Financial Value of Generic Products to the Retailers

Subject: Branding
Pages: 8
Words: 2232
Reading time:
8 min
Study level: PhD


Product brand name is very important since it enables manufactures to create customer loyalties on their products, broadens consumer awareness expands the branded product in the market. Therefore, branding is very crucial to the marketing strategies of manufactures. In the recent past the retail selves have seen rapid proliferation of unbranded products which have came to be known as generic products. Scholars have used different title to describe generic products. The major features of generic products are in packaging and lack of familiar brand name. Consumers have largely been attracted to these products due to their relatively low pricing as a result of reduced packaging cost and advertisement expenses. Studies have been done to identify consumer perception towards generic products by comparing them with national or international brands, but no study as conclusively gained consumer perception for specific generic products when they are compared to each other.

Financial value of generic products to the discount retailers

Generic products are items owned by the organizations with primary economical goal of distributing them rather than producing them (Dofman & Peter, 1982). The rise of big and well organized retails chains, as seen generic products emerge as a key weapon for battle between the manufactures and retailers in their pursuit to control channels and consumer loyalty (Robert & Matthew, 2003). Kumar & Jan (2007) points that though the retailers have enjoyed an up hand in shelf space allocation in stores and in store promotions for the generic products their market share as not raised exponentially to eclipse the name brand products. Madaan (2009) adds that the generic products have failed to upstage the national brands despite enjoying advantage of shelf space allocation and in-store advertisement mainly due to the customer’s perception that they are of low quality. Keith (1996) note that the generic product saves consumers from 30% to 50% of their grocery bills while at the same time earning the retailer big profit. Moers (2006) points that the selling margins of generic products as increased in the retailer stores while those of national brands are diminishing due to the different pricing of both products, the prices of the generic products as led the consumers to prefer them since they are mostly of the same quality with those of name brand, this as led to low retail selling margins of the name brand. Dofman & Peter (1982), note that the retail grocery are very competitive hence the retail margins of the branded level are very small since the generic products have taken most of the shelves’ space. Peter (2009) opines that the reason for the generic products having an upper hand in the grocery stores over the branded ones is due to the fact that both the products cannot be economically identical since this violates the one pricing law, the manufactures of the branded products have sunk a lot of money in packaging and advertising. Further the difference in the marginal cost is not due necessarily that the generic products are of low physical quality but it is in the use of low cost input by the store brands. Robert & Matthew (2003) echoes the claim and further point that though the final products of both brands may be physically the same and equal in quality the manufacturing cost differs due to the differences in the production technology, the material used and the cost of labor. Studies have shown that quality of the best generic products is almost the same as those of national brand if not equal (Michael & Shapiro, 1989). Further Michael & Shapiro (1989) point that in the evaluation of the both products the generic products have consistently exhibited high quality standards as those in branded products. Moers (2006) argues that the raise in sales of the generic products in the grocery store is due to the fact that recently the products packaging as been enhanced tremendously and their quality improved making them comparable to the national brands. Robert & Matthew (2003) say that the generic product owner do not risk in compromising the quality of their products because it could spell financial disaster to them for being associated with inferior quality products which would spill over to the credibility of their other products and the stores trading those labels. Moers (2006) states that the financial value of the generic product to the retailers is significantly big since they (retailers) are able to bargain lower prices on the products components and vertically incorporate them to do the process themselves instead of having to buy at high marginal costs. Peter (2009) note that the retailers of generic product get value of their money in producing these product without investing much in research and development while the manufacturers of the national brand have to invest substantial sums of money in developing new products and improving the quality of the existing ones. Keith (1996) point that the grocery retailers are shielded from the marketing cost, trade promotions and advertisement of their generic product these as enabled the grocery retailer cut up the expenses hence improving their profit margins while offering low priced products. Kumar & Jan (2007) disagrees by pointing that pushing for the generic brands at the expense of name brand is not the best strategy of increasing the profit margins by the grocery retailers since investment in generic brands coupled by good reputation of one retailer benefits other retailers and these spillovers of reputation limits the potential of generic products from differentiate the retailers.

