Jiazhen Huo

Advances in Theory and Practice in Store Brand Operations Advances in Theory and Practice in Store Brand Operations Jiazhen Huo

Advances in Theory and Practice in Store Brand Operations Jiazhen Huo School of Economics and Management Tongji University Shanghai, China

ISBN 978-981-15-9876-0 ISBN 978-981-15-9877-7 (eBook) https://doi.org/10.1007/978-981-15-9877-7

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This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore Preface

Private brand (PB), also known as private label (PL) or store brand (SB), refers to a brand created and controlled by a retailer. In the 1960s and 1970s, private labels began to emerge in France and England. Although private labels have grown rapidly worldwide, their market share varies greatly from region to region. According to Nielsen’s 2018 Global Private Label Report, the largest markets for private-label products are found primarily in the more mature European retail markets. With the growth of e-commerce, some online retailers have also launched private-label goods, but the market share for China’s private labels is only 1–3%, which represents a significant gap in comparison with Europe and America. This research monograph project considers: (1) product strategy for private branding; (2) pricing strategy for private brands; (3) channel strategy for private brand introduction; and (4) supply chain coordination for private brand introduction. We focus on the main challenges for Chinese retail companies in developing their private brands and use the practices of the Chinese Lianhua supermarket’s private brand management as a case study. This research includes the results of both empirical and theoretical insights. The empirical study aspect is focused on factors that influence purchasing intentions related to retailer’s private branding. We identify the main factors that influence consumers’ purchasing intentions for private brand products, including the psycho- logical characteristics of consumers; the attributes of private brand products; retailer image; the perceived quality of private brand products; the influence of information value and the influence of manufacturers upon PB decisions. The theoretical study largely relates to introduction strategies for store brands when considering product cost and shelf space opportunity cost and other technical parameters. In relation to the pricing of private brand products we find that the stable price and stable reference price will increase with memory factor, perceived quality of PB and the sharing rate of NB’s revenue, but decrease with the reference effect param- eter and the weight coefficient of PB’s history price. Our study of the dynamic assortment planning problem in the presence of heterogeneous brands indicates that ignoring brand heterogeneity will overestimate the retailer’s expected revenues significantly, and that the potential revenue overestimation will depend on initial

v vi Preface inventories and prices. We note that the theory behind introducing store brands to combat showrooming is effective. Using game theory, we examine strategic coordination mechanism design and competition and cooperation between retailers and manufacturers by focusing on advertising decisions that consider the competition of retailer and manufacturer, and the Competition of National and Store Brands with advertisement intervention. Our results show that for both manufacturer and retailer, Stackelberg’s leader-follower game strategy is more effective than the Nash non-cooperative proposal. Our findings are able to optimize the supply chain and indicate the best pricing and advertising investment decisions. This manuscript is funded by National Natural Science Foundation of China (71532015). As the leader of this key project, I acknowledge the financial support from the National Science Foundation of China. I extend my thanks to the members of my research team for their excellent contributions and hard work.

Acknowledgments This research is supported by the National Natural Science Foundation of China (Grant No. 71532015). I sincerely thank the members of my research team for their contributions.

Shanghai, China Jiazhen Huo August 2020 Contents

1 Introduction ...... 1 1.1 The Development of Store Brands ...... 2 1.2 The Market for Store Brands in China ...... 4 1.2.1 The Development of Store Brands in China ...... 4 1.2.2 Reasons for the Low Market Share of China Store Brands ...... 6 1.2.3 Challenges for China Store Brands ...... 8 1.2.4 Lianhua’s Practice in Respect of Store Branding ...... 9 1.3 The Outline of This Work ...... 11 1.4 Summary...... 11 References ...... 12 2 Product Strategy for Store Branding ...... 15 2.1 Factors That Affect the Success of Store Brands ...... 16 2.1.1 Retailers Profit(s) from Store Brands ...... 16 2.1.2 Manufacturers Profit from Store Brands ...... 17 2.1.3 National Brands Profit from Store Brands ...... 18 2.1.4 Customers Benefit from Store Brands ...... 18 2.1.5 StrategiesinTimesofCrisis ...... 19 2.2 Motivation for Introducing Store Brands ...... 19 2.2.1 Increasing Market Share Through Additional Product Categories ...... 20 2.2.2 Improve Bargaining Power to Compete with National Brand Manufacturers ...... 21 2.2.3 Strengthen Consumers’ Loyalty and Influence ...... 21 2.2.4 Control of Product Positioning ...... 23 2.2.5 OtherMotivations...... 23 2.3 Factors That Affect Consumers’ Choice of Store Brands ...... 24 2.3.1 PriceandPromotion...... 24 2.3.2 Customers’ Perception of Risk in Buying Store Brands . . . . 26 2.3.3 Customers’StoreImage ...... 28 2.3.4 Familiarity of Store Brands ...... 30

