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Intra-category competition, entry probability, and private label share

Evidence from organic food retailing in Australia
Lay Peng Tan
Department of Marketing and Management, Macquarie University, North Ryde, Australia, and

Received 12 August 2011 Revised 12 January 2012 Accepted 8 March 2012

Jack Cadeaux
School of Marketing, University of New South Wales, Sydney, Australia
Purpose The purpose of this study is to examine the entry probability and performance of private labels at an organic food retailer. For a growing sector with unique market structure and category characteristics, it examines how competitive factors affect the attractiveness of a product category for private label entry by an organic food retailer and how the manufacturer brand assortment that the retailer stocks affects private label share. Design/methodology/approach This study analyses store level cross-category data from an independent organic retailer and eld data on retail competition. Findings The ndings show that organic private label stock-keeping units are more likely to be present in categories with supermarket competition. They also show that concentration of shares amongst manufacturer brands (as measured by the Herndahl index) negatively affect the probability that the retailer will enter a category with a private label stock-keeping unit (SKU) but positively affects the share of that private label SKU. Research limitations/implications Although the results arise from a fairly small sample of around 30 categories, the focal retailer offers a unique opportunity to examine several private label decisions at the store level. Future work could examine in greater depth the competitive interaction between supermarkets and organic retailers and the effects of such competition on their assortment decisions. Originality/value By extending private label research beyond the conventional supermarket industry, this study conducts a pioneering test of the effects of competition between retail formats on the likelihood of private label entry. Keywords Private label, Entry probability, Intra-category, Inter-format competition, Organic retailing, Australia, Retailing, Organic foods Paper type Research paper

Asia Pacic Journal of Marketing and Logistics Vol. 24 No. 3, 2012 pp. 414-432 q Emerald Group Publishing Limited 1355-5855 DOI 10.1108/13555851211237894

1. Introduction The impressive growth and penetration of private labels in grocery retailing has attracted considerable discussion and research interest in both the trade and
The authors are grateful for the constructive and valuable comments they received from the reviewers. They also wish to thank the anonymous retailer which provided the data for this study.

academic press. On the academic research front, the private label literature has gone through an evolution: from an initial focus on the effects of private labels on market structures (Kaven and Call, 1967; Stern, 1966) and from proling private label prone consumers (Burger and Schott, 1972; Coe, 1971; Myers, 1967) to a more recent emphasis on the strategic roles of private labels for retailers (Ailawadi and Harlam, 2004; Ailawadi et al., 2008; Chintagunta et al., 2002; Corstjens and Lal, 2000; Dhar et al., 2001; Mills, 1995; Morton and Zettelmeyer, 2004; Nandan and Dickinson, 1994), optimal marketing actions for private label performance (Choi and Coughlan, 2006; Dhar and a et al., 2007; Hoch, 1997; Hoch and Banerji, 1993; Kumar and Steenkamp, 2007; Oubin Raju et al., 1995a, b; Sethuraman, 1992) to analyses of private label success (Lamey et al., 2007; Lamey et al., 2012) and the effects of private label strategy on manufacturer brands (MBs) (Geyskens et al., 2010). The evolution mirrors the increasing importance of private labels in many categories. Consumers response to private label is another key research area with focuses such as consumer perceptions of private label (Bellizzi et al., 1981; Miranda and Joshi, 2003; Richardson, 1997; Richardson et al., 1994) and the effects of perceived quality differential in consumers willingness to pay more for national brands (Sethuraman, 2000; Sethuraman and Cole, 1997; Steenkamp et al., 2010). Most research, however, focuses on private labels for conventional supermarket product categories. This study extends private label research beyond conventional supermarkets to the context of organic packaged food, with an independent organic retailer as the focus of the analyses. In particular, using store-level cross-category data from the focal retailer and eld data on retail competition, this study examines how competitive factors affect the attractiveness of a product category for private label entry by an organic retailer and the effects of MB assortment on private label share performance. This paper is structured as follows: rst, it provides an overview of the Australian organic retail market incorporating information from academic and trade publications, from researchers eld observations, and from interviews. It directs specic attention toward the organic packaged food market. The organic retail market in Australia is a growing sector with unique market structure and category characteristics. This industry situation poses broad implications for private label merchandising of organic foods in Australia. Quantitative analyses follow this discussion. This analysis reects the continuum of decision making a retailer faces in developing a private label program (following Sethuraman, 2005). In particular, the analyses examines how: . inter-format competition from supermarkets; and . intra-category competition from MBs affects both the probability that the retailer will offer a private label stock-keeping unit (PL SKU) in a category and the resulting private label share of that SKU once offered. The paper concludes with a discussion of some broad implications and areas for future research. 2. The Australian organic retail market The demand for organic food products worldwide appears to have expanded rapidly in recent years stimulated by consumer perceptions that organic food products are safe, clean, and ethical (Chang et al., 2003) and from a community desire for sustainable food production and farming systems (RIRDC, 2000). In Australia, organic domestic retail sales

