The Effect of Store Brand Share on Retail Margins : An Empirical Analysis

The increasing share of store brands in the grocery industry has been cited as a key factor in improving the position and performance of retailers relative to national brand manufacturers. This paper uses data from two major retail chains to examine whether and how high store brand share affects retail margins, given that the store brand has been introduced. In particular, we determine whether retailers earn (a) higher percent margins on store brands than on national brands, not just gross but also net of direct product costs; (b) higher percent margins on national brands in categories where they have high store brand share; and (c) higher dollar margins from consumers who are heavy users of store brands. We find that retailers do obtain significantly higher percent margins on store brands than on national brands even after accounting for the direct product costs they incur. More importantly, they are able to obtain significantly higher percent margins on national brands in categories where the share of their store brand is strong, compared to categories where their store brand share is small. However, consumers who are heavy users of the store brand contribute much less to the total dollar margin of the retailer than do consumers who are light or medium users of store brands, because they buy fewer items in total from the retailer. We conclude that high store brand share does improve retail margins, but it is important that retailers retain a balance between store brands and national brands in order to attract and retain the most profitable customers who buy some store brand items but not too many