vii viii Contents

2.3.5 Customers’ Perceived Quality of Store Brands ...... 31 2.3.6 Customers’ Perception of Value for Money ...... 32 2.3.7 Customers’ Brand-Loyalty Towards Store Brands ...... 32 2.3.8 OtherFactors...... 33 2.4 Strategy for Introducing Store Brands ...... 34 2.4.1 The Strategy of Product Quality ...... 34 2.4.2 Strategies for Product Brands ...... 36 2.4.3 StrategiesRelatedtoTargetMarket ...... 38 2.4.4 The Strategy for Product Positioning ...... 39 2.4.5 Strategies for Retailer Advertising of Store Brands ...... 42 2.5 Empirical Study of the Factors Influencing Purchasing Intention for Retailer Store Brands ...... 43 2.5.1 Research Hypothesis ...... 44 2.5.2 ResearchDesign ...... 49 2.5.3 EmpiricalAnalysis ...... 50 2.5.4 Research Conclusions and Management Significance ...... 57 2.5.5 Deficiencies in the Research ...... 66 2.6 Introduction of store brands considering product cost and shelf space opportunity cost ...... 67 2.6.1 Introduction ...... 68 2.6.2 The Model ...... 71 2.6.3 Stackelberg Equilibrium ...... 72 2.6.4 NumericalStudies ...... 81 2.6.5 Conclusion ...... 91 2.7 Summary...... 92 References ...... 93 3 Pricing Strategy for Store Brands ...... 101 3.1 Pricing Strategy Based on Marketing Factors ...... 101 3.1.1 Multi-brand Pricing Strategy Based on Advertising ...... 102 3.1.2 Multi-brand Pricing Strategy Based on Sales Channel . . . . . 105 3.1.3 Multi-brand Pricing Strategy Based on Brand Positioning...... 107 3.1.4 Multi-brand Pricing Strategy Based on Layout ...... 112 3.2 Pricing Strategy for Competitive Brands Considering ConsumerConsciousness...... 115 3.2.1 Pricing Strategy for Competitive Brands Considering ValueConsciousness ...... 115 3.2.2 Pricing Strategy for Competitive Brands Considering PriceConsciousness...... 117 3.2.3 Pricing Strategy for Store Brands Considering Discount Consciousness ...... 119 3.3 Pricing Strategy Considering Different Sales Structures ...... 121 3.4 Pricing Strategy Under Different Classifications of Store Brand Manufacturers ...... 124 Contents ix

3.5 Dynamic Pricing of Store Brands with Reference Effect ...... 127 3.5.1 Problem Description and Model Building ...... 128 3.5.2 Fixed Pricing Strategy Without Reference Effect ...... 130 3.5.3 Dynamic Pricing Strategy Considering Reference Effect ...... 131 3.5.4 NumericalAnalysis ...... 135 3.5.5 Conclusion ...... 139 3.6 Dynamic Assortment in the Presence of Brand Heterogeneity . . . . . 140 3.6.1 LiteratureReview ...... 142 3.6.2 Problem Statement and Model ...... 145 3.6.3 ParameterEstimation ...... 148 3.6.4 EmpiricalAnalysis ...... 151 3.6.5 Conclusions ...... 159 3.7 Summary...... 160 References ...... 161 4 Channel Strategy and Conflict Resolution ...... 169 4.1 Channel Competition Between Traditional Manufacturers andRetailers...... 169 4.1.1 The Competition Between Brick-and-Mortar and Online Channels ...... 170 4.1.2 The Impact of Channel Structure ...... 170 4.1.3 Multi-channel Competition and Strategies ...... 171 4.2 Channel Competition When Considering the Introduction ofaStoreBrand...... 172 4.2.1 The Impact of Introducing a Retailer’s Store Brand ...... 172 4.2.2 Channel Competition After the Adaptation ofaRetailer’sStoreBrand ...... 172 4.2.3 A Win-Win Situation for Both Retailers and Manufacturers ...... 173 4.3 Channel Coordination Between Traditional Retailer and Manufacturer ...... 174 4.3.1 Price Discounts in Traditional Channel Coordination ...... 174 4.3.2 Revenue Sharing in Traditional Channel Coordination . . . . . 175 4.3.3 Cooperative Advertising in Traditional Channel Coordination ...... 176 4.3.4 Inventory Transfer in Traditional Channel Coordination ...... 177 4.3.5 Channel Coordination Through Other Methods ...... 178 4.4 Channel Coordination Between Retailers and Manufacturers When Store Brands Are Introduced ...... 179 4.4.1 Channel Coordination Through Revenue Sharing ...... 179 4.4.2 Channel Coordination Through Cooperative Advertising ...... 181 x Contents

