Chapter 1: Introduction
This chapter describes the motivation for this study and the background of the problem which is central in this master thesis. Furthermore, different research questions will be composed to answer the problem statement in paragraph 1.3. Besides this, paragraph 1.4 will answer the relevance of this thesis, from an academic perspective, as well as from a managerial perspective. Moreover, the study boundaries will be discussed in paragraph 1.5. Finally a summary of the chapter structure which is used in this thesis will be given in paragraph 1.6.
§1.1 The problem background
According to Hoch, Montgomery & Park (2000), the retailer's own brand trends upward in 86 percent of the fast moving consumer goods categories. Moreover, the basic findings of the study of Hoch et al. (2000) is that private labels have shown consistent long-term growth. In turn, national brands have been relatively stable during the same period. Private labels increase retailer power due to the fact that retailers can replace manufacturers' brands with their own private labels (e.g. Thomassen et al., 2006). In addition, retailers obtain insight into the cost structure underlying manufacturer brands (Thomassen et al., 2006). From this can be argued that the age of retailer power changed from 1970 to today in their advantage (e.g. Thomassen et al., 2006). It is therefore that the manufacturers are engaged in keen competition with private label nowadays (e.g. Quelch & Harding, 1996). The key question of manufacturers is how to make the turnaround in this competition. Marketing research consultants, like GfK NORM (see appendix A for an introduction to GfK NORM), have to tackle this issue often. The current manufacturer strategies to arrest the success of private label according to Kumar & Steenkamp (2007), seems to be not enough to gain market share, and hence increase manufacturer power. For example, the manufacturer strategy advertising creates a sense of preference, but it is not that easy to convert that preference into sale(s) (Thomassen et al., 2006). It is therefore interesting to investigate if in-store factors have an impact on choosing a grocery product (i.e. national brand or private label). The influence of those in-store factors could have an effect on the grocery choice, and hence an effect on shopper behavior/consumer preference. In this context, in-store factors means factors that could influence consumer behavior when they have entered the store. In addition, the first choice and therefore the created different brand perceptions may change the effect of the in-store factors (Emmelhainz et al., 1991; Verhoef & Sloot, 2006). In other words, what are the effects of the shelf position, number of unique national brand/private label stock keeping units, the number of private label tiers,
and price gap between private labels and national brands on the second grocery choice, given that the first choice is out of stock? Hence, those in-store factors in this study could be used as a strategy to trigger the consumer to choose a national brand over private label or the other way around (given that the first choice is out of stock). This decision is taken when the consumer is standing in front of the shelf.
§1.2 The problem statement
To what extent have shelf position, number of unique stock keeping units, number of private label tiers, and price gap effect on the choice probability of choosing private label or national brand the second time if the first grocery choice is out of stock?
§1.3 Research questions
The following research questions will be discussed in the next chapters in order to provide a clear understanding of the proposed framework and to answer the main question:
1) What is the importance of the in-store factors in this study on the choice probability of choosing private label or national brands the second time (given that the first choice is out of stock)?
2) What is the difference between the effects of the in-store factors in this study and the mechanism of these in-store factors discussed in existing literature?
3) What is the impact of the first choice (i.e. private label or national brand) on the effects of the in-store factors on the choice probability of choosing private or national brand the second time (given that the first choice is out of stock)?
4) What are the implications of the results for the management decisions in the future?
This paragraph will discuss the relevance of this thesis, both from an academic perspective, as well as from a managerial perspective.
1.4.1. Academic relevance
Many studies investigate the concept private label and the development over the years. Like the study of Thomassen et al. (2006), the authors explore that the age of retailer power changed from 1970 to today in their advantage. Other studies explore the concept private label and consider the private label strategy (e.g. Kumar & Steenkamp, 2007; Hoch, 1996; Quelch & Harding, 1996). In addition, existing literature consider the fact why consumers have a higher willingness to pay national brands over private labels, and the other way around (e.g. Steenkamp et al., 2010). However, less studies investigate the impact of the first choice between
private label and national brand on the second choice. In other words, could the first choice between private label and national brand predict the probability that a consumers' choice will be private label or national brand the second time? It is therefore that this study could close a gap between the willingness to pay national brands over private labels (or the other way around), and the relationship between the first and second choice of private label or national brand.
Furthermore, existing literature often investigate out-store factors which could influence the success of private label or national brand (e.g. Lincoln & Thomassen, 2008). In this context, out-store factors (e.g. advertising, innovation degree, quality improvement, etc.) means factors that could influence consumer behavior before they have entered the store. However, less studies investigate the so-called in-store factors (Steenkamp et al., 2010). It is therefore that this study will elaborate more on the in-store factors. The in-store factors in this study are shelf position, number of unique stock keeping units, number of private label tiers, and price gap.