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have grown over 50 percent in two years from A$623M in 2008 to $947M in 2010 (Kristiansen et al., 2010). The sales value of organic packaged food, in particular, has grown over 17 percent from A$322.7M in 2007 to A$380.4M in 2010 (Euromonitor International, 2011). Australia is an emerging market in comparison with key organic markets such as USA (the worlds largest) and Germany (the largest in Europe) with respective sales value for organic packaged foods of USD11,18B and USD2.38B in the year 2010. Forecasts for Australia showing strong growth at a compound annual growth rate of 4 percent so as to reach A$425M by 2015 arise from growing trends such as healthier eating habits, home cooking and demand for natural and wholesome food (Euromonitor International, 2011). Strong growth is also evidenced in mainstream organic food marketing with major manufacturers such as Unilever (e.g. Go Organic), Heinz (e.g. Heinz organic baby food) and Kraft Foods (e.g. Back to Nature) venturing into the organic food industry with their respective organic ranges (Kristiansen and Smithson, 2008). 2.1 Market structure and category characteristics 2.1.1 Market structure. In Australia, organic food is retailed through a variety of outlets, including independent organic retailers, mainstream supermarkets, and farmers markets (for fresh produce). Anecdotal evidence shows that the majority of organic foods in Australia are sold through independent organic retailers. The trend, however, is shifting in favour of large multiple retailers with multiple store outlets including supermarkets and independent retailers because of the one-stop shopping convenience and lower prices they offer (Chang et al., 2003; Kinnear, 2002). The competition amongst the independent organic retailers is often described as friendly to the extent that organic retailers perceive other such retailers to be sharing a vision of growing the industry. In contrast, inter-format competition with conventional supermarkets is perceived as a threat mainly due to the lower prices at supermarkets for organic product ranges. In particular, supermarkets not only have begun to stock organic SKUs but also offer private labelled organic SKUs (PL SKUs) within their assortments. Some examples are Coles Organic, Woolworths Organic and Just Organic by Aldi. Typically, organic goods hold a large price premium over non-organic goods. A major price survey at the six capital cities in Australia between December 2003 and January 2004 found that the presence of PL SKUs in the conventional supermarket brought the level of price premium at the national level for organic wheat biscuit cereal to be at the lowest of all surveyed products (Halpin and Brueckner, 2004). This evidence suggests that supermarkets were pursuing a lower-price strategy in their organic categories, with PL SKUs as their most likely tools. The supply chain of the organic industry is highly fragmented with retailers having to get their supplies from numerous suppliers from both cottage and mainstream industries (Monk, 2004). A large independent organic retailer once commented that it has more than 1,000 suppliers many more than conventional supermarkets would have (Vyner, 2005). General observations at organic stores reveal that, besides some established brands that have wide product ranges (e.g. Heinz organic), the shelves are occupied by numerous brands from multiple small domestic suppliers with each having a very limited number of SKUs. This scenario depicts a market structure with many players within each product category, with each player likely to have only a small share of the market. This market structure differs sharply from that of the conventional supermarket industry which is often dominated by leading national brands.

