Battling for the Household's Category Buck: Can Economy Private Labels Defend Supermarkets Against the Hard-Discounter Threat?

Traditional grocery retailers often use price-based strategies to defend against hard-discounters (HDs). One increasingly popular approach is the introduction of an economy private label (EPL), which provides similar or even larger price advantages over national brands than HD products. However, the jury is still out on whether these EPLs actually shield traditional supermarkets against the HD threat. To shed light on this issue, we estimate an individual-level spending model across 148 product categories, in which we assess the retailer's losses to HDs and his gains from introducing an EPL. Our results show that while EPL introductions increase category sales among the traditional chain's loyal customers, they alienate its other shoppers. On average, and in the absence of HD competitors, EPLs can enhance sales – provided they are introduced in the right (infrequently purchased and less-differentiated) categories and rolled-out sufficiently broadly. However, EPLs are not a good defense tool against the (equally cheap but often higher-quality) HDs; their impact becoming (more) negative following HD entry. The authors discuss implications for retailers in managing their EPL line.