4.4.3 Channel Coordination Through Positioning of Store Brand Quality ...... 183 4.4.4 Other Methods of Coordination ...... 184 4.5 Pricing Strategy for Bricks & Mortar (B&M) Stores in a Dual-Channel Supply Chain Based on the Hotelling Model . . . 184 4.5.1 Introduction ...... 185 4.5.2 LiteratureReview ...... 187 4.5.3 Model Framework ...... 190 4.5.4 Showrooming When the B&M Retailer Implements noStrategy...... 192 4.5.5 Showrooming When the B&M Retailer Implements aStore-BrandStrategy...... 192 4.5.6 Considering Store-Brand Awareness ...... 199 4.5.7 Conclusion ...... 203 4.6 Summary...... 204 References ...... 204 5 Supply Chain Coordination ...... 211 5.1 Supply Chain Coordination Based on Game Theory ...... 213 5.1.1 Pricing and Profitability ...... 213 5.1.2 Strategic Interaction Between Manufacturer andRetailer ...... 215 5.1.3 Supply Chain Coordination Based on Positioning ofStoreBrand...... 217 5.2 Supply Chain Coordination Mechanism ...... 218 5.2.1 Advertising Mechanisms ...... 218 5.2.2 Channel Coordination Mechanism ...... 220 5.2.3 Promotion and Rebate Strategies Mechanism ...... 222 5.2.4 Shelf Allocation Strategy Mechanism ...... 223 5.2.5 Contracts Mechanism ...... 224 5.2.6 Rest of the Mechanisms ...... 225 5.3 Supply Chain Competition and Cooperation Between Retailers and Manufacturers ...... 226 5.3.1 Supply Chain Competition and Cooperation Based on Store Brands ...... 226 5.3.2 Supply Chain Competition and Cooperation with the Introduction of Store Brands ...... 229 5.4 Supply Chain Advertising Decisions with Competition between National and Store Brands ...... 230 5.4.1 Model and Assumptions ...... 231 5.4.2 Differential Game Models Based on Stackelberg Game Theory ...... 233 5.4.3 Comparison with Nash Non-cooperative Game ...... 238 5.4.4 Conclusion ...... 240 Contents xi

5.5 Competition Games for National and Store Brands withAdvertisementIntervention...... 240 5.5.1 Models and Assumptions ...... 241 5.5.2 Stackelberg Games with Shared or Secret Information of Manufacturer’s Advertising Costs ...... 243 5.5.3 Analysis of the Property of the Optimal Solution oftheGame ...... 246 5.5.4 Conclusion ...... 248 5.6 Summary...... 248 References ...... 249 About the Author

Jiazhen Huo, PhD, Chair Professor (Supported by BOSCH) of School of Economics and Management, Tongji University, China. His research interests are Logistics and Supply Chain Management, Service Operations Management. In the past decades, he has published more than 30 papers on such as OR, JOM, IJPE, EJOR, IJPR and other high quality journals and presided 7 research projects funded by the National Nature Science Foundation and a number of consulting projects.

xiii List of Figures

Fig. 1.1 Store brands of Lianhua ...... 10 Fig. 2.1 Research model framework ...... 44 Fig. 2.2 Theoretical model ...... 52 Fig. 2.3 Standardized model ...... 53 Fig. 2.4 Standardized cylindrical model ...... 58 Fig.2.5 Variableresultsfordifferentvaluesofc ...... 82 Fig.2.6 Retailer’stotalprofitfordifferentvaluesofc ...... 82 Fig. 2.7 Manufacturer’s total profit for different values of c ...... 83 Fig. 2.8 Variable results for different values of k ...... 85 Fig. 2.9 Retailer’s total profit for different values of k ...... 86 Fig. 2.10 Manufacturer’s total profit for different values of k ...... 87 Fig. 2.11 Variable results for different values of αs ...... 88 Fig. 2.12 Price for different values of αs ...... 88 Fig. 2.13 Retailer’s total profit for different values of αs ...... 89 Fig. 2.14 Comparison between the periods before and after the introduction of the SB in αs ...... 89 Fig. 2.15 Comparison between the periods before and after the introduction of the SB in αs ...... 90 Fig. 2.16 Demand and shelf space proportion for the SB for different values of αs ...... 91 Fig. 3.1 Effect of memory coefficient on price and reference price ...... 135 Fig. 3.2 The effect of reference effect coefficient on price and reference price ...... 135 Fig. 3.3 The effect of weight coefficient on price and reference price . . . 136 Fig. 3.4 The effect of store brand perceived quality on price and reference price ...... 136 Fig. 3.5 The impact of retailers’ share of NB on price and reference price ...... 137 Fig. 3.6 Two-stage consumer choice model ...... 146 Fig. 3.7 Effect of inventory levels on revenue overestimation ...... 155 xv xvi List of Figures

Fig. 3.8 Effect of price on revenue overestimation ...... 155 Fig. 4.1 The model ...... 190 Fig. 4.2 Customer’s decision-making process under a store-brand strategy...... 194 Fig. 4.3 Consumers’ decision-making process considering store-brand awareness ...... 200 List of Tables