This unique supply situation, with many brands of SKUs being available, and potential low market concentration amongst the manufacturers, in principle, could provide independent organic retailers with signicant scope to experiment with different assortment compositions, implying broadly that assortment would likely be a key controllable tool for inuencing sales performance. The assortment effects on sales performance may also arguably be stronger given the low level of brand advertising from such small manufacturers. 2.1.2 Category characteristics. The difference between an organic or non-organic product is not always observable. Hence, external certication plays a key role in providing consumers assurance of authenticity. The organic sector is highly regulated. The Australian Quarantine and Inspection Service (AQIS) administers the organic export certication program. There are seven AQIS accredited private certiers, for example AUS-QUAL Limited (AUSQUAL), Australian Certied Organic (ACO) and NASAA Certied Organic (NCO) which provide certication services for export markets based on the National Standard for Organic and Biodynamic Produce (National Standard). For the domestic market, the certiers use a variety of different standards some in compliance with the National Standard, and some not (Leu, 2009). As reported by Leu (2009), the Chairman of Organic Federation Australia (OFA), the industry peak body for the organic industry in Australia, the presence of numerous standards and the absence of a legal denition for the term organic inhibits regulatory authorities such as the Australian Competition and Consumer Commission (ACCC) from taking actions against any misleading, deceptive and false claims. In response, a new Australian Standard, championed by OFA was launched in 2009. The new Australian Standard serves as the base or reference standard. It is voluntary, operating as a co-regulatory system rather than a self-regulatory or a governmental mandated regulatory system (Leu, 2009). The voluntary nature of the organic standard in Australia is one reason for relatively lower consumer condence in organic products in this country (Willer and Kilcher, 2011). Such lack of consumer condence could be an important source of market uncertainty for organic retailers. 3. Emergence and perceived strategic roles of private label SKUs 3.1 The emergence of private label SKUs Private labels play a prominent role in the global organic market. In the USA, whole foods market, the largest organic foods retailer in the world offers a wide range of SKUs under their 365 Everyday Value private label. Other examples of some leading European supermarkets that offer organic foods with private labels include Carrefour with over 800 SKUs under Carrefour Bio, Sainsbury in the UK and Tegut in Germany with each offering over 1,000 private labelled organic SKUs. These private label ranges have reportedly attracted a greater share of consumer spending by offering a competitive price point relative to branded organic products (Australian Department of Foreign Affairs and Trade and Austrade, 2004). In Australia, PL SKUs are commonly found within the organic ranges at the major supermarkets such as Coles, Woolworths, Aldi, and IGA. PL SKUs at such supermarkets accounted for a 17 per cent value share of total organic packaged food in Australia in 2010 (Euromonitor International, 2011). PL SKUs are also emerging within the product assortments of many independently owned organic retail stores in Australia. However, market level data for these PL SKUs are not known to be available as yet.

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The present study used eld observations and interviews to gain insights into the emergence and perceived roles of PL SKUs offered by the Australian independent organic retailers. The ten organic retailers interviewed were located within eastern Australia. They represent typical organic retailers in that they all stock broadly similar product assortments. For example, they stock organic fruit and vegetables, packaged foods, drinks and snacks, and organic nuts, oats, and our in bulk. Some of the larger stores also stock organic skin care and beauty products. Eight of the ten organic retailers interviewed offer PL SKUs. The PL SKUs in these retailers stores are at the earlier stage of private label evolution (following Laaksonen and Reynolds, 1994). That is, these PL SKUs have their own labels (often the store name) and are often, though not always, the lowest priced SKUs within the category. They are found mostly in staple lines such as, for example, pasta, rice, and rolled oats. In addition to those SKUs repackaged from bulk via in-house production which are basic in their appearances, some larger retailers also stock PL SKUs that have been contract-manufactured. Examples of contract manufactured PL SKUs include fruit juices, olive oil, vinegar, jams, and savoury chips which are often me-too copies of MBs. As reported earlier, the supply chain is cluttered with many small players from domestic cottage industries, alongside some mainstream players. However, it is not well understood why organic retailers would have their own private label SKUs when so many branded SKUs are already available. 3.2 The perceived strategic roles of private label SKUs The ndings suggest that supply factors partly drive the introduction of PL SKUs among these interviewees stores. Some products were only available in bulk. To provide their customers with these products in smaller retail quantities, the retailers performed the basic distributive function of breaking bulk (Coughlan et al., 2006). The repackaging and re-labelling involved thus create the opportunity for the introduction of PL SKUs. The stores, particularly the larger ones, brought in contract manufacturers when the sales turnover was large enough to sustain a wider range of PL SKUs. This practice advances the private label programs a step closer to those commonly observed in conventional supermarkets. Following the introduction of PL SKUs, the retailers use and perceive their PL SKUs to play several strategic roles such as enhancing overall store performance via building store trafc and retaining store visits and loyalty of their customers (Corstjens and Lal, 2000; Dhar et al., 2001; Fox and Sethuraman, 2006). The stores use PL SKUs to create a point of differentiation from competition (Bhasin et al., 1995) and to provide better consumer value in terms of offering better service and product options for their customers (Bhasin et al., 1995). Some retailers use their PL SKUs as a form of advertisement for the store. Most retailers cited improving margins as the other main motivation (following Ailawadi and Harlam, 2004) although the better margin was often eroded by the high wages cost involved in re-packaging the products in-house. Appendix 1 contains some illustrative quotes from the interviews. Juxtaposing these ndings against a mainstream private label literature that is based mostly on conventional and usually US supermarkets, we found some evidence that organic retailers are at the early stage of emulating the private label programs adopted by such supermarkets. Although bridging a supply gap was the initial reason

