Executive Summary:
What’s in a Brand Name? The Battle between National Brands and Store Brands
Would you pay $3 for a box of Kellogg’s frosted flakes cereals when a Kroger brand of private label frosted flakes is just $1.50? Some or many of us would and might attribute our decision (as rational human beings) to the intrinsic quality difference between the “branded” and “unbranded” goods. To some extent, according to Professor Raj Sethuraman, this rationalization is correct—the better known brands may indeed be higher in objective quality than the lesser known brands. To a greater extent, however, this perceived superiority may be in the minds of consumers who would pay a premium simply because it is a “Kellogg” brand. This intrinsic value, termed brand equity, is an elusive, yet dominant force behind a consumer’s purchase decision, a brand’s market success, and a company’s financial value.
The battle between national brands and store brands in grocery products is a strategically important context in which to study brand equity. Store brands or private labels in the United States have grown from $34 billion in 1994 to nearly $60 billion in 2002, outpacing national brand growth. How do national brands fight back? One option is to drop prices to compete with lower-priced private labels. But this option decreases margins and has generally tended to erode national brand manufacturers’ profits. A second option is to enhance brand image and induce consumers to pay more for national brands – that is, enhance brand equity. In his article, “Measuring National Brands’ Equity over Store Brands and Exploring its Antecedents,” author Raj Sethuraman of SMU Cox offers insights for national brand manufacturers and for retailers by developing an econometric approach to measuring brand equity and identifying some factors that influence brand equity.
Defining Brand Equity
In the context of national brand vs. store brand competition, Sethuraman defines brand equity as the price premium that consumers would be willing to pay for national brands over a store brand when both brands have the same “true” quality. There are two reasons why consumers would pay a premium for the reputed brand. First, consumers may perceive the reputed brand to be superior in quality even though the objective quality may be the same—the price premium of Quality Equity. Second, consumers may pay a premium for the reputed brand even if they perceive the quality of the brands to be the same, or a Non-Quality Equity premium.
The Findings
Sethuraman’s econometric model analyzes consumer survey data on 20 grocery product categories, yielding several interesting results. First, brand equity was found to represent a significant component of the size of the price premium that consumers pay for national brands over a store brand. In fact, of the average 37% premium that consumers stated they would pay for the national brand, about 80% of that premium (or nearly 30%) can be attributed to brand equity. Furthermore, a significant component of the brand equity is due to Non-Quality Equity or brand image. In particular, of the 30% total brand equity, about 26% (85% of total equity) is due to brand image. Also noteworthy from the findings, brand equity exists to a significant extent even in the so-called “commodity” products such as bleach and flour.
The study also identifies several product category and consumer characteristics that are significant antecedents of brand equity. Brand equity tends to be higher in heavily advertised, hedonistic (offering consumption pleasure like soft drinks or cookies), high-priced product categories. Brand equity also tends to be higher among females and younger consumers. The effect of income on brand equity is particularly insightful. Both low-income and high-income consumers seem to exhibit high levels of brand equity. It is the middle-income consumers who have the least brand equity. These results have potential managerial implications for both national brand manufacturers and retailers.
Managerial Implications
The finding of substantial non-quality equity (brand image) represents good news for national brand managers because it allows them to command a reasonable premium even when retailers close the quality gap. National brand managers should maintain and increase this equity through frequent and effective advertising. The importance of non-quality equity suggests that they should focus more on image-based emotional advertising than on quality or attribute-based advertising. On the other hand, retailers wishing to increase private label share can attempt to reduce non-quality equity. This reduction may be accomplished by enhancing the image of store brands through better packaging, local advertising or greater shelf-space allocation, or countering the image impact of national brands.
Findings related to consumer antecedents of brand equity have implications for segmentation and targeting. Those segments of consumers that have higher levels of national brand equity are natural segments for national brand manufacturers to target. Thus, other things equal, national brand manufacturers would be better off targeting young, educated, females with low or high income. Retailers on the other hand may be better off targeting the older, less-educated, middle-income males for their store brands. Because private labels are low-priced items appropriate for low-income consumers and because females are primary grocery shoppers in a majority of cases, store brand managers can attempt to attract these consumers by reducing the imagery of national brands or by increasing the imagery associated with store brand, e.g., packaging and in-store advertising.
Contributions
Brand equity is the lifeline for national brands. However, the recent growth of private labels led some experts to state that brand equity is no longer significant. The first contribution of this article is to affirm that brand equity is alive and well. Second, the article identifies how the brand equity manifests itself. Is it through quality perceptions or is it imagery that goes beyond quality perceptions? This distinction has important ramifications for marketing strategies. A third contribution is that the article not only measures brand equity but also identifies its consumer and category antecedents. According to Professor Sethuraman, “This research quantified how important brand image is and identified the characteristics that influence brand equity. Perhaps this is what caught the attention of researchers and practitioners and made this article one of the top 10 downloads in marketing at the time it was published.”
Professor Sethuraman believes more work needs to be done in identifying the sources of non-quality equity. He put forth the following questions: “Why are consumers willing to pay a price premium for national brands even when they know that the quality of the national brands and the store brands are the same? Is it because of reputation, loyalty, experience, or simply habit?”
This paper was published in Review of Marketing Science in September/October 2003. It was also a Top 10 Download on Social Science Research Network’s website.
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