Table 2.1 Judgment principles for internal consistency and reliability coefficient index ...... 51 Table 2.2 Scale reliability analysis results ...... 52 Table 2.3 Model fitting index ...... 53 Table 2.4 Standardized parameter inspection ...... 54 Table2.5 CorrelationTestBetweenVariables ...... 54 Table2.6 CorrelationCoefficient...... 55 Table 2.7 Hypothesis test results ...... 59 Table 3.1 Comparison of profits with reference effects being positive . . . 138 Table 3.2 Comparison of profits with reference effects being negative ...... 138 Table3.3 Dataforestimation ...... 151 Table3.4 Uniformpriordistributions ...... 152 Table3.5 Estimatedparameters ...... 152 Table 3.6 Expected revenues under two consumer choice models ...... 154 Table 3.7 Impact of initial inventory on dynamic assortment ...... 156 Table 3.8 Impact of increasing one unit inventory on revenue improvements ...... 157 Table 3.9 Impact of full price discount on dynamic assortment ...... 158 Table 3.10 Impact of partial price discount on dynamic assortment ...... 159 Table 4.1 Notations used in the paper ...... 191 Table 4.2 The equilibrium solutions of the three models ...... 193

xvii Chapter 1 Introduction

Store brand (SB), also known as private label (PL) or private brand (PB), refers to a brand created and controlled by a retailer. According to the definition from the Private Label Manufacturers’ Association (PLMA), private brand products include all the products sold under a retailer’s brand name, where the retailer controls part of or all the process from design to the sale of products. Although usually produced by third party manufacturers, private brand products are designed by the retailers and sold in their own stores. Private brands stand in contrast to supplier or manufacturer brands, which are also known as national brands (NB). In the main however, for simplicity and consistency we will now prefer the term “store brand” and “store label” over the other “private brand or label” terminology. In the 1960s and 1970s, store labels began to emerge in France and England. Initially, retailers mainly offered low-quality, cheap store label products as an alterna- tive to supplier brands (Steenkamp and Geyskens 2014). Through the 1980s, retailers began to improve the quality of their store brands, with some store label products matching the quality of national brand products, with store label pricing often being lower than the equivalent national brand product (Steenkamp and Geyskens 2014). Retailers are motivated to develop store brands for the following four main reasons: 1. Increasing market share and profits. Retailers expand the variety of product offerings by introducing private brands to meet niche market needs and thereby increase their market share (Amrouche and Zaccour 2008; Kotler 1999; Mills 1999). Retailers can make significant additional profits by selling store brand products, because the profit margin of them is usually much larger than the profits from selling other-brand products (Dimitrieska et al. 2017). 2. Improving the bargaining power of retailers. The introduction of store brands can reduce retailers’ reliance on national brands and increase their bargaining power over manufacturers by lessening their dependency on NBs (Groznik and Heese 2010). At the same time, since retailers control the assortment and positioning of all brands on their shelving, the introduction of store brands can also significantly improve their bargaining power (Morton and Zettelmeyer 2004).

© Tongji University Press 2021 1 J. Huo, Advances in Theory and Practice in Store Brand Operations, https://doi.org/10.1007/978-981-15-9877-7_1 2 1 Introduction

3. Increasing brand loyalty. Since store labels have the characteristic of being sold only through specific retail channels, the development of store labels by retailers can differentiate themselves from other retailers and increase consumer loyalty (Bontems et al. 1999; Hoch and Banerji 1993). Seenivasan et al. (2016) found that store brands increase brand loyalty by enhancing store differentiation. Lombart and Louis (2016) studied the impact of consumer perceptions of store brands and retailer personality traits on consumer loyalty and found that if consumers believe that the retailer is credible, honest and considerate, then store brands can enhance the retailer’s standing. Consumers’ attitudes toward store brands will affect their loyalty to retailers, so it is of strategic importance and value for retailers to manage store brands effectively. 4. Controlling the positioning of the product. By introducing store label products, retailers can control product positioning, especially when it is difficult for retailers to find products from manufacturer brands that exactly match their requirements (Amrouche and Yan 2012; Morton and Zettelmeyer 2004).

