinger, Luhmer, and Sorger 1988,Mägi and Julander 2005).
In consumer packaged goods, manufacturer brands constitute important perceptual cues (Grewal, Krishnan, Baker and Borin 1998,Dawar and Parker 1994) that contribute to the image of the retailer carrying them (Ailawadi and Keller 2004). Clearly, brand presence should affect consumers’ perceptions of a store’s assortment. Also, brands are usually deemed informative about quality, as quality is often perceived with uncertainty (Zeithaml 1988,Richardson, Dick, and Jain 1994). Moreover, in a store context, where price information is complex and ambiguous (Hamilton and Chernev 2010a), consumers may be uncertain about a store’s overall expensiveness too (Alba, Broniarczyk, Shimp and Urbany 1994), and the presence of known brands may prove helpful in the formation of price and ‘value-for-money’ perceptions (Monroe, Grewal, and Compeau 1991,Biswas, Wilson, and Licata 1993). We build on these insights below.
2.2. Conceptual framework
Figure 1 summarizes our framework on how the introduction of NBs influences the hard-discounter’s perceptions and, subsequently, share-of-wallet.
--- Insert Figure 1 about here ---
Impact on Value Image. NBs are typically (still) perceived to have higher quality than private labels (Kumar and Steenkamp 2007, Steenkamp, van Heerde and Geyskens 2010). Being such ‘beacons of quality’, they are likely to enhance the perceived quality of the hard-discounter’s offer. At the same time, national brands are generally higher-priced than private labels (Steenkamp et al. 2010, Ailawadi, Neslin, and Gedenk 2001). Hence, NB introductions mayalso lead consumers to infer that the HD has become more expensive (Mägi and Julander 2005, Hamilton and Chernev 2010a). The impact on the HD’s ‘value-for-money’ positioning – a key ingredient of its success – is thus not clear a priori, but depends on the net outcome of these two forces.
Impact on Assortment Image. Even if total assortment size remains unchanged, NB presence may enhance the consumer’s overall perception of assortment appeal and variety offered by the store (Oppewal and Koelemeijer 2005). In contrast with the own labels carried by hard-discounters, NBs invest heavily in their ‘aura of uniqueness’(Geyskens, Gielens, and Gijsbrechts 2010) and, therefore, have often built a segment of loyal customers. As shown by Broniarczyk, Hoyer and McAlister (1998), consumers’ variety perceptions are shaped by the presence of a ‘favorite brand’. Hence, carrying NBs is likely to contribute to the HDs overall assortment appeal – creating a more favorable assortment image.
Moderating Effects. Clearly, not all NBs are alike, and we expect the strength of these effects to be moderated by the following brand- and category characteristics.
Price gap: The size of the perception adjustment may depend on the price charged for the NB at the HD store. Like Deleersnyder et al. (2007), we see a potential role for two distinct price gaps: (i) the “between-store price gap”, i.e. the difference between the NB price at the HD compared to that of traditional stores, and (ii) the “within-store price gap”, i.e. the deviation between the HD’s price for the NB and its PL offer. The between-store price gap comes into play when shoppers engage in cross-store comparisons (Gauri, Sudhir and Talukdar 2008): a larger gap (higher NB price at traditional stores relative to the HD) possibly enhancing the perception that the HD offers good ‘value-for-money’ (Hamilton and Chernev 2010a). However, consumers may also build their price beliefs by focusing on cues inside the store (Hamilton and Chernev 2010a, Lourenço and Gijsbrechts2010), and use the premium charged for the NB compared to the HD’s PL to adjust the discounter’s image. This within-store price comparison may trigger a dual effect. On the positive side, a large price gap may signal that the NB is in a different ‘quality league’, thereby lifting the quality perception of the HD’s offer (Deleersnyder et al. 2007). Also, the price of the vertical extension may be ‘contrasted’ with that of the prevailing PL offer, emphasizing that the HD’s PL offer is cheap (Hamilton and Chernev 2010b). In such cases, a larger within-store price gap (NB more expensive relative to the PL) may trigger a more favorable value image. On the negative side, consumers may ‘integrate’ the new (high) NB price into their overall price beliefs. In that case, larger price gaps translate into a less favorable value image of the store (Hamilton and Chernev 2010b). The net outcome depends on the strength of these opposing forces. Which one will prevail, we leave as an empirical issue.
