Do preferences for private labels respond to supermarket loyalty programs?

Abstract

This paper examines the effects of supermarket loyalty programs (LPs) on the demand for private labels (PLs). Using transaction level data on grocery purchases and individual level information on the membership of loyalty programs, I estimate a model of demand in which membership may affect the consumers’ valuation for PLs, their sensitivity to price changes and have spillover effects on both named brands (NBs) and rivals’ PLs. My identification strategy of the membership effect exploits observed variation in shopping patterns at the consumer level over time and includes a control function using LP characteristics as instrumental variables to account for a potential selection bias related to unobserved factors of the membership decision. I find a significant effect of LPs on consumer preferences for PLs. Compared to non-members, membership reduces consumers’ price sensitivity for the products sold by the supermarket they are members of, but increases it for products sold by supermarkets they are not members of. These effects are weaker for households that are members of the LPS of multiple supermarkets. Further, I use my demand model along with a supply model to simulate counterfactual scenarios in which supermarkets unilaterally modify their LPs to make it more difficult for customers to benefit from them. I find a considerable decrease in the demand for PLs and an increase in the demand for NBs. In response, supermakets decrease PLs’ prices and increase NBs prices in order to partially offset the impact on PLs’ demand.