Retailer Private-Label Margins: The Role of Supplier and Quality-Tier Differentiation

Abstract

The authors show how new realities in the private-label (PL) landscape, including differential PL-sourcing relationships and differentiated, three-tiered PL portfolios, affect the gross margins that retailers realize on their PLs. In addition, they examine the moderating role of the identity of the PL supplier (dual brander vs. dedicated supplier). Retailer PL margins are lower for stockkeeping units from PL suppliers with whom the retailer shares a more intense relationship, as reflected in their relationship breadth and depth, but this negative effect can be countered through multisourcing. Building prolonged relationships with PL suppliers also results in lower retailer PL margins, but only for more national brand–oriented suppliers. Dedicated PL suppliers have little to gain by building long-term retailer relationships, but they are less vulnerable to the retailer's practice of multisourcing than dual branders. Although economy PLs may appeal to conventional supermarkets to keep (hard) discounters at bay, they result in lower margins (percentage-wise and absolute) than the standard PLs they cannibalize. Premium PLs, in turn, offer the retailer a higher margin, but only when produced by suppliers with a sufficient extent of national brand focus. However, the higher promotional support often given to premium PLs tends to mitigate the actual margin advantage.