Private Labels: A Sign of Changing Times

Abstract

A widely held view is that a dramatic shift is well underway in the structure of food system. First noticed at the farm level, contracting between retailers and fruit and vegetable growers for specific quality attributes signaled a shift from commodity style markets to relational transactions managed by retail grocers operating on massive spatial scales. By contracting directly with suppliers, retailers found they could more efficiently procure and manage characteristics of products and transactions that affect their performance. Similar contracting between meat processors and growers emerged in animal production. As a result of this shift, retailers define product specifications and contract their production. This new organizational form constitutes a shift from a manufacturer dominated push system coordinated by markets operating at grower, assembler, processor, wholesaler, and retailer levels, to a pull system coordinated by bilateral contracts and agreements. A key element of new strategies associated with these new organizational forms is the private label that can be used by retailers to strategically define attributes of products. The implications of private labels for farmer, processors, and consumers are significant and have received substantial attention by economic researchers, though many issues remain unresolved with respect to the performance implications of private labels and the new functional role of retailers. Of specific interest in this paper is how private labels relate to national brands, do they constitute near equivalent products that are close substitutes, or do they offer cheaper, lower quality products to a different market segment than buys national brands? To address this question, the paper presents results of student implemented effort to examine field evidence gathered through scripted interviews with consumers at retail grocery venues. The paper begins with a summary of the key results available from the literature and identifies questions left unresolved. The paper then presents our approach followed by presentation of results from field interviews. We implement the study in Vienna, Austria and find strong evidence that supports the conclusion that while private labels have been widely adopted as a strategic tool by retailers. We find that private labels have been targeted at two market segments. A segment of consumers looking for low cost, and lower quality products are served by several private labels, while an important set of private labels targets the segment of consumers looking for high quality, higher priced products. The latter finding confirms that private labels are appearing that constitute national brand near equivalent products. This finding further suggests that continued structural change in the food industry is likely to see increasing supply of private labels that challenge the market positions of national brands.