The Reciprocal Relationship between Private Label Use and Store Loyalty

Abstract

Does private label use drive store loyalty at the individual household level? This question is important to retailers, as they decide how much to push private labels over national brands, and to national brand manufacturers, as they look for effective ways to both cooperate with and compete with retailers. Yet, empirical evidence of the association between private label use and store loyalty is both limited and mixed. In this study, we develop an econometric model of the relationship between a household's private label share and share of wallet. The model includes major drivers of these two behaviors and controls for simultaneity and non-linearity in the relationship between them. It is estimated using a unique dataset that combines complete purchase records of a panel of Dutch households with demographic and psychographic data. We estimate the model for two leading chains in the Netherlands - the leading service chain with a well-defined private label strategy and the leading value chain with a less differentiated private label program.

We find that private label share significantly affects share of wallet and vice versa at the service chain, and both effects are strongly non-linear in the form of an inverted U. In contrast, the association between the two constructs at the value chain is much weaker and, if anything, is driven by the effect of share of wallet on private label share. The implications of this research are very important. Service retailers with a well-differentiated private label program can reap the benefits of a virtuous cycle - greater private label share increases share of wallet and greater share of wallet increases private label share. But, this virtuous cycle only operates to a point, and interestingly, private label share levels appear to have already exceeded that point. Further, just having a private label offering does not ensure the virtuous cycle. Value chains positioned on price without a well-differentiated private label do not get a loyalty benefit from private label.

Keywords: private label share, store loyalty, share of wallet, simultaneity, non-linear effects