History of the Sale of Generic Brands at Specific Retailers

Generic brands where first introduced in French retails, the grocery products where put to 38 store and hypermarkets. The generic product packaging was done by wrapped the product with a plain paper and with composition about the product in it. The generic brands where positioned together with name brands and were selling at competitive prices. Within a short period of time the generic product become a successful phenomenal in France (Keith, 1996). In USA the generic brand products where first introduced by Chicago jewel food retailer. The programmed was so successful that the Jewel food store decided to open more generic lines. Peter (2009) notes that the success of the generic brand made many to believe that the brand was one of the significant development that had hit the grocery businesses. Peter (2009) further notes that within six years of generic brand introduction in the grocery business it had recorded a pick of 2.5% of the total national sales in the USA. Wal mart the largest USA grocery seller, sell 40% of its products as generic brands that are produced through contracts between the Wal mart and the manufactures. The wal mart grocery businesses started offering the generic brands in 1991 with the introduction of Sams choice a drink that was manufactured by Cott Beverages specifically for the wal mart. The drink was well accepted by the consumers and within a period of two years it was among the three most popular beverages in USA. Keith (1996) points that wal mart business is rooted in selling the general merchandise at low prices by purchasing large volumes of products for its stores which leads to low price. Great value was introduced by wal mart in 1993 to form a name brand equivalent; this was the grocery branding strategy. The products which where offered in the Great vale chain where said to be of the same quality as those offered by the name brands but where sold at low cost due to the elimination of advertising and marketing expenses the generic products under the Great value line are not among the product produced by the Wal mart but are manufactured and packaged by agriculture and food corporation USA, the Great value line is just a labeling system of Wal mart.

Studies that show the impact that the sale of generic brands has on name brand sales and on the revenues of these retailers

The impact of generic brands to the revenue of name brand is contested in the body of literature. Kumar & Jan (2007) empirically illustrates that the name brand gets smaller sales increase from price drop since their customers are niche and less sensitive to the price reduction, while at the same time the generic brands price drop does not affect them much either. Vithala (2009), argues that big price gaps between the name brand and the generic brand yield more success for the later in terms of the sales volumes hence reducing the sales revenue of the name brand, though he caution that the generic brand volumes is only part of the discounted retailer profitability margins, the retailer has to consider the effect of the price reduction on categories revenues and gross margins. Since he might lose the revenue if the price gap is too big to sustain. In the study by Kumar & Jan (2007) found that the reduction of price by 33% to 55% for the generic brands over the name brand increase there sales volumes but reduces revenues since the price elasticity for the generic brands is low. Thus, the generic brands retailers should focus on increasing the perceived quality gaps in order to improve the store images. With the growth of generic brands the retailers are gearing to assort the name brand products as a result of successful innovations hence they are able to command prices and volumes (Moers, 2006). This has led to increased investment of substantial amounts of money by manufacturer in the field of research and development in order to hit back at the generic products in terms of quality product. Madaan (2009) notes that the generic brands prices as become a very important reference price against which the name brand price are compared to, the comparison as greatly affected the pricing of the nation brands hence affecting there revenue generation to their manufactures. Moers (2006) points that when the retailer improves the quality of their generic products the name brand loses some of their pricing power and the price of there name product they command over the store products. Madaan (2009) observes that if manufactures of the name brands fails to convince their consumers of the high quality of their product it become tough to them to justify their high charges on the same product which is priced lower by the retailers hence losing a segment of the consumers to the store brands. Dofman & Peter (1982), points that faced with the generic brand entry to the market resulting to price competition at low end market some manufactures have innovated high price name products to avert stiff competition from the store brands, since the retailers have no capacity to produce expensive product innovation they are not engaged in making high premium product. Robert & Matthew (2003) notes that with high innovative products the national brand can be able to withstand the generic products onslaught but since there are very little innovation going on the name product front the generic brand are able to close the existing gap of quality and pricing meaning that the national brands loss its market share and to some extent the revenues. Dofman & Peter (1982), note that the increase of market share by the generic products does not automatically led to the increase of profit to the retailers at the detriment of the name brand, they further note that though the profit of the generic brands tends to higher the profit per unit is not always high for these products hence the increase of the market share of the generic may result to low total profit margins overall. If the generic brand share is not accompanied by higher spending at the store the possibility of decline in profitability and total revenue is very high. Robert & Matthew (2003) points that generic products provides point of product differentiation with respect to retailer competition thus improving the customer loyalty to their product , these helps the retailers to compete with the name brand manufactures. Robert & David (1991) agrees and further opines that since the generic brands serves as differentiators there is a like hood of the consumers who like the generic brands will more of their purchases to these products and thus increase the share of spending to these store resulting to high profitability and increment of the revenue. Michael & Shapiro (1989) notes that the generic brands have recently enjoyed increased attention and there revenues is growing at alarming rate. The entry of generic brand the national brand manufactures have been forced to respond by changing there pricing (Robert & David 1991). Further he note that if the national brand and generic product where to receive the same competitive reaction from the consumers then the emergence of market share battle between the generic brand and the name product could be very costly in terms of product promotion and advertisement to the side of name brand manufactures. The studies regarding generic brands have provided useful insight on market segmentation, the studies point that the consumers have continued to prefer the name brand over the store brands despite these brands having low prices. Michael & Shapiro (1989) points that the generic brands have not affect the revenue of the national brand despite there low pricing this as been helped by the consumers rating of the name brand as being of higher quality than the store brand.


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