Executive Summary:
A stream of research has suggested that retailers may be better off positioning their store brands closest to the national brands, thus increasing their price substitutability. Retailers also appear to have embraced this notion. This paper explores the question – should retailers always strive to be “like national brands?” Using a simple analytical model, we show that increasing the price substitutability need not always be an optimal action for the retailer. When advertising can significantly enhance national brand demand or when there is a sizable unserved (by national brand) market that can be served by the store brand, increasing the price substitutability may actually lower retailer profits. Even when retailer profits increase, the total channel (manufacturer + retailer) profits often decrease. Based on these results we offer three positioning alternatives for store brands – (i) “Be Like National Brands” Strategy, (ii) “Let Store Brands be Store Brands,” strategy and (iii) “Live and Let Live” strategy. We discuss the characteristics of these strategies and the conditions under which they are appropriate. A follow-up empirical analysis tests some implications from the analytical model and offers additional insights and recommendations for store brand manager.
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