Private-Label Use and Store Loyalty

Abstract

The authors develop an econometric model of the relationship between a household's private-label (PL) share and its behavioral store loyalty. The model includes major drivers of these two behaviors and controls for simultaneity and nonlinearity in the relationship between them. The model is estimated with a unique data set that combines complete purchase records of a panel of Dutch households with demographic and psychographic data. The authors estimate the model for two retail chains in the Netherlands—the leading service chain with a well-differentiated high-share PL and the leading value chain with a lower-share PL. They find that PL share significantly affects all three measures of behavioral loyalty in the study: share of wallet, share of items purchased, and share of shopping trips. In addition, behavioral loyalty has a significant effect on PL share. For the service chain, the authors find that both effects are in the form of an inverted U. For the value chain, the effects are positive and nonlinear, but they do not exhibit nonmonotonicity, because PL share has not yet reached high enough levels. The managerial implications of this research are important. Retailers can reap the benefits of a virtuous cycle; greater PL share increases share of wallet, and greater share of wallet increases PL share. However, this virtuous cycle operates only to a point because heavy PL buyers tend to be loyal to price savings and PLs in general, not to the PL of any particular chain.