Prior research of Amrouche & Zaccour (2007) already considers how strategic shelf-space allocation of store and national brands could create shelf optimization, and hence maximizes category profit. However, this study will focus on the fact that shelf position may influence the choice probability of the second choice, given that the first choice is out of stock. It is therefore that this study could close a gap between strategic shelf-space allocation and the impact of shelf position on the preference towards private label or national brand.
Moreover, the factor price is discussed in many studies (e.g. Steenkamp & Kumar, 2007; Sinha & Batra, 1999), but prior research does not investigate the impact of price on the choice probability the second time. It is therefore that this study could close a gap in the literature.
Behind those two in-store factors this study will consider a factor that calls for more elaboration in the existing literature, namely product assortment. Considering for example the study of Rooderkerk et al. (2013) the concept product assortment is investigated in previous research in terms of assortment optimization, and shopper decision tree. In addition, Geyskens et al. (2010) explored the effects of different private label tiers within the product assortment of the retailer. However, less studies consider the impact of number of stock keeping units and number of private label tiers on the choice probability the second time.
1.4.2. Management relevance
It is for retailers difficult to determine the effects of product out of stock. This study could therefore help (category) managers of retailers and manufacturers to gain insights into the consequences of the out of stock challenge. Moreover, the impacts of the in-store factors on the choice probability the second time (given that the first choice is out of stock) may help the managers to achieve their management decisions.
The factor shelf position is a limited resource that has a high impact on retailer's performance (e.g. Amrouche & Zaccour, 2006; Frank & Massy, 1970). Although this factor is under the overall control of the
retailer (e.g Thomassen, Lincoln & Aconis, 2006), it is a tough challenge for managers of retailers to make the shelving plans. The results of this study could help the retailers with constructing the shelving plans in such a way that the choice probability of choosing private label the second time will increase, given that the first choice is out of stock. The same will apply for the results of the price gap between private labels and national brands. Furthermore, the retailers are increasing their product portfolios with different private label tiers (e.g. Geyskens et al., 2010). It is therefore essential for the retailer if extending their product range has a positive effect on private label purchase.
On the other hand, the manufacturers could use the results of this study to understand the effects of different private label strategies. Those strategies may have a negative influence on national brand preference. It is therefore that the manufacturer could identify the bottlenecks with the results of this study, and therefore respond to the consequences of private label strategies. The results of this study can define new strategies for the manufacturer to turn the tide. Moreover, the manufacturers may better understand the impact of their innovation degree on the national brand choice probability the second time, given that the first choice is out of stock.
§1.5 Study boundaries
This study will focus on the Dutch fast moving consumer goods (hereinafter, this study refers to this as FMCG) industry. According to Quelch and Harding (1996), the retailers' power in relation to manufacturers' is greater in Europe than, for example, in the United States. This is one of the reasons that private label is more developed in the European FMCG industry than elsewhere. The European market is therefore a great market to investigate national brand in comparison to private label. According to Kumar & Steenkamp (2007), Dutch retailer Royal Ahold has for example 23% more private label in 2005 than French retailer Carrefour. Due to the fact that the Dutch supermarkets have one of the highest private label-national brand ratio in Europe, this study will only look at the Dutch FMCG industry.
Furthermore, next to the four in-store factors in this study no other factors will be taken into account to investigate whether those in-store factors influence shopper behavior or not. In addition, the national brands of different manufacturers will not be distinguished. In other words, the national brand of different manufacturers will be taken together as one general national brand.
Moreover, this study will mainly focus on the last three stages of consumer buying decision process. In other words, the first stage (i.e. problem recognition) and the second stage (i.e. information search) will not be considered. So, influences in those stages like sales promotions and point of sale material will not be taken into account.
Furthermore, the difference in store volume will not be considered in the mechanism elaboration of the in-store factor shelf position. The difference between high and low store volume can have an effect on
the consumer associations (e.g. Frank & Massy, 1970). In addition, this study will make no distinction between the difference in container sizes (small versus large).
§1.6 Brief Overview of the Rest of the Chapters
The next chapter serves to give this study the building blocks for this study. It is therefore that the chapters 2.1 to 2.4 elaborate on the individual in-store factors. Chapter 2 will also consider the different hypotheses which could be formulated from the arguments given in the theoretical framework (i.e. chapter 2.1 to 2.4). Furthermore, the third chapter will discuss an overview of the research methodology. Questions which will be answered in chapter three are for example: How is the data collected in this study? Which analysis is applied in this study? Moreover, the fourth chapter will present the results of the analysis. Finally, chapter 5 includes the conclusion and discussion of this study. In addition, the managerial implications, and limitations & recommendations for future research will also be considered in chapter 5.
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