Building Store Loyalty through Store Brands

Abstract

In this article, the authors study the role of a store brand in building store loyalty through a game theoretic analysis. In a market in which a segment of consumers is sensitive to product quality and consumers' brand choice in low-involvement packaged goods categories is characterized by inertia, the authors show that quality store brands can be an instrument for retailers to generate store differentiation, store loyalty, and store profitability, even when the store brand does not have a margin advantage over the national brand. In addition, this loyalty argument does not apply for the “cheap and nasty” private label strategy. Such a private label policy, on the contrary, reinforces rather than reduces price competition among stores. Indeed, the quality of the store brand must be above a threshold level to create this opportunity. It also follows that quality store brands, when carried by competing retailers, can be an implicit coordination mechanism that enables all the retailers to become more profitable. Finally, a quality store brand policy is profitable only if a significant portion of shoppers buys the national brand. This surprising result establishes the complementary roles of store brands and national brands. The former create store differentiation and loyalty, whereas the latter enable the retailer to raise prices and increase store profitability. The authors provide empirical support for their thesis by using evidence from Europe and household-level scanner panel data from the United States and Canada.