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Professor Tony Frost in an Ivey Classroom

Media Release

Private branding saves managers money

Study provides simple test to show when private labels are effective

 

LONDON, ON, February 1, 2010 - Under the right conditions, private branding provides a win-win situation for managers in both manufacturing and retail, ultimately saving them money, according to a new study on branding rights from the Richard Ivey School of Business.

"Private branding can be an effective way to limit conflict between the manufacturer and the retailer and reduce the extra transaction costs between the two parties," said Shih-Fen Chen, William Shurniak Professor of International Business, Richard Ivey School of Business, the study author.

Go into a drugstore for a headache remedy, and the pharmacist might direct you to a store-brand medication. It has the same active ingredients as Tylenol, but it costs less due to the growing trend of private branding. Private branding is when retailers put private labels or store names on products that were made by manufacturers with their own brands.

Many manufacturers resist private branding, considering it a ploy by retailers to grab more market power. However, resistance to a private label can lead to conflict with the retailer and extra transaction costs if the marketing of a product depends on retail advertising and in-store promotion, key roles often fulfilled by retailers.

If promotion is successful, the manufacturer might abuse its newly gained reputation by raising the wholesale price, putting the retailer's investment in jeopardy. If the retailer over-promotes the product with excessive price cuts, the brand image of the manufacturer might suffer. As a result, the manufacturer has to monitor the operation of the retailer, producing extra transaction costs.

Chen said private branding is traditionally considered a practice that triggers channel conflicts, but his theory instead sees it as a way to reduce channel conflicts.

"Private branding becomes a solution to this problem," said Chen.

Chen's findings also show retail chains often invest more in advertising and promotion of privately branded products than those branded by the manufacturer.

He suggests a simple test to determine whether the manufacturer or retailer should brand a product: whoever contributes more to the success of the product should get the branding rights.

"Branding rights should be assigned in a way that aligns the incentives of the parties," said Chen. "This reduces the transaction cost and enhances efficiencies for the benefit of the customer."

Chen's study, "Transaction Cost Implication of Private Branding and Empirical Evidence," will be published in an upcoming edition of Strategic Management Journal.

Details of the research were released today in the February edition of impact, an online monthly publication featuring new research from faculty at the Richard Ivey School of Business. To read the full article, click here: http://www.ivey.uwo.ca/publications/impact/vol16no2-chen.htm

Michael Sider, Assistant Professor, Management Communications, also discusses the importance of effective communication in the workplace. For the full article, click here: http://www.ivey.uwo.ca/publications/impact/vol16no2-ff-sider.htm

 

About the Richard Ivey School of Business

The Richard Ivey School of Business at The University of Western Ontario (www.ivey.ca) offers undergraduate (HBA) and graduate degree programs (MBA, Executive MBA and PhD) in addition to non-degree Executive Development programs. Ivey has campuses in London (Ontario), Toronto, and Hong Kong. Ivey recently redesigned its curriculum to focus on Cross-Enterprise Leadership - a holistic issues-based approach to management education that meets the demands of today's complex global business world.

 

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For more information, please contact:
Dawn Milne, Richard Ivey School of Business, 519-850-2536, dmilne@ivey.ca