for PL introduction, upon introducing PL SKUs, organic retailers view and use them as strategic tools much as do conventional supermarkets. Interestingly, although a desire to obtain negotiation power with suppliers is a frequently cited motivator for conventional supermarkets to carry PL SKUs, this theme did not surface from any of the interviews. This situation can be attributed to the volatility of a fragmented market structure where both the retailer and the numerous suppliers may be more mutually dependent than they would in the conventional supermarket industry, at least in Australia. In addition, with many manufacturers within a product category, low market concentration is more likely to be creating more room for retailers to extract channel prots through different assortment compositions than in forcing retailers to have to engage in power plays with one or two leading national brands, as might be the case in the conventional supermarket industry. Following the strategic decision to have a private label program, a retailer plausibly faces a continuum of decision making for its management (following Sethuraman, 2005). That is, a retailer would rst select product categories in which to introduce PL SKUs. Then, the retailer would make marketing decisions for the development and positioning of their PL SKUs. Subsequently or concurrently, an assortment planning process would follow to determine how many and which PL SKUs to have and how many competing MB SKUs to have within each category. The process is shown in Figure 1. Using store-level data from one of the independent retailers, this study thus examines via a cross category analysis how competitive factors affect the attractiveness of a product category for PL entry (the strategic decision as shown in Figure 1) and the effects of MB assortment on private label share performance (i.e. the outcome of assortment decisions, as shown in Figure 1). The following sections present the conjectures, introduce the data sets and report the quantitative ndings. 4. Conjectures 4.1 Probability of private label entry: effects of inter-retail format competition The increasing involvement of conventional supermarkets in organic food retailing suggests a shift in the nature of competition towards greater emphases on one-stop shopping convenience and lower price (Chang et al., 2003; Kinnear, 2002). More importantly, it may also result in greater intra-category competition (such as discussed by Miller et al., 1999) within those organic product categories that conventional supermarkets choose to carry. This conjecture could be supported by several theoretical and empirical arguments. First, as suggested in industrial organisation economics, competition becomes more intensied when there are more players within a product category (Ailawadi and Harlam, 2004; Waterson, 1984). Second, the competitive

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Strategic Decisions To introduce PL? Which product category?

Marketing Decisions Target market Positioning Pricing and promotion Etc.

Assortment Planning Decisions PL SKUs Manufacturer branded SKUs

Source: Partially adapted from Sethuraman (2005)

Figure 1. The continuum of decisions a retailer faces in their private label planning

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relationship between the conventional supermarkets and organic retailers is, arguably, asymmetric. That is, given the relatively greater customer base of a supermarket and given that organic retailing is still a niche market, more of the customers from an organic retailer would have also been customers of a supermarket than the reverse. Third, greater involvement from supermarkets would imply greater distribution intensity for the product categories that the supermarkets choose to stock. Greater distribution intensity of a product category means that consumers can buy the product through more of the possible outlets in a trading area (Coughlan et al., 2006). Consequently, greater intensity may lead not only to greater intra-brand competition but also to greater intra-category competition between retailers (Cadeaux, 1992; Porter, 1976). In response to such intensifying competition, the focal retailer may be propelled to introduce PL SKUs within those categories for which they face between-retail-format competition from the conventional supermarkets (McMaster, 1987). Finally, as discussed earlier, low consumer condence in organic foods has created a highly uncertain market environment for retailers, particularly for independent retailers with little access to systematically processed category performance information. The mere fact that a supermarket stocks an organic category may signal to the independent retailer a condition of relatively lower uncertainty for that category and give that retailer condence to develop a private label program in such a category. Moreover, a small business like the independent retailer (compared to a supermarket) may merely imitate the supermarkets private label strategy. In fact, empirical evidence shows that small businesses may decrease their sophistication of planning as environmental uncertainty increases (Matthews and Scott, 1995). Consequently, we conjecture that:
Private label SKUs are more likely to be present in categories that face supermarket competition.

4.2 Probability of private label entry: effects of MB share concentration Competition within a category is expected to increase with private label introduction. Raju et al. (1995b) analytically demonstrate that private label introduction is more likely to increase category prots for the retailer if the category has relatively more MBs even though the private label share is expected to be lower (Hoch and Banerji, 1993; Sethuraman, 1992). Therefore, a retailer might arguably be more likely to introduce PL SKUs in categories with more intense competition amongst national brands. However, Putsis (1997) presented an alternative argument, claiming instead that brand proliferation would deter PL entry in a category. He argued that a high dispersion of brands implies a wider coverage of attribute space by national brands, thereby reducing the threat of competitive entry (Putsis, 1997, p. 359). Given the fragmented nature of the MB industry for organic foods in Australia, the prediction implied by Hoch and Banerji (1993) or Sethuraman (1992) makes more sense than the one proposed by Putsis (1997). That is, unlike powerful mainstream national brand manufacturers such as Kelloggs or Arnotts, most manufacturers of organic food brands do not proliferate large ranges of sub-brands and SKUs in an effort to cover all market segments within a category and hence saturate the attribute space (as suggested by the crowding out entry deterrence hypothesis of Putsis (1997)). Instead, less concentration in a category will arguably attract rather than deter PL entry by an organic retailer. Thus, we conjecture that:

Private label SKUs are more likely to be present in categories with greater dispersion (less concentration) of shares amongst manufacturer brands.

