The Consumer Welfare Effects of NB Introductions at Discounters

The Consumer-Welfare Effects of National-Brand Introductions at Hard Discounters

Didi Lin

Barbara Deleersnyder

Marnik G. Dekimpe

Inge Geyskens*

January 2013

Didi Lin is a doctoral candidate in Marketing, Tilburg University, Warandelaan 2, 5000 LE Tilburg, the Netherlands. Tel: +31-13-466 82 79. E-mail: [email protected]. Barbara Deleersnyder is Associate Professor of Marketing, Tilburg University, Warandelaan 2, 5000 LE Tilburg, the Netherlands. Tel: +31-13-466 82 52. E-mail: [email protected]. Inge Geyskens is Professor of Marketing, Tilburg University, Warandelaan 2, 5000 LE Tilburg, the Netherlands. Tel: +31-13-466 80 83. E-mail: [email protected]. Marnik G. Dekimpe is Research Professor of Marketing and CentER Fellow, Tilburg University, Warandelaan 2, 5000 LE Tilburg, the Netherlands, and Professor of Marketing, Catholic University Leuven, Belgium. Tel: +31-13-466 30 22. E-mail: [email protected]. The Consumer-Welfare Effects of National-Brand Introductions at Hard Discounters

Private-label (PL) dominated hard discounters constitute one of the fastest growing retail formats in many Western economies, and have contributed considerably to the continued share growth of PLs in European grocery retailing. This increasing dominance of PLs starts to raise concerns among policy makers in that it may restrict in-store inter-brand competition by limiting national-brand (NB) availability, which could make consumers worse off. Given their scanty store assortment, this concern applies especially to the hard-discount format. Recently, however, several leading discounters have moved away from their exclusive PL focus, and have started to add a select set of NBs to their assortment. Hard discounter Lidl, a leading discount retailer in Europe, was at the forefront of this trend. The strategic choice of opening positions for NBs at its stores is seen by many industry observers as a key reason why it has grown faster than many of its discount competitors (Steenkamp and Kumar 2009).1 These NB slots are in high demand, and NB manufacturers as Nestlé, PepsiCo, and P&G are all eager to get their NBs listed on the hard discounters’ shelves. Indeed, the sizeable market share of the hard-discount format causes NB manufacturers to miss out on a large part of the market when they are not included in the discounters’ assortment. This study examines the consumer-welfare implications of NB introductions in hard discounters’ PL-dominated assortments. We aim to uncover whether consumers indeed benefit from being able to also buy NBs in the discount format (= impact on variety), and/or whether such a NB listing will affect the prices of established offerings (= impact on prices), at the discounter and/or at competing retailers. In line with Hausman and Leonard (2002)2 and Brynjolfsson, Hu and Smith (2003)3, we express in monetary terms the consumer-welfare effect of NB introductions in hard discounters’ assortments, where we further divide the total welfare effect into a price effect and a variety effect. For this purpose, we model the changes in consumer expenditures and changes in grocery prices following the introduction of 18 NBs across different grocery categories at the German discounter Lidl between 2003 and 2009. By comparing the expenditures that consumers would save (positive welfare effect) or that consumers would require additionally (negative welfare effect) to reach the same utility level when the NB becomes available at the store, we are able to infer how consumers are affected by this strategic assortment decision. Our results show that introducing NBs at the hard discounters benefits consumers by having additional variety in an otherwise limited assortment. Unfortunately, this enhanced variety effect is often overshadowed by a negative price evolution on established offerings after the NB introduction at Lidl. Indeed, the addition of a NB at discounter Lidl seems to reduce the pressure on prices of comparable offers at other German retailers, which is harmful to consumers. Hence, NB introductions at hard discounters are not necessarily welfare- enhancing. Interestingly, the relative size of the variety-enhancing and/or deteriorating price effect is found to vary systematically with a number of category- and NB-specific characteristics. Given the growing concerns of policy makers that consumer choice may become too restricted in PL-dominated assortments, we provide insights how a strategic selection of categories and NBs may allow hard discounters to allay these concerns with minimal

1 Steenkamp, J-B.E.M. & Nirmalya K. (2009), “Don’t Be Undersold,” Harvard Business Review, 87 (12), 90-95. 2 Hausman, J.A. & G.K. Leonard (2002), “The Competitive Effects of a New Product Introduction: A Case Study,” The Journal of Industrial Economics, 50 (3), 237-263. 3 Brynjolfsson, E., Y. Hu, & M.D. Smith (2003), “Consumer Surplus in the Digital Economy: Estimating the Value of Increased Product Variety at Online Booksellers,” Management Science, 49 (11), 1580-1596. 2 adjustments to their basic business model.