Store Loyalty: What’s in Your Grocery Cart?

In grocery store aisles across the nation, a quiet battle has been taking place and tactfully changing the retail landscape. It’s a classic story of David and Goliath. Private label brands (or store brands) are starting to challenge the dominance of stronger, more esteemed national brands. Increasingly, retailers are deploying store brands to compete in their own aisles, reaping the benefits of higher margins as well as lower wholesale prices from manufacturers. However, the real winnings of war lie beyond immediate profit. The billion-dollar question is whether store brands are actually able to capture the loyalty of store customers.

March 27, 2014

Not too long ago, American consumers deemed private label brands to be “generic” and “cheap alternatives.” But times are changing. Consumers are increasingly embracing store brands as preferred substitutes, and retailers have been keen to respond. In fact, a nation-wide study in 2011 showed that 77% of consumers regard store brands to be as good or better than national brands. As retailers invest more into developing store brands, it has become a critical determine whether store brands actually serve to differentiate the store from competitors.

Conventional wisdom among retailers insists that store brands are indeed useful in cultivating store loyalty. However, this belief has been called into question by recent research. One study found that high levels of store brand purchases by customers are correlated with low store loyalty, suggesting that retailers may need to reduce their emphasis on store brands. A second study argued that customers buying store brands are more likely to switch to a newly opened Wal-Mart store in the neighborhood, which implies that retailers who invest in store brands may be more vulnerable to competition from Wal-Mart. Together, these results suggest that retailers’ attentiveness to store brands may be misguided.

Given the strategic importance of this issue for retailers, K. Sudhir, Professor of Marketing at Yale Center of Customer Insights at the Yale School of Management  (in collaboration with Satheesh Seenivasan at Monash University and Debabrata Talukdar at School of Management, State University of New York at Buffalo) revisited the store loyalty dilemma. They identified several conceptual issues in these recent studies that might have erroneously caused these surprising findings. First, they argue that the traditional metrics of store brand loyalty may be invalid for answering this question. For instance, the authors note that the measures of store brand loyalty and store loyalty contain an inherent mathematical relationship, leading to flawed results. (Store brand loyalty is measured as the store brand's share of store spend, but since store loyalty is the share of store spend on total spend, store spend enters the numerator of store loyalty and the denominator of store brand loyalty, creating a negative relationship by construction.) The authors propose that the right definition of store brand loyalty should have been the share of store brand spend relative to a household's total spend.

Retailers should indeed continue to invest in store brands to differentiate from conventional competitors and cultivate customer loyalty. Though quality is still key.

Once they corrected the problem of erroneous definition, the authors were able to re-establish the conventional wisdom that greater store brand loyalty is correlated with greater store loyalty. Furthermore, they investigated the role of store brand quality-another recent area of focus by retailers – and found that the quality of store brands significantly contributes to customer’s store loyalty. This evidence redeems the store differentiation role of store brands. 

The authors also questioned the validity of the Wal-Mart study. Both Wal-Mart and store brand shoppers are value conscious. Hence, the fact that Wal-Mart attracted disproportionately more store brand shoppers is not surprising. This should not be interpreted as negative effects on store loyalty. As Sudhir asks, would the ability of Nordstrom's to draw more high-end product shoppers from Macy's suggest that Macy's should not seek to gain the loyalty of high-end product shoppers? 

The closing of a local store belonging to a focal supermarket chain in the study provided the perfect scenario to explore this question. After the store closed, the nearest store location belonging to the same chain was 3.8 miles away, whilst the nearest competitor was only 0.3 miles away. Using the same measures as the previous study, the authors found that loyal store brand customers were also more likely to travel to the further location and maintain a higher share of wallet at the supermarket chain. Thus, store brand patrons are indeed the shoppers who exhibit greater store loyalty.

These results have exciting implications. Retailers should indeed continue to invest in store brands to differentiate from conventional competitors and cultivate customer loyalty. Though quality is still key.

“Repeat business and behavior can be bribed. But loyalty has to be earned.” These words by Janet Robinson, former CEO of the New York Times and one of Forbes’ 100 Most Powerful Women in the World, embody the most important takeaway from the research findings. Indeed, retailers who invest in the quality of their store brands will effectively earn the loyalty of their customers as well. In other words, store brands must be trained and ready to fight for the hearts and minds of consumers, not just for their wallets.

 

Contributed by Dawn Lu, Yale College 2014

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