Leading brands: Similar to Gielens (2012), we expect brand positioning to play a role. National brands that hold a leading position in their category are likely to be better known and trusted, and positively contribute to the HD’s perceived quality. Hence, ceteris paribus (i.e. after controlling for price differences), we expect NBs that are category leaders to more favorably influence perceived value-for-money. Moreover, such leading brands are more likely to be consumers’ ‘favorites’, and, as such, more apt to upgrade the HD’s assortment perception and appeal (Broniarczyk et al. 1998, Sloot and Verhoef 2008), which, again, suggests a positive moderation.
Brand line depth: A NB introduction is likely to more strongly enhance assortment perceptions as more stock-keeping units (SKUs) are introduced. Not only does this make the NB shelf presence more prominent, but variety within a brand line has also been shown to increase assortment appeal (Borle, Boatwright, Kadane, Nunes and Shmueli 2005, Boatwright and Nunes 2001). Hence, we expect a positive moderation of number of introduced NB-SKUs on the HD’s assortment image.
Category purchase frequency: NB introductions may also be more influential in frequently purchased categories. Changes in such categories are more likely to be noticed (Hamilton and Chernev 2010a), and may matter more to consumers. Moreover, product categories that are more often purchased have greater potential to enhance the (perceived) utility of shopping at the store (Inman, Winer, and Ferraro 2009, Bell, Ho and Tang 1998).
Cumulative share of NB SKUs: Finally, we expect the impact of NB introductions to depend on how many NB products the discounter already carries at the time of introduction. Previous studies already uncovered a nonlinear relationship between store patronage and brands (SKUs) offered (Borle et al. 2005, Briesch, Chintagunta and Fox 2009), in which item ‘uniqueness’ plays an important role. Building on those insights, we expect that HDs where NBs are absent or where their presence is negligible, may experience momentum: new introductions being evaluated more positively as the share of NB products in the HD assortment increases. This leveraging may occur because consumers take better notice of the NB offer or begin to find it extensive enough to weigh on their perceptions. However, while this phenomenon may be observed initially, extra introductions may lead to little incremental assortment appeal, and jeopardize the perception of low (PL) prices across-the-board. We thus expect the cumulative presence of NBs to have a moderating effect for value and assortment image, but leave the direction of the effect as an empirical issue.
Impact on Share-of-Wallet. By listing NBs, HDs aim to build stronger store loyalty and enhance shoppers’ share of spending at the store (Deleersnyder et al. 2007, Planet Retail 2010). Given the critical role of images in consumer store choice and spending (e.g. Ailawadi and Keller 2004, van Heerde et al. 2008, Baker, Parasuraman, Grewal and Voss 2002), any changes in the HD’s ‘good value-for-money’ reputation or perceived assortment variety from adding NBs, are, indeed, likely to affect the shoppers’ budget share spent at the store. Figure 1 includes these effects, and portrays how NB listings, through their impact on the hard discounter’s reputation, translate into store share-of-wallet. We expect the impact of NB introductions (over and above the resulting actual changes in price and assortment size, which we separately control for) to mainly materialize through the value and assortment perceptions. Still, it is not excluded that they also affect purchases directly, without ‘leaving their footprint’ on the store’s overall image. For completeness, we allow for such direct effects in our framework, and empirically test for their presence, but without specifying a direction for the main effect, or postulating specific moderating effects.
Table 1 summarizes the expected NB introduction effects.
--- Insert Table 1 about here ---
Controls.Figure 1 captures these effects and includes other factors that we control for. We expect NB introduction effects to occur over and above actual changes in price and assortment size – which we therefore include as separate variables. Also, consumers may differ in their ‘baseline’ perceptions of HDs, something we control for by including ‘hard-discounter proneness’ as a household characteristic. To account for the fact that images are ‘sticky’ (Alba et al. 1994) and that consumers may only partially update their store perceptions upon NB entry, we incorporate lagged assortment and value images. Similarly, consumers’ previous share-of-spending at the HD chain enters as a control for its current SOW. Finally, HDs may also delist NBs from the shelves, and this too may influence consumers’ perceptions of and spending at the store.