4.3 Private label share performance: effects of MB count Industrial organisation economics suggests that competition intensies when the number of competitors increases (Scherer and Ross, 1990; Waterson, 1984). At the market level, Sethuraman (1992) and Hoch and Banerji (1993) found that private label share increases as the number of MBs within a category decreases. Intuitively, a larger number of players would lead to smaller individual shares (Sethuraman, 1992). Moreover, inter-brand competition within stores is far more vibrant than between stores to the extent that consumer search costs are far lower within stores than they are between stores (Steiner, 1993, 2004). This is so in part because, within a store, brands within a category are generally displayed together, thus enabling consumers to make quick comparisons of price, quality and performance features (Steiner, 2004). Furthermore, Dhar and Hoch (1997) conjecture that [. . .] private labels would be able to pursue a focused positioning strategy when facing only one or two large national brands (p. 213). This argument implies that private labels would likely perform better when there are fewer MBs within a category. Within a store and within a product category, a retailer has ultimate control over the number of brands they place on their shelves (Dhar and Hoch, 1997). Hence, to some extent, a retailer has control over the level of competition to which they want to expose their private labels. Therefore, a retailer that includes a larger MB count within its category assortment would in effect create higher inter-brand competition for its own private labels. Thus, we claim that:
Private label share will be lower in categories with greater distinct manufacturer brand count than in categories with a lower distinct MB brand count.

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5. Data sets The anonymous focal retailer was one of the eight interviewees that carry PL SKUs within their product assortment. It represents a typical organic retailer in this region given the types of organic product assortments they stock and their emphases on personal service. The focal retailer is considered as one of the relatively larger stores within this region with a store size of approximately 100 m2 and total storewide assortment exceeding 6,000 SKUs. The focal retailer stocks approximately 300 PL SKUs in about 30 food categories. Much like PL programs typical of larger independent organic retailers, these PL SKUs include staples repackaged in-house from bulk (e.g. rice, pasta, our, rolled oats) and items from contract manufacturers (e.g. vinegar, oil, jam, fruit juices, etc.). The focal retailer uses their store name as their private label, again a common practice amongst the independent organic retailers that have private label programs. In comparison to prior private label studies using data from conventional supermarkets, a sample size of around 30 categories was undoubtedly small. In practice, and within the emerging organic retailing market in Australia, the focal retailers private label program represents an important development in this market. It is thus a unique quantitative case study for examining several private label decisions at the store level. The focal retailer provided assortment records and sales reports. Observations of the two leading supermarkets within closest proximity to the focal retailer yielded retail competition information (following for example, Ailawadi and Harlam, 2004; Stassen et al., 1999).

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6. Results and discussion 6.1 Probability of private label entry A logistic regression model tested the above conjectures about how category competition affects the entry probability of PL SKUs. The dependent variable was whether or not a PL SKU is present in a category (1 present, 0 not present). Total category sales (dollars) was included in the model as a control variable since categories with greater sales may appear to be attractive to the focal retailer to introduce a PL SKU given the potential for larger prot (Hoch and Banerji, 1993; Sethuraman, 1992). MB share concentration was measured by the sum of squared MB brand shares. t-tests compared the mean scores of total category sales and sum of square MB share between categories with and without PL SKUs (Table I). Cross tabulations and a x 2 test examined the association between the presence of supermarket competition and the absence or presence of private label (Table II). Primary observational data indicated the presence or absence of supermarket competition which was operationalised as a dichotomous variable, c (c 1, if a supermarket stocks an organic SKU in the category; otherwise c 0) (following for example, Ailawadi and Harlam, 2004). Table III presents logistic regression results and Table IV presents the classication matrix. Cross tabulations (Table II) and a x 2 test (Pearson x2: 27.14, p , 0.001) show that there is a signicant association between supermarket competition and the absence or presence of a PL SKU. As depicted in Table III, the x 2 goodness of t index (Hosmer and Lemeshow) and the likelihood ratio test indicate that the logistic regression model adequately ts the data. The Nagelkerke R 2 (0.329) shows that this model explains a reasonable proportion of the variation. In addition, the classication matrix (Table IV) shows that even though the absence or presence of PL SKUs was not perfectly predicted, the correct prediction rate of 80.3 percent indicates the strong discriminating power of the predictor variables. A closer look at the hit ratios reveals that while the model predicts the absence of PL SKUs very well (94.4 percent), it does not predict the presence of PL SKUs too well (27.3 percent). This could partly be attributed to the unequal cell size that has deed the pure chance odds (Morrison, 1969). That is, each category has an a priori 0.79 probability of not having PL SKUs and only a 0.21 probability of having a PL SKU.
t-test for equality of means sig. (two-tailed) 0.000 0.014