1.1 The Development of Store Brands

Early research abroad mainly focused on the significance of store brands for the development of retail enterprises. The store brands that were developed overseas early on had three main characteristics: (1) higher frequency of purchase, often daily consumables, the purpose being to enable them to quickly gain wide attention and interest from customers once launched; (2) obvious differentiation among products with strong selectivity, so that retailers could easily highlight the characteristics of products to meet the needs of subdivided customer groups; (3) moderate price presenting low risk: it was easier to attract consumers to try, and thus increase the possibility of accepting store branded goods. From the initial low-price stage to the modern high-quality stage, the develop- ment of store brands can be divided into four types, namely unknown brands, quasi- brands, family brands and image brands. Consumers’ attention gradually shifted from price to quality, and retailers store brand product categories also expanded, from low prices and low quality to high quality and low price. The image brand stage was more concerned with attracting consumers through product innovation, enhancing the value of products thus improving their store image (Zhang 2017). In early research, it was clear that consumers’ perception of store brands was of low quality and low prices, but with the development of store brands and their promo- tion by advertising, more consumers began to perceive that there were no significant differences in the quality of store brand products and national brand products, and that high-quality store label products existed (Xie and Luo 2011). This was due to the retailers increasing investment in product quality, design, style, and packaging, which attracted consumer attention. Over the past ten years, the quality of store brands has 1.1 The Development of Store Brands 3 been greatly improved, although national brands still dominate the market for high- end products, including jewelry, household appliances, computers, automobiles and furniture (Dimitrieska et al. 2017). Although store labels have grown rapidly worldwide, market share varies greatly from region to region. According to Nielsen’s 2018 Global Private Label Report,1 the largest markets for store-label products are still found primarily in the more mature European retail markets. Comparatively, store labels still have much room for growth, especially in North America, where penetration is still relatively low. Store labels have the largest market share in Spain at 42% and in Germany the store label share is about 35%. In the Asia Pacific market, store label share is generally low, and only accounts for 4.2% of the market. Europe has the largest store label share because significant numbers of customers hold positive perceptions about store labels. The growth of the store brand market share in various countries is not linear, but when it reaches 5–10%, it appears to have an accelerated effect. The market share of store label products represents diversity among the various product categories, with statistics showing that the market share of store label products in 38 countries averages 32% in refrigerated foods, 5% in personal care products and 2% in infant products (ACNielsen 2005). Overall, the average price of store label products is 31% lower than the NB manufacturer’s price, but there are significant differences depending on the category. For example, the prices of personal care products are 46% lower on average, and the prices of refrigerated foods are 16% lower (Caprice 2017). There are also many examples showing that store label product prices are higher than NB manufacturer brands because these store labels have taken a superior position to some high-end brands. In the past, store brand positioning was mostly as a low-cost alternative to national manufacturer brands, but this situation has changed. Retailers recognized that high-quality store brands were more competitive and profitable, and easily triggered vicious competition with manufacturers. With the development and differentiation of store brands, more and more scholars began to study customers’ purchase preference behavior for store brands. Cho (2019) analyzed the purchasing data of a large Korean supermarket and found that people who are over 50 years old and people with lower incomes preferred store brand products, as opposed to those who are under 30 years old and have higher incomes. In addition, customers who shopped frequently at the store tended to choose store brand products more than customers who purchased larger amounts of goods less frequently. The new e-commerce retail companies have become an indispensable part of the store brand development era, and are showing an enhanced results trend, even as latecomers. This phenomenon results from the intrinsic reliance of e-commerce on data and its better understanding, influence and control of customer purchasing behavior. According to Nielsen’s 2018 Global Private Label Report, e-commerce will be another disrupter to national brand status. Amazon, for example, is not just disrupting the consumer product space; it is fragmenting the path to purchasing goods

1See the Nielsen’s Global Private Label Report (2018) available at https://www.nielsen.com/us/en/ insights/report/2018/the-rise-and-rise-again-of-private-label/. 4 1 Introduction and opening new opportunities for store labels. We have entered an age in which store labelers also have strong opportunities to compete by using e-commerce platforms. Store brands usually benefit from online channels, Nenycz-Thiel et al. (2016) surveyed five types of packaged products in the UK and found that in most cases, store label products had a higher market share in online channels than offline channels, and online customers have higher loyalty. Moreover, this difference is more significant in high-end store brand products. Online e-commerce retail companies have a wide range of store brand products, which account for a relatively high proportion, because e-commerce retail enterprises can maximize the variety of their store brands by taking advantage of the visibility and convenience of their online platforms, without considering space factors such as venues. Traditional department store’s own brand development is slow, still in its infancy with slow product replacement (Qin 2017). Research have found that the relative intrinsic loyalty and the conquering power of store brand products differ in different categories or channels, that means some categories of store label products may sell better online. Therefore, different strategies can be formulated according to the category’s competitiveness in different channels (Arce-Urriza and Cebollada 2018). Both traditional retailers and online retailers have gradually realized the importance of understanding their store brand products and formulating reasonable operating strategies. Traditional retailers must especially recognize their shortcomings and take corrective action, or they will struggle in the development of their store brands. In this era of a growing e-commerce economy, retailers have tried online to offline (O2O) operations in pursuit of the combination of online and offline advantages. However, where retailers are not the owners of a brand, it is difficult to achieve uniform prices online and offline. The development of store brands to obtain pricing power for retailers helps the development of O2O operations (Zhang and Zan 2016). This has prompted e-commerce retailers to vigorously develop their store brands.

1.2 The Market for Store Brands in China

In this section, we will focus on the market of store brands in China. The remainder of this chapter is organized as follows: we first introduce the development of store brands in China. We then examine the reasons for the low market share of China’s store brands and the challenges for China store brands are analyzed, and the development of the Lianhua store brand model is introduced as a case study.

