The premium option in the multiple price tiers created for store brands offers

One of the most salient changes in the grocery environment is the success of private labels (PLs). Since a large number of FMCG categories now already have at least one PL, retailers are increasingly adopting a multi-tiered PL strategy. In practice, this often means a switch from a single standard product offering to a three-tiered PL portfolio. This ranges from the typical cheap and low quality own labels (i.e., economy PLs) to somewhat less expensive PLs comparable in quality to the national brands (NBs) (i.e., standard PLs), to premium quality and high value added PLs (i.e., premium PLs) (Kumar and Steenkamp, 2007). With this strategy, retailers can satisfy the heterogeneous nature of consumers, and further create differentiation compared to their competitors (IRI, 2016). For instance, Italian retailer Conad states that they grew in all channels primarily thanks to a multi-tier PL program, which they started a few years ago (Global Retail Mag, 2013). Examples of retailers who launched a new economy or premium PL tier are international grocery chain 7-Eleven (Just Food, 2015) in U.S. and Korean retailer Lotte (IGD, 2014). In the same spirit, recently an increasing number of leading retailers have extended their PL tier offerings with new alternatives targeted to distinct consumer segments (IPLG Europe, 2014), such as health and kids lines (e.g. Good For You at U.K. retailer Asda and Conad Kids at Italian retailer Conad). Likewise, U.S. retailer Kroger has expanded its organic and healthy (standard and premium) PL lines recently (Market Watch, 2012). In the meantime, industry observers increasingly state that economy PLs are facing big challenges. They are shrinking in volume sold since they fail to compete with discounters (IRI, 2016). Moreover, they generate lower margins than standard PLs and most importantly they can cannibalize the current PL offerings that in the end leads category profit erosion (Ter Braak et al., 2013; IPLG, 2016). On the other hand, standard PL tier keeps its popularity and premium PLs is actually growing not only in size but also in value (IRI, 2016). That brings us to evaluate what is the impact of this further proliferation within the tiers on consumer demand and retailer profits. In other words, whether new line introductions or delistings within different tiers help retailers. Together with this further proliferation in PL tier offerings, there is an ongoing discussion on how different PL tiers should be priced relative to each other and their NB competitors. The top retailers in U.K. (i.e. Tesco, Sainsbury's and Asda) have increased the price of economy PLs more than 40 per cent on average (Daily Mail, 2012). Likewise, according to IRI, U.K. shopping basket data show that prices of standard PL items are slowly getting closer to NBs’ prices (Just Food, 2013, IRI, 2016). Similarly, although industry observers advise the retailers to set their premium PLs price more than NB counterparts, there is still little known about how premium PLs should be priced (Millward Brown, 2008, World Trademark Review 2012).

Hence, this PL proliferation to new quality tiers (i.e. economy, standard and premium) and the further line proliferation within each tier pose challenges to a retailer's PL-NB portfolio management and price setting. Within a retailer, how do the different PL tiers/lines compete with each other and with the existing NBs in the assortment? And, how does this PL-NB competition influence consumer demand and retailer's profits? To answer these questions, we estimate a rich discrete choice demand model at the consumer level. The adopted approach allows us to derive demand and profit implications for different scenarios by calculating counterfactuals. More specifically, we derive the demand and profit effects under the following set of scenarios: (i) dropping or adding a line (kids, health or muesli) within a PL tier and (ii) changing the PL tier prices. By predicting consumer purchase adjustments to these changes in a retailer's PL-NB portfolio, we can define which PL/NB tiers and lines win or lose in terms of demand. Moreover, we derive what happens to a retailer's profits, addressing the recent call for more PL studies on profit implications (see Sethuraman and Gielens, 2014).

Insights on PL tiers in the academic literature are limited, as the majority of articles studying PLs do not make the distinction between different PL tiers. These studies regard PLs as one group (e.g. Lamey et al., 2012; Steenkamp and Geyskens, 2014), or consider one specific tier (e.g. Pauwels and Srinivasan, 2004). Nonetheless, Ter Braak et al. (2014) study the category drivers of premium PL introduction. Among other things, they find that retailers are more likely to introduce premium PLs in categories with a more proliferated assortment in terms of standard PLs, still being aware of creating PL fatigue. Based on online experiments, Plameira and Thomas (2011) showed that consumers’ quality perceptions of a premium PL increase in the presence of a value PL, whereas quality perceptions of a value PL are not affected by the presence of a premium PL alternative. In addition, Geyskens and colleagues (2010) show that, based on a brand-choice model with context effects, the introduction of an economy PL cannibalizes the incumbent standard PL but benefits the mainstream NBs. Similarly, an introduction of a premium PL cannibalizes the incumbent PLs (i.e. budget and standard) and sometimes benefits premium-quality NBs. Gielens (2012) studies the impact of PL and NB introductions on category sales and the share of the top-3 NBs and the three PL tiers (aggregated over brand variants). She finds, among other things, that new products introduced by standard PLs and premium PLs are sometimes able to boost category sales, to shrink NB rivals’ shares, and to cannibalize other PL tiers (respectively, economy and premium, and only economy), whereas new products introduced under the economy PL flag only stimulates overall economy PL share. We contribute to this literature stream in multiple ways. To the best of our knowledge, we are the first to study the demand implications of (i) further line proliferation within PL tiers (rather than PL tier introductions (see Geyskens et al., 20101 and Palmeira and Thomas, 2011) – or new product introductions within a PL tier (see Gielens, 2012)) and (ii) different PL tier price settings. Finally, besides the demand implications of further proliferation and price decisions within the multi-tier PL strategy, we study the profit implications for the retailer.

In sum, the study aims to answer the following research questions: How do PL lines/ tiers and NBs compete within a retailer? What are the demand and profit implications of this competition for the retailer? The rest of the paper is organized as follows. In the next section, we provide a brief overview of the data, followed by a section that presents the empirical framework with more detail regarding the method of estimation. In Section 4, we present the empirical results. In Section 5, what-if scenarios are discussed in detail. Finally, we conclude with discussion, limitations and ideas for further research in Section 6.

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