Discriminating variable Table I. Group means and t-test for categories with/without PL SKU Sum of square MB brand share Total category sales ($)

PL SKU No Yes No Yes

N 124 33 124 33

Mean 0.422 0.268 1,391 2,896

No. competition Table II. Supermarket competition and presence of PL SKU Categories with No PL SKU Categories with PL SKU Total Count Count Count 85 6 91

With competition 39 27 69

Total 124 33 157

Parameter b SE b Predictors Sum of square MB brand share Competition (1 present, 0 absent) Total category sales ($) Constant Overall model evaluation Goodness of t statistics (Hosmer and Lemeshow) Log-likelihood test (test of overall model) Cox & Snell R 2 Nagelkerke R 2 (max. 1) 2 2.422 1.949 0.000 2 1.812 1.253 0.508 0.000 0.695

Walds x2 3.740 14.740 1.197 6.810 x2 9.221 37.262

df Sig.(p) 1 0.053 1 0.000 1 0.274 1 0.009 df Sig.(p) 8 3 0.324 0.000

e b(odds ratio) 0.089 7.020 1.000 0.163

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Table III. Results of logistic regression analysis of category attractiveness for PL SKU

0.211 0.329

Actual group Categories with No PL SKU Categories with PL SKU Predicted total Overall percentage correctly classied: (117 9)/157 80.3% Proportion chance criterion: (0.21)2 (0.79)2 66% Note: The cut-value is 0.500 for the classication matrix

Predicted group With PL Actual No PL SKU SKU total 124 117 (94.4%) 7 (5.6%) (79%) 24 (72.7%) 9 (27.3%) 33 (21%) 141 (89.8%) 16 (10.2%) 157 Table IV. Classication matrix

To further evaluate the performance of this model, the proportional chance criterion was then computed as it is deemed the most useful reference point in instances of unequal cell sizes (Morrison, 1969; Patterson, 2004). The prediction is found to be better than chance, as evidenced by a more favourable comparison to the proportional chance criterion (66 percent). The presence of supermarket competition increases the probability that PL SKUs will be present. The odds that a category that faces supermarket competition will have PL SKUs is 7.020 ( p , 0.001) times greater than that of a category that does not face competition. Also, as conjectured, brand share concentration has a negative effect on the probability that a category would contain a PL SKU (b 2 2.422, p , 0.10). The logistic regression results indicate that, within the focal store, PL SKUs are more likely to be present in categories when supermarket competition is present but are less likely to be present in categories where the concentration amongst MBs is greater. These results provide a pioneering test of the effects of competition between retail formats on the likelihood of private label presence. PL SKUs seem to be present in those categories that face supermarket competition because they function as strategic tools in facing the growing competitive threats from supermarkets. As Fox and Sethuraman (2006) point out, the competition between different retail formats is competition for store visits rather than for customers, in that retail customers include both formats as part of their shopping strategies. This argument is consistent with empirical generalisations about buyers split loyalty behaviour,

