The fringe or national brand manufacturer? An analysis of private label sourcing strategy

Abstract

Purpose Private labels (PLs) have flowed into a wide range of categories and continue to expand especially in the mass channel. This paper aims to investigate the optimal PL sourcing strategy for a retailer and the impact of different sourcing strategies on the interaction between the upstream national brand (NB) manufacturer and the downstream retailer in a dyadic supply chain. Design/methodology/approach The authors develop a game-theoretic model that allows for vertical differentiation, where a retailer may choose between two types of PL sourcing strategies, i.e. fringe and NB manufacturer sourcing (NBMS). Under fringe manufacturer sourcing, the procurement cost is low but the PL recognition is also low. There exists a group of loyal consumers who only choose the NB. Under NBMS, the procurement cost is high but the loyal consumers may switch between two products. The channel members engage in a three-stage sequential game and the authors analyze the subgame perfect equilibrium by comparing the retailer’s best profits in the two subgames, i.e. fringe and NBMS. Findings The model shows that the retailer inclines to source from the NB manufacturer if the size of the loyal consumer group is relatively large, which provides a rationale for the existence of NBMS. It is also shown that the NB quality plays a positive role on NBMS. As the NB quality becomes higher, the retailer is more likely to procure the PL from the NB manufacturer instead of the fringe manufacturer. In addition, both channel members can be better off and more consumer surplus is provided by expanding the market under NBMS. Overall, sourcing from the NB manufacturer may improve channel profit, consumer welfare and social welfare. Originality/value The research contributes to explaining why the practice of sourcing PLs from NB manufacturers is widely adopted by retailers and can help retailers to make appropriate PL sourcing strategies under various circumstances.