1.2.1 The Development of Store Brands in China

In developed economies, store labelling is a strategic point in the development of retailing, whilst in emerging economies store label market penetration is often not high, and the role of the store label is not so important. It may be that retailers in 1.2 The Market for Store Brands in China 5 emerging economies have insufficient knowledge of their own rights and powers, affecting their understanding and management of the potential for store brands; in addition, retailers in emerging or developing countries may lack sufficient skills to fully utilize the real opportunities of store branding (Herstein et al. 2017). In recent years, many large domestic retail enterprises have launched their own brand products, such as Lianhua’s store brands “Better Living”, “Lianhua Jiahui”, “Youpin Life”; Wal-Mart’s store brand “Yekee”, “Great Value”, and so on. China Resources Vanguard also launched “Simple Life”, “Home Run”, “VICTOR” and other store brands. With the growth of e-commerce, some online retailers have also launched store-label goods. JD started to introduce its store brands in 2010, and has developed a number, mainly “dostyle”, “Hommy”, “Truewow”, and “INTERIGHT”, with annual sales of its store brand products reaching several hundred million yuan (Liu 2016). However, at present, the market share for China’s store labels is only 1–3%, which still represents a significant gap compared with Europe and America. At present, there are two main ways to promote store brands: one is to use store- banner branding, and the other is to use stand-alone branding. For the first method, retailers use their own store’s brand name to part-name their store brands, such as “Dangdang Youpin”. The advantages of this method are obvious, but the disadvan- tage is when the quality of a product is in question, it can easily affect the reputation of the entire store’s name as a brand, which makes for higher management require- ments. Geyskens et al. (2018) believe that when brand value is high, store-banner branding is suitable, otherwise stand-alone branding is the best choice. They found that store-banner branding can bring higher sales and profits because customers often cannot distinguish the relationship between store-banner and store brands, so retailers’ clear use of store-banner branding provides support for this. Many large retail companies have begun to adopt their store brand chain operation strategy. Pan (2018) explored how China’s retail companies should develop their store brand chain operations through research on “MINISO”, which is a retail company founded by a Chinese entrepreneur and Japanese designer. As Pan concluded from his research, retail companies should pay attention to the following points during the development of their store brand chains: (1) Establish a market-oriented development concept for store brands, so that products can better meet consumer needs; (2) Optimize products and in-store design in a thematic way, gaining advantages in terms of price, promo- tional activities, in-store experience and product quality; (3) Accurate positioning of store brand products and clear target markets also help customers to effectively identify the brand. Large supermarkets are the main force for implementing their store brand strategy. The target market for large supermarkets is mainly commu- nity residents near certain business districts; the target market for online retailers is young people aged 18–35. Li and Wang (2019) believe that in the process of store brand development, store brand product development and product portfolio manage- ment are two issues that require special attention. In the development process, they suggest using the advantages of data to strengthen the analysis of market demand; in the process of portfolio management, they advocate handling the relationship between category (width) and variety (depth), and expanding a portfolio of store brand products gradually. 6 1 Introduction

By analyzing data from more than 60 retail companies and more than 60 supplier companies distributed throughout the country, the report “2019 China Private Brand Market Research”, found that the proportion of average single product store brand items in the current retail market, the sales of store brands and categories of store brands all show an increasing trend (Li et al. 2019) and the overall strength of China’s retail industry has gradually grown. In 2015, 14 Chinese retailers entered the global retail top 250, such as Suning, Gome, JD, Shanghai Friendship Group and Dashang Group. Compared with foreign-funded retail enterprises however, local retail companies have greater deficiencies in terms of core competitiveness and the capacity for sustainable development (Zhang and Zan 2016). The implementation of local (Chinese) retail companies’ store brand strategy is still in its infancy, and their competitiveness and profitability are insufficient. Compared with foreign-funded enterprises such as Wal-Mart and Auchan, local retailers’ store brand sales and inventory accounts for a significantly smaller propor- tion. Traditional retailer’s store brand development is struggling, but with the rapid development of online sales, online retailers have become a new force in the devel- opment of store brands. Traditional retailer’s store brand product development often adopts the OEM (Original Equipment Manufacturer) model, or imitation develop- ment model. In contrast, online retailers mostly adopt the joint development model, which is highly related because of their advantage in valuing the use of data and can quickly react to market demand information. Apart from a few companies such as “China Resources Vanguard” and “Century Lianhua”, traditional retailers have not established an independent operational department for their store brands. Most large online retailers have not only established independent store brand operations depart- ments, but also established independent store brand product development teams (Liu 2016). Li and Wang (2019) summarized the factors that restrict local retail companies from implementing their store brand strategy: these are divided into two aspects, the first being industry factors. When many domestic and foreign retail enterprises enter the market, it leads to fierce competition in the retail market and low profit margins. This limits the enthusiasm of local companies to develop their store brands. The second is the enterprise factor, which includes the lack of comprehensive talents, the difficulty in quality control for commodities, the difficulty of achieving scale effects because of the small scales involved, and weak product development capabilities.

