De-Listing Budget Private Labels—a Small-Scale, yet Interesting, Experiment

The debate has been on for some time now about whether budget lines[1] support a formula’s competitiveness or weigh on its cost base and reputation. Rather than just talking about the potential impact of de-listing, university graduate Stephen Ophof actually tested it. His thesis 'The impact of de-listing economy private labels on category sales and distribution patterns' won the Rabobank-sponsored Anton Dreesmann Thesis Award 2017[2] and also was turned into a Rabobank report.

[1] To fend off competition from hard discounters service-oriented supermarkets have introduced generic, basic food products at a deep price discount of between 40 percent and 60 percent compared to brands. These budget private-label products are meant to signal the retailers’ price competitiveness and to prevent consumers from defecting to (hard) discount food retail formulas.

[2] The ‘Anton Dreesmann Leerstoel voor Retailmarketing’ Foundation - supported by a group of leading retailers in the Netherlands - has chosen Rabobank as its partner to host and co-organise its annual congress. The partnership started in 2011 and we have prolonged this successful collaboration until at least 2020.

“Supermarkets can do without budget private labels”

Stephen Ophof's thesis discusses an interesting field experiment in an average-sized supermarket, where budget private label items with a high share in volume and turnover were de-listed in four product categories. The de-listing had no negative impact on revenues in the four categories.

Stephen sees a clear win-win-win. Consumers benefit from decreased choice complexity and increased search efficiency. Food retailers can realise cost savings in the supply chain. And the consumers’ willingness-to-pay seems to go up, allowing for higher price points. Additionally, the freed-up shelf space may be used to introduce more premium products, to support category turnover and quality perception.

Perhaps there is more than meets the eye – shelf psychology

Yet, it is too early to cry victory. Both mainstream private label and A-brands won market share thanks to the temporary de-listing of the budget lines (see Figure 1). Category revenues may be up, but whether the food retailer makes more margin remains to be seen. It looks like the A-brand supplier is the real winner of the de-listing.

Stephen’s experiment did not measure who bought what. It is most likely that the price sensitive budget private label shoppers went for the nearest price point—the mainstream private label. But the experiment may also have chased regular mainstream private label buyers to the A-brand because without the budget private label product, the mainstream alternative is suddenly the cheapest option again, with all the negative connotations that come with that position on the shelf.

Although Stephen is likely to be right regarding the direct effects of a delisting, sticking to budget private labels may well boost the food retailer’s private label strategy and profit margins, as they turn mainstream private label products into attractive, mid-priced alternatives.