Alvis, Ronald G.

Beck, Robert L.

English

Research Papers in Economics

SOUTHERN  JOURNAL  OF AGRICULTURAL  ECONOMICS  DECEMBER  1975
PRIVATE  LABELING  OF MILK  AND
THE  IMPACT  ON MARKET STRUCTURE
Robert L.  Beck  and Ronald  G.  Alvis
INTRODUCTION  of private labeling in the dairy industry as asso-
ciated  with changes  in  market  structure  from
Branding,  as  a  means  of product  differen-  a broad national market perspective.  For many
tiation, is a practice of long standing in the food  dairy products this approach is logical since their
industry. Historically, food manufacturers  have  market tends to be national in scope. Fluid milk
used  brands  as  a  means  of  gaining  a  larger  markets,  however,  differ.  While  market  areas
share  of the  market  while  avoiding  the  conse-  have greatly expanded in recent years, fluid milk
quences  of  direct  price  competition.  Merchan-  markets are still considered to be somewhat local
dising  food,  particularly  dairy  products,  under  in nature.
private  label brands,l  however,  is a practice  of  Thus, this study was  an attempt to  analyze
more recent origin.  the effect of private label brands of milk on the
Introduction  of private label  brands of dairy  structure  of local fluid  milk  markets. Through
products can be traced to that period of the 1920s  personal  interviews with plant managers,  data
when  private  label  brands  of evaporated  milk  were  obtained relative  to: (1)  initial changes  in
first  appeared  in some  markets.  This  was  fol-  the  number  of competitors  and market  shares
lowed  by private  label  brands  of butter  in  the  with  the introduction  of a private  label  brand
1930s and fluid milk and ice cream during  the  of milk into  major fluid  milk  markets  in  Ken-
1950s  [6, p.  44].  tucky and (2) management's reactions about the
Today,  private  label  brands  account  for an  effect  of private  labeling  on market  structure.
increasing  portion  of  dairy  products  moving
through  the  market  system.  For  example,  a  ROLE  OF PRIVATE  LABEL  BRANDS
recent  study  involving  major food  chains  oper-
ating in Kentucky and the North Central region  Crucial  to  any  inquiry  into  the  impact  of
showed that two-thirds (65 percent) of the chains  private  label brands on  market structure  is  an
interviewed  had  some  type  of  central  milk  understanding  of their  role in marketing  milk.
buying  program.  Seventy  percent  of the  food  In theory,  brands have  been treated solely as a
chains  with  central  milk programs  (excluding  means  of  product  differentiation  and,  thus,  a
chains which owned and operated their own milk  nonprice competitive device used primarily as a
processing  facilities)  carried  their own  private  way of avoiding the consequences  of direct price
label brand of milk which accounted  for 56 per-  competition.  Chamberlin  discusses  product
cent of their fluid milk  sales [5,  p.  iv].  differentation  as  a  method  whereby  a  seller,
This increased use of private label brands of  operating  under  conditions  of  monopolistic
fluid milk has no doubt influenced  the structure  competition, separates his market from those of
of fluid milk  markets.  Studies  in  recent years  his rivals [4].  Bain recognizes the importance of
have tended  to  focus  on the extent  and growth  product  differentiation  as  a  significant  struc-
Associate  Professor,  Department  of  Agricultural  Economics,  University  of  Kentucky  and  Assistant  Economist,  McDonald  Cooperative  Co.,  Flint  Michigan.
The  investigation  reported  in  this  paper  (Journal  Article  No.  75-1-2)  is  in  connection  with  a  project  of the  Kentucky  Agricultural  Experiment  Station
and is published with approval of the Director.
1
Private label refers to merchandise packaged mainly to a distributor's specifications for resale only by that distributor under a brand name owned by the distributor.
155tural variant from the standpoint of influence on  Number of competitors
the conduct and performance of sellers operating
within  the markets  [1].  In both  cases,  product  An  attempt  was  made to  get  some  idea  of
differentiation (branding) is dealt with primarily  changes  in  structure  by  asking  handlers  to
in terms of nonprice competition.  Thus, the role  identify instances when competitors  left a mar-
of brands  in  our imperfectly  competitive  theo-  ket following the introduction of a private label
retical  framework  is  that  of  a  nonprice  com-  brand.  Managers  identified  a total  of 21 firms
petitive device,  that had left seven major market areas because
Some  evidence  suggests  that  private  label  of competition  from  private  label  brands.  The
brands have begun assuming the role of a means  number of competitors  eliminated ranged  from
of direct price competition.  In this changed role,  one to seven per market.
private  label  brands  become  a  vehicle  for  en-
gaging  in  direct  price  competition  at  both the  Market Shares
wholesale  and retail levels  [2,  3].
Accepting  this  changed  role  helps  explain  To evaluate the impact of private label brands
the  accelerated  growth  rate  of  private  label  on market shares, managers were also asked to
brands  in  fluid  milk  markets.  Because  they  estimate theirshare of the marketoneyear prior
provide an effective method of engaging in direct  to  and  one  year  followi  tein  the  introduction  of
price competition, both fluid milk processors and  private  labels in various  markets  in the state.
retail  food  chains have become involved  in pri-  These  estimates,  plus  data from  other sources,
vate  labeling.  The processor engages  in private  provided the basis  for an  examination  of three
labeling to remain competitive, pricewise, in the  selected markets (Lexington, Paducah and Bow-
market and to retain counter space in the super-  ling Green) in detail. The results are summarized
market. The retail food chain uses private labels  in Table  1.
as a means of vertical integration either through  The reason  most often  given for changes  in
owning and operating  milk processing facilities  firms' shares in a particular market was usually
or  contracting  through  a  central  milk  buying  associated  directly  or  indirectly  with  private
program. In either case, the objective is to secure  labeling. Market shares decreased in some cases
their own brand of fluid milk that will retail at a  because  private  labels had come  into a market
lower price than the processor brands.  area  and  had  obtained  some  of the  wholesale
Therefore,  the  consequences  of introducing  business.
a private label brand of milk into a local market  Some  processors  lost  an  outlet  because  a
may differ substantially from that of introducing  retailer started packaging his own brand. In this
an  additional  processor  brand.  The  remainder  situation,  handlers  were  dealing  with  a  food
of this paper is devoted to an examination of the  chain that had entered into processing  and was
impact  of private  labeling  on  the  structure  of  supplying its own retail stores.
local fluid milk markets.  Some  processors,  who  had  been  packaging
private labels for retailers, lost accounts. Others
lost shelf space  in the store. This is not uncom-
RESULTS  AND DISCUSSION  mon,  since the  retailer  controls the  amount  of
space  allotted  to  each  brand.  Some  handlers
Effect of Private Label Brands on Market Structure  refused to process private brands and as a result,
Market  structure  is  more  inclusive  than  lost a share of the market.
either the number of firms operating in a market  Firms increasing their shares in some  mar-
or  the market  shares  controlled  by each  firm.  kets  did  so  through  either  (1)  negotiating  a
Since  these  are  frequently  used  measures  of a  contract  enabling them  to supply  one  or  more
change  in  structure,  much  of  this  analysis  private  labels  or  (2)  obtaining  increased  shelf
centered around changes in number of firms and  space in stores.
market shares  when a  private  label brand  was
introduced  into a market.  Overall  effect  of private labeling introduced  into a market.
The  analysis  is  divided  into  the  following  To further study the impact of private label
parts: (1) managers' responses regarding impact  brands  on market