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for example, the multi-store, multi-brand or multi-retail format shopping behaviours found by Ehrenberg and colleagues in the last several decades (Ehrenberg et al., 2004; Uncles and Kwok, 2009; Wright et al., 1998). Under such competitive environments, private labels may create a point of differentiation from competition and help build store loyalty for the focal retailer. As such, PL SKUs may indeed help to defend the share of wallet of their customer base by sustaining the customers store visits (Fox and Sethuraman, 2006). As discussed earlier, the voluntary nature of organic certication in this country might have affected consumer condence in purchasing organic products and thus created high market uncertainty for the retailers. Supermarkets are arguably better able to adapt to such environmental uncertainty given their access to a wide range of category performance and industry data. Consequently, a small business such as an independent organic retailer may closely monitor supermarket competition and perceive the supermarkets presence in a category as an indicator of reassurance to launch a private label program. On the other hand, the signicant effect of supermarket competition on the likelihood of private label presence may also be due to the simple reason that these categories are categories with greater sales. Because the signicant effect of supermarket competition on the likelihood of private label presence may be one of a spurious relation due to the common cause of greater sales potential, we controlled for category sales in the logistic regression model (Table III) and found that category sales was not a signicant discriminating factor for the absence or presence of a PL SKU. However, it was found to be a signicant discriminator when we excluded the variable of MB share concentration from the logistic regression model. The high correlation between category sales and MB share concentration might have subsumed the prediction power of category sales. Ideally, industry-level data should be used to capture the probable presence of a common cause related to greater sales potential. These data are not available in the present study. If and when such data become available, future work can more carefully analyse the competitive interaction between supermarkets and organic retailers and the effects of such competition on their assortment decisions. 6.2 Private label share performance The conjecture about how distinct MB count affects the performance of private label was tested with correlations and ordinary least squares multiple regressions via cross-category analyses. Only categories with PL SKUs were included. The main objective was to examine the effects of MB assortment on private label share while controlling for the impact of total category sales and within-category price differentials between MBs and private labels. Consistent with previous studies on private label performance (Dhar and Hoch, 1997; Hoch and Banerji, 1993; Sethuraman, 1992), private label share is measured by the ratio of private label sales to total category sales and is expressed in percentage terms as follows: RPL k Rk where: RPL k Rk sales revenue of PL SKUs within category k. total sales revenue for sub category k.

The price differential between MBs and private labels is measured by the ratio of the difference between the average MB SKUs price and the average PL SKUs price to the average MB SKUs price (Sethuraman, 1992). It is also expressed in percentage terms as follows:    MB 2 P  PL 100 P
k k

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 MB P k  k m21 Pmk P ik for each SKU Pik in category k of size mk. where P k i1 An outlier for percentage of price differential was removed to address the issue of non-normality. The sample size was n 32. Private label share was negatively correlated with total MB brand count (r 2 0.561, signicant at p 0.01, two-tailed) (Table V). The regression results (Table VI) provide support for a nding that a greater MB count would have a crowding out effect on PL SKU share performance (Beta 2 1.125, p , 0.001). The basic nding that PL share will be lower when MB count is higher is not surprising, although it does suggest a trade-off for a retailer who wants to both satisfy the brand preferences of its customers and at the same time maximise its PL share. For example, experimental evidence suggests that the assortment of MBs has a positive effect on category assortment satisfaction (Cadeaux, 2008). However, although retailers face such trade-offs in managing the number of MBs, they have less control over the dispersion of shares amongst the MBs that they do stock in a category. Hence, it is also important to examine how the concentration of MB shares in a category affects PL share in a category in which a PL is present. The following section reports the additional analyses. 6.2.1 Additional analyses: effects of MB share concentration on private label share performance. As discussed in Section 4.2, although there are competing arguments, we argue and nd that, in the context of the Australian organic food retailing industry,
(1) MB count (1) Total category sales ($) (2) T1 percentage of MB PL price differential (3) Private label share (4) 1 0.678 * * 0.423 * 2 0.561 * * (2) 0.678 * * 1 0.065 2 0.079 (3) 0.423 * 0.065 1 2 0.168 (4) 2 0.561 * * 2 0.079 2 0.168 1

Note: Correlation is signicant at: *0.05 and * *0.01 levels (two-tailed)

Table V. Correlation matrix categories with private label SKU

Adj-R 2 0.484, F(3,28) 10.681 ( p , 0.005) Unstandardised coefcients Standardised coefcients B SE b t-stat. Sig. (p) (Constant) MB count Total category sales ($) Percentage of MB PL price differential 2 1.809 2 2.111 0.977 0.560 0.669 0.385 0.273 0.320 2 1.125 0.667 0.264 2 2.706 2 5.484 3.579 1.751 0.011 0.000 0.001 0.091 Table VI. Regression results (dependent variable: private label share)

