The rise of "store brands"

Earlier this week, we reported on a department store buying designer brands, and now we have a similar instance of vertical integration as stores like CostCo, Safeway, Kroger, and Target are beginning to sell their own premium store brands. These store brands have gained share at the expense of branded manufacturers like Kraft. From the Wall St. Journal (article)

For years, retailers' own brands were largely cheap generics with dull packaging. Now, in an increasingly crowded food-retail market, supermarket chains are trying to differentiate themselves and build customer loyalty by offering quality products unavailable anywhere else. Chains have improved the taste of store-branded foods over the years by tapping customers for taste tests. They also hire staff food scientists to help create products.

I am not sure I believe the differentiation/loyalty explanation. A much simpler explanation is that store brands earn higher margins for the grocery store so the grocery store wants to sell more of them. The higher retail margins on store brands are likely due to the fact that they are marked up only once (by the retailer) and not twice (by the manufacturer as well as the retailer). The higher retail margins on store brands may also be due to lower advertising and promotional costs.

The difference between the two cases of vertical integration seems to be that while Lord & Taylor is acquiring a designer label to drive traffic to its store, these grocery stores are acquiring brands to sell to existing traffic. The success of each strategy will depend on whether customers shop at the retailer because of the brands it carries; or whether they buy brands because of the retailers that carry them.

Ask your marketing department to design a test to distinguish between these explanations.