1.2.2 Reasons for the Low Market Share of China Store Brands

As an independent director of Lianhua Supermarkets Limited, the largest supermarket chain in China and a listed company on the Hong Kong Stock Exchange, I have been engaged in retail consulting for nearly 20 years and is very familiar with the operation and management practices of the retail industry in China. Based on my understanding of Chinese retail practices and issues over the past 20 years and the team’s research 1.2 The Market for Store Brands in China 7 and analysis of several large retail enterprises, including Lianhua Supermarket, the reasons for the low market share of China’s retail store label industry are mainly as follows: 1. Store brand recognition is not high. Store brands are still a relatively new thing for Chinese consumers, and their awareness and brand recognition are not high enough. Consumers also lack trust in store label products, preferring to choose products that they are familiar with. In countries with a long time to build their store brands, such as the United States, the United Kingdom, and France, the rate of consumers who trust in their store brands has reached 75, 56, and 38%, respectively (Xu 2016). 2. Unstable quality of store brands. At present, the development of China’s retail enterprise store branding is still in the following stage, where some enterprises are able to reduce store brand OEM costs, and although the advantages, which are the low prices of store brands, are ensured, the quality is difficult to guar- antee, affecting customer satisfaction and brand image. Retail companies have inadequate control over the production quality of their store brands and loopholes in the supervision of retail company store brands have also caused store brand products with low quality entering the market (Xu 2016). 3. Inadequate supply chain systems. The development of a retailer’s store brand requires the integration of a complete supply chain system, including category selection, product development, production, quality control, marketing, logistics and sales of the product. 4. Promotion methods are not reached to a certain level. Although some large super- markets have developed their store brands, enterprises may still use a single promotional method for these types of goods, and discounts, coupons and other promotional methods are less used. 5. Risk aversion affects motivation for new product introduction. For retailers, there is more pressure to sell their store brand than to sell other goods. If there is a problem with the store brand, it may immediately affect the brand image of the entire company. Retailers have therefore reduced their own incentive to introduce their store brands from a risk prevention perspective. In the fiercely competitive market environment, Chinese retail enterprises, in order to be robust in facing the competition, urgently need new theories and methods to guide practice, develop their store brands in a scientific and orderly manner, and improve the differentiated competitiveness of their enterprises. Therefore, it is essen- tial to conduct research on the relevant theories as well as key techniques and methods for developing retail store branding. At the same time, given China’s large popula- tion and thus a high demand for goods, store label goods still have huge potential for development. This provides a good practical background for the study of retail development for store label theories and methods. 8 1 Introduction

1.2.3 Challenges for China Store Brands

In China, traditional store brands often mean low prices and serious product homo- geneity. Not only is it difficult to persuade people from the premium brands, but it is also extremely difficult to attract new consumers. Although the awareness of Chinese retail companies’ store brands has increased in recent years, the proportion of store brands in most large-scale retail companies are still below 10%, and even in China’s largest supermarket chain, Lianhua Supermarket, it is only 5%. The average level of store brands in the entire Chinese retail industry is only 1–3%. How to develop store label products with high quality and low price like the foreign retail industry and increase the market share of store labels are the practical problems that Chinese retail companies are facing today. For Chinese retail companies to develop their store brands, the following problems need to be solved: 1. Select the correct product. There are between 1 and 2 million kinds of Stock Keeping Units (SKUs) in China’s large physical supermarkets (hypermarkets), and there are more types of products in online retail companies. Which are the most suitable and competitive to choose for the development of store brands in which categories is the first problem to be solved. An important reason for the slow development of store brands in China is that consumers have insuffi- cient confidence in store brands. Therefore, it is necessary to deeply analyze the main factors affecting the introduction of store brands from the perspective of consumers. Although there are some international studies in this area, there are few systematic studies based on the characteristics of the Chinese market. 2. Fixed price. According to LSA/Fournier’s survey of the French market, the impor- tance of retailers’ motivations to introduce their store brands is ranked from high to low: reducing prices (33%), increasing profits (25%), improving their posi- tioning (18%) and increasing consumer loyalty (16%). We can see price is an important factor that affects the introduction of store brands. Before the introduc- tion of store brands, consumers had known expectations about the performance and price of existing products, and price is one of the ways to reflect quality. Lower prices may lead to lower quality expectations, and if the price is too high, it will be difficult to achieve the low-price strategic benefit of store brands. There- fore, how to set prices effectively is also a problem that retail companies must solve when introducing store brands. 3. Restructure channels. After the introduction of store brands, the retailer’s original supply and sales channels will undergo structural changes. To deal with the impact of retailers introducing their store brands, many suppliers have expanded various direct sales channels, so planned channel reconstruction is imperative. At the same time, many retailers have also introduced online sales channels, and changes in the supply network will inevitably bring channel conflicts. How to design a reasonable mechanism to coordinate the “relationship” between channel members and resolve channel conflicts is also a problem that needs to be resolved. 1.2 The Market for Store Brands in China 9

4. Coordinate the supply chain. After the introduction of store brands, retailers and suppliers have seen increases in the horizontal competitive relationship on the basis of the traditional upstream and downstream flows, and as the supply and sales channels have become more complex, the relationship between retailers and suppliers has become intricate. Under the traditional model, suppliers and retailers usually improve the efficiency of decentralized decision-making and the performance of the supply chain through various established coordination methods. But are these strategies effective after the introduction of store brands and how effective are they? How to optimize the efficiency of the supply chain so that both suppliers and retailers can benefit from it is a key consideration. The “Analysis Report on the Operating Status of China’s Chain Retail Enterprises 2013–2014” shows that although the sales of the top 100 retail companies exceeded 2 trillion in 2013, factors such as slow growth in the macroeconomic environment, weak consumption, e-commerce channel diversion, consumption upgrades, and continued high costs and other factors, together led to a decline in the growth rate of the traditional retail industry. The growth rate has turned into a single digit for the first time at only 9.9%, and the sales of the top 100 retail companies decreased from 10.8% in 2009 to 8.7% of total retail sales of social consumer goods. Regardless of whether it is an online or offline retail enterprise, the high homogeneity of products has shackled market development. Only product differentiation can attract passenger flow, and differentiation that depends on the development of store brands is potentially a good strategy.

