This study investigates the value of private label brands to consumers using two approaches: First, subjective evaluations of the perceived relationships between price and quality for private label (PL) brand and national brand (NB) products based on survey responses; and second, objective measures of price and quality for PLs and NBs widely available in the U.S. Price was generally perceived to be a signal of quality for NBs, but not for PLs, an indication that consumers' knowledge may not have kept pace with quality improvement in PLs. Objective estimation of the quality gap potentially existing between PLs and NBs determined that the “quality premium” of NBs observed in the past has largely disappeared. Consumers, notwithstanding, sought a lower purchase price for PLs. In turn, the higher price they were willing to pay for NBs accorded with estimates of the actual “price premium” associated with NBs.
Private label brands are now an integral element of the retail landscape, having achieved impressive penetration in all western markets, with levels of 40 percent in several European countries (according to 2012 figures from the Private Label Manufacturers Association–PLMA). Indeed, the PLMA reports that in certain product categories in some countries penetration is beyond 70%. The consistent levels of growth of PLs in most markets tracked by Nielsen for the PLMA (which includes the U.S., where penetration approaches 25%) signify how valuable PLs are to retailers. In the present work, we seek to determine the value of PLs to U.S. consumers, where many PLs have increased in quality and price.
Consumers certainly seem to value private labels (PLs). According to the PLMA, a 2011 survey of European shoppers found that one-third of them are “buying more” store brands. Also, according to the PLMA, a separate 2011 survey of U.S. consumers found that 39 percent would recommend a store brand. Thus it seems safe to assume that PLs will continue as an important component of many consumers' purchases. Relevant to consumers' purchase decisions are the factors of private label quality and price, especially with respect to national brands (NBs). In the present work we characterize the value of PLs, first by examining the objective price-quality relationship of PLs relative to NBs, and second by investigating consumers' subjective perceptions of that relationship. In particular, we focus on the actual or objective “price premiums” associated with the purchase of NBs, and on consumers' stated (subjective) willingness to pay those price premiums for the implied benefits of NBs.
1.1. Quality trends in PLs
At one time the terms “cheap” and “private label” appeared fission-proof, but today the merchandising strategies of retailers' PLs resemble those of the national brands, encompassing both low and high price points (Liu and Wang, 2008 and Soberman and Parker, 2006). One consequence is that, to a greater extent, newly-introduced PLs are targeted at the upper echelons of product quality (see, e.g., Corstjens and Lal, 2000 and Steenkamp et al., 2010). Pache (2007) reports that while some PL companies follow the familiar low-price, low-quality approach (sometimes referred to as “generics”), others embark upon a “high quality” (i.e., equivalent to national brand) product strategy, setting their prices just 5 to 10 percent below national brands. In fact, the current trend is towards PLs rivaling the quality of NBs. Our research addresses the following: Have consumers' perceptions of the price and quality of PLs relative to NBs kept up with changes in the market?
In the present work we investigated the value that private label brands deliver to consumers. We did so using both objective and subjective judgments of private label quality relative to national brands. A key objective was to determine if consumer's perceptions accurately tracked the trend in PLs toward higher product quality, which we also investigated. In particular, our goal was to determine if the trend toward higher price (and quality) persists, and to estimate whatever quality premium NBs might continue to hold relative to PLs. Finally, we sought to establish the degree to which consumers might be still willing, if at all, to pay a premium price for NBs, and if so, how closely it might correspond to any objective PL-NB price differential.
Part of our approach to investigate the accuracy of consumers' perceptions of the relationship between product quality and price for PLs and NBs entailed estimating the effect of PLs on the objective price-quality relationships in those markets in which they exist. Our goal was not to characterize the entire PL market, but to identify the potential effect of PLs on these relationships. Hence the geographical focus of the present work was the U.S. market, where PLs have steadily gained market share but are far from reaching their possible maximum levels (given the observed penetration rates in other countries). Previous research has examined consumers' perceptions of product quality generally, and PL quality in particular, but not the perceived relationship between PL product quality and price. Thus the present work, which deals with subjective perceptions of price and quality, presents a novel contribution. In addition, our examination of the objective relationship between price and quality yields new insights into consumer choice in markets with PLs.
We offer two general conclusions from the present research. First, consistent with previous research, which has usually found consumers to believe that price is a reliable predictor of quality, consumers reported that higher prices generally, albeit weakly, signal higher quality in a brand. Unusually, however, consumers did not believe in this association for PLs. Instead they saw the relationship as being potentially negative. Thus it is clear that consumers are much less confident using price as a guideline of quality when buying PLs than when buying NBs. Are their perceptions accurate? To some extent, yes. While we cannot specifically characterize a negative correlation between objective measures of price and quality for PLs, we did observe a deterioration of that relationship when PLs were present in a market compared to when they were not. This implies that the relationship between price and quality is undermined when PLs are present. A complete test of the accuracy of consumers' price-quality perceptions would necessitate determining the correlations for just PLs. Regrettably, given the limited number of PLs in some product categories, reliable estimates of correlations cannot be made. That is because a product category with just one PL can be profoundly affected by that single brand, but cannot yield a reliable estimate of the PL price-quality relationship. Nonetheless, it would appear that consumers' reluctance to attribute higher quality to higher-priced PLs is not misguided. But, as Imkamp (2008) notes, a market having low price-quality correlation affords the opportunity for savvy consumers to acquire bargains. One important limitation of the present work, however, is that we cannot characterize how long such bargains would exist. The strategic response of NBs to newly introduced PLs may cause the relationship between price and quality in the market to change over time if NB managers adjust the price and quality of their offerings.
A second general conclusion, again consistent with previous research, is that consumers expect a product of lower quality when they buy a PL than when they buy a NB. But such a perception does not reflect the current markets containing PLs. Today, the so-called “quality premium” gap of NBs (e.g., Rao and Monroe, 1989) appears to have closed. Evidently consumers' knowledge has not kept up with this change. By switching from a NB to a PL consumers could expect to gain value of nearly one-third. There are thus many reasons why a consumer might be loyal to a favored brand, but it is becoming increasingly clear that neither price nor objective quality bar selection of a PL.