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a higher concentration of shares amongst fewer MBs would deter PL entry in a category. Given that a retailer has decided to offer a PL SKU in a category, there are once again two competing arguments. On one hand, a greater concentration of shares amongst fewer MBs may imply that manufacturers have successfully satised most demand, leaving little residual demand for a retailers PL offering. Alternatively, one could argue that a greater dispersion of brand shares reects a greater heterogeneity of demand in a category (Dhar et al., 2001). In that sense, share dispersion implies not only supply fragmentation, but also demand fragmentation. In which case, the implication would be that segments are small, and in particular, the PL segment is small like others. Following this reasoning, less concentration of shares (greater dispersion) would lead to a small PL share. Here, we nd the arguments inconclusive and thus make no predictive conjecture, but rather treat this question in an exploratory fashion. The regression results (Table VII) suggest that greater concentration of brand shares in a category has a positive effect on PL share performance (Beta 0.629, p , 0.05). Earlier, we argue that a greater concentration of shares amongst fewer MBs may leave limited room for retailers PL offerings. However, the nding suggests otherwise. The positive effect that concentration of brand shares has on PL share may imply that the retailers PL offering is able to full some segments of the markets which might remain untapped by the MBs current product range. One probable explanation might arise from the relative stability of consumer preferences. That is, in the conventional supermarket industry, consumer preferences might be relatively better dened and more stabilised due to relatively greater product familiarity and consumer knowledge. Coupled with the product proliferation observed in some staple categories in conventional supermarkets, little residual demand may remain for other offerings. In contrast, consumers in an emerging market such as organic food may still be forming their preferences through learning about the organic product offerings. Thus, one could argue that consumers demand for organic offerings is still evolving and perhaps being shaped by the availability of product ranges. As such, a greater concentration of shares amongst fewer MBs observed at this stage may not necessarily mean that there is little room for other offerings. 7. Conclusions Very little research addresses private labels outside the contexts of conventional supermarkets and convenience consumer goods categories. The interviews and eld observations provide some insights into the format of private label programs and the retailers perceived roles of private labels in the context of organic retailing. Findings from logistic regression analyses provide empirical evidence that organic PL SKUs
Adj-R 2 0.169, F(3,28) 3.102 ( p , 0.05) Unstandardised coefcients Standardised coefcients B SE b t-stat. Sig. (p)

Table VII. Regression results (dependent variable: private label share)

(Constant) Sum of square MB brand share Total category sales ($) Percentage of MB PL price differential

2 2.386 2.248 0.290 0.315

1.044 0.791 0.277 0.418

0.629 0.198 0.148

2 2.286 2.844 1.048 0.752

0.030 0.008 0.304 0.458

are more likely to be present in categories when supermarket competition is present but are less likely to be present in categories where the concentration amongst MBs is greater. In addition, a greater number of MBs appear to diminish private label share whereas a higher concentration of MB shares appears to enhance private label share. Findings from this study suggest that, when managing their private label program, retailers could use assortment planning to create a category environment that is helpful to the performance of their private label SKUs. In particular, retailers could exercise their control over assortment planning to limit the intra-category competition to be in favour of their PL SKUs. They could do this simply by restricting the number of MBs within a category. This should work to the extent that a greater MB assortment appears to hurt private label performance. However, retailers should avoid an over emphasis on their PL SKUs within a category in light of evidence supporting a positive relationship between category assortment variety and sales performance (Chiang and Wilcox, 1997; Tan and Cadeaux, 2011). Going too far in limiting the number of MBs within a category may also increase the risks of being too dependent on a small number of suppliers which may in turn affect the retailers power to extract greater channel prots. Previous studies have also identied that it would be conducive to introduce private label SKUs when: . cross-price sensitivity among MBs is low (Raju et al., 1995b; Sayman and Raju, 2004); . cross-price sensitivity between MBs and private label SKUs is high (Raju et al., 1995b); and . the MBs are similar in strength (Sayman and Raju, 2004). These category and market characteristics are, however, not observable in this study given the unavailability of consumer panel data or market data at the category level for organic goods. The generalisability of these ndings should be veried when and if such data are available. In summary, this study makes some important contributions to private label research and practice by conducting a pioneering test of the effects of competition between retail formats on the likelihood of private label presence and by extending the private label discussion beyond the conventional supermarket industry.
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Private labels build store loyalty through providing a point of differentiation from the competition

Private labels create better consumer value

Private labels as a form of advertisement for the store, and private labels improve margin

Table AI. The perceived rolesa of private labels: ndings from interviews with organic retailers


Selected private label references

Selected quotes

Following for example, Bhasin et al. (1995), [. . .] if you have a brand specic to your shop, Corstjens and Lal (2000) and Dhar et al. (2001) then people will associate that with your shop and come back for that particular brand [. . .] Its a loyalty issue [. . .] it creates point of difference to other shops around the place. (Interviewee no. 8) Its for customer loyalty because they have to come back here to get that again [. . .] to differentiate my business from the rest of my competitors [. . .] (Interviewee no. 6) Following for example, Bhasin et al. (1995) [. . .] we buy bulk to save costs for the customers, because anything that is prepackaged in a nice pack will cost more (Interviewee no. 4) [. . .] (some products) you often cant buy in any other way but bulk. . . we buy in bulk and split it up for the customer [. . .] for their convenience (Interviewee no. 2) Following Ailawadi and Harlam (2004) [. . .] its also a form of advertising for the store because your label is sitting there [. . .](Interviewee no. 6) The reason of doing that is to create greater awareness for [store name] [. . .] therell be better prot margin in that [. . .] (Interviewee no. 3)