1.2.4 Lianhua’s Practice in Respect of Store Branding

Lianhua Supermarket introduced its store brand “Lianhua” (LH for short) in the early 90s. With this development at Lianhua Supermarket, they also differentiated the Jiahui (food category) and Youpin Life (nonfood category). Later, Jiahui targeted its product positioning as low-priced consumer goods, and Youpin Life turned to the high-end market. Nowadays (2018) Lianhua has found its store brand department is responsible for the design, development, and management of the store brand products. It has now developed six store brands: Better Living, UPSF (Youpin Life), Youxiang, Youshi (consumer goods), Tasy (high-end market) and Yours. Figure 1.1 shows the store brands of Lianhua. The sales volume of Lianhua store brands accounts for 5.3% of total sales, with ambient temperature products accounting for 3.1% of the total sales volume. Lianhua chooses its manufacturers according to a series of quality process control systems. The store brands of Lianhua are different in various areas of the business. For example, Lianhua has independent store brands in convenience stores, while in supermarkets and online stores, the store brands are uniform. The reasons why Lianhua introduced its store brand products were mainly to increase its market share and profits. The profit margin for store brands is 10% higher compared to similar products. Normally, the price index for general store brand 10 1 Introduction

Fig. 1.1 Store brands of Lianhua products is 90% and for high-end products, it is 110%. Lianhua aims to cover different categories of products using their store brands strategy. Currently, Lianhua’s store brands have covered daily purchasing allocations, for example: fermented rice wine, cereals, oil and groceries, water and beverages, snack foods, home cleaning, personal care, household goods, and home textiles. Home appliances and baby supplies are not covered yet. In Lianhua, grain and oil products have better competitive advantage compared with other categories of store brand products. Lianhua sets the price of its store brands based on costs and profit margin, while the profit margin of store brands is 10% higher than other products within the same category, Lianhua also conducts promotions for a batch of store brand products every two weeks, and it responsible for the cost of this promotion. In terms of national brand products, manufacturers are responsible for the promotions. In the early stage of introducing store brands, the promotion frequency is often higher, to acquire more customers’ cognition of the store brand. The introduction of store branding impacts both the manufacturers and Lianhua. For example, Lianhua displays its goods in a different way after the introduction of store brands. Lianhua has display policies for store brands: store brands have specific exclusive counters, and they are usually located near best-seller goods. From what we see, the conflict between manufacturers and Lianhua is not apparent, as Lianhua cooperates with a lot of manufacturers, the competition between manufacturers exists all the time, and they are usually small manufacturers without the power to affect Lianhua. There exist challenges, though, for Lianhua to develop its store brands. Store brand development differs in different locations, which leads to unbalanced development paths. Compared to Metro, Germany’s largest retail group, the different categories of 1.2 The Market for Store Brands in China 11

Lianhua store brands are more numerous, which affects brand cognition. The brand image of Lianhua store brands need to be strengthened.

1.3 The Outline of This Work

This study is based on the problems that need to be solved to promote the development of store branding as a strategy in China’s retail industry. It is focused on four topics, namely: (1) retail brand product strategy; (2) pricing strategy; (3) channel strategy and (4) supply chain coordination. These key issues are described as follows: 1. The characteristics of consumers who purchase store brand products in the Chinese market and the key factors that affect the success of store brands; the strategic design of the introduction of store brands under different business formats; the distribution and layout of stock shelves after the introduction of store brands 2. Pricing strategies for store brands that consider consumer behavior and compe- tition among the channel members 3. Channel selection and conflict resolution mechanism design in a multi-channel environment after the introduction of store brands 4. Design of supply chain coordination strategy and supply chain optimization after the introduction of store brands. These research results can be applied to the practice of offline and online retail companies to develop their store brands.

1.4 Summary

In this chapter, we first discuss the development of store brands. There are four main reasons that motivate retailers to develop store brands: (1) Increasing market share and profits; (2) Improving the bargaining power of retailers; (3) Increasing brand loyalty; (4) Controlling the positioning of the products. The evolution of store brands is often observed in four stages, from unknown brands, to quasi-brands, family brands and finally, image brands. We discuss the characteristics of these store brand evolutionary stages. In the second part, we discussed the market for store brands based on the Chinese experience. We found that the sales of store brands and brand categories of in China are an increasing trend. Many large domestic retail enterprises have launched their own brand products in recent years. The reasons for the low market share of private brands in China are discussed. Using a real-life case study, we illustrated the issues using the practice and challenges experienced by Lianhua supermarket in terms of store brand management. In the final part, we presented our outline for the remaining parts of this work, pointing to the four key topics of retail brand product strategy, pricing strategy, channel strategy and supply chain coordination. 12 1 Introduction

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