How Business Cycles Contribute to Private-Label Success: Evidence from the United States and Europe

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Lien Lamey, Barbara Deleersnyder, Marnik G. Dekimpe, & Jan-Benedict E.M. Steenkamp

Executive Summary
Private-label products now account for more than 20% of global grocery sales and are expected to grow to 30% by 2020. Although there are considerable cross-country differences, all developed countries have witnessed a steady increase in the share commanded by store brands over the past decades. This growth has been attributed to various factors, such as a gradual shift in the communication budget from advertising to sales promotion, the growing concentration in the retail sector, and an over-time improvement in private-label quality.

This article formally addresses the link between private-label success and business-cycle fluctuations in a country’s aggregate economy. Data covering multiple decades are available for several key private-label countries (the United States, the United Kingdom, West Germany, and Belgium). The findings confirm conventional wisdom that a country’s private-label share increases when the economy is suffering and shrinks when the economy is flourishing. Notably, asymmetries are found in the extent to and speed with which private-label share changes in cyclical up- versus downturns. Consumers switch more extensively to store brands during bad economic times than they switch back to national brands in a subsequent recovery. In addition, the switch toward private-label brands is faster than the opposite movement toward national brands when the recession ends. Finally, not only are consumers more prone to buy private labels during economic downturns, but some of them also keep buying private labels when bad economic times are long over, leaving permanent "scars" on national brands’ performance level.

The authors argue that national-brand manufacturers can mitigate the effect of an economic downturn on their share by intensifying their marketing-support activities in recessions. Thus far, such a proactive strategy is not often observed. On the contrary, available evidence suggests that many manufacturers actually exacerbate their predicament by cutting back on their marketing expenses when the economy turns sour, insofar as they scale back their innovation activity and reduce their advertising budgets. Most retailers invest more strongly in their private-label program when the economy deteriorates, making it even more difficult for the national brands to catch up with the share lost during contractions.

In summary, although the impact of the aggregate business cycle may seem uncontrollable, a proactive marketing strategy on the part of national-brand manufacturers may mitigate the observed dependency of private-label success on general economic conditions. Thus, to guard their position against private labels, manufacturers are strongly advised to reconsider their current passive marketing behavior during depressed economic times and to continue supporting their brands when they need it the most.

Biography
Lien Lamey is a doctoral candidate at the Catholic University Leuven, Belgium. She has received an honorable mention in the 2005 Alden G. Clayton Doctoral Dissertation Proposal Competition issued by the Marketing Science Institute and an honorable mention in the 2005 ZIBS Doctoral Dissertation Competition issued by the Zyman Institute of Brand Science. Her research focuses on time-series modeling applied to a private-label context.

Barbara Deleersnyder obtained a PhD in Marketing at the Catholic University Leuven, Belgium (November 2003). In October 2003, she joined the Department of Marketing Management in the Rotterdam School of Management at Erasmus University in Rotterdam as a postdoctoral research fellow. In 2005, she received a university grant to support four additional years of research at the same institute, where she is currently working as an Assistant Professor in Marketing. Her research is mainly empirical and involves studies in the area of Internet distribution, the impact of general economic conditions on consumer and company behavior, market(ing) performance measurement and management of change, the demand for consumer durables, and the performance of grocery brands. Her studies have appeared in Journal of Marketing, Quantitative Marketing and Economics, and International Journal of Research in Marketing. In 2002, one of her studies won the Best Paper Award of International Journal of Research in Marketing.

Marnik G. Dekimpe (PhD, University of California, Los Angeles) is Research Professor of Marketing at Tilburg University and Professor of Marketing at the Catholic University Leuven. He has published in Marketing Science, Management Science, Journal of Marketing Research, Journal of Marketing, International Journal of Research in Marketing, and Journal of Econometrics, among others. He won best-paper awards in Marketing Science (1995, 2001), Journal of Marketing Research (1999), International Journal of Research in Marketing (1997, 2001, 2002), and Technological Forecasting and Social Change (2000). He serves on the editorial board of Marketing Science, Journal of Marketing, Journal of Marketing Research, International Journal of Research in Marketing, Journal of the Academy of Marketing Science, and Journal of Interactive Marketing. His current research interests deal with the impact of product-harm crises, the internationalization of retail firms, and the growth of private labels.

Jan-Benedict E.M. Steenkamp is C. Knox Massey Professor of Marketing and Marketing Area Chair in the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill. He has published in International Journal of Research in Marketing, Journal of Consumer Research, Journal of Marketing, Journal of Marketing Research, and Marketing Science, among others, and serves on the editorial boards of each of these journals. He is also past editor of International Journal of Research in Marketing. He won the Hendrik Muller lifetime award for the social and behavioral sciences awarded by the Royal Netherlands Academy of Sciences. He has also received the Society for Marketing Advances Distinguished Marketing Scholar lifetime award; the O’Dell, Little, Bass, and International Journal of Research in Marketing best-article awards; and the Americam Marketing Association Global Marketing Special Interest Groupr Excellence in Research Award. Other articles were finalists for the Little, Green (twice), and International Journal of Research in Marketing best-article awards. His research focuses on global marketing, the effectiveness of marketing instruments, interorganizational relationships, and marketing research techniques.

Journal of Marketing, Vol. 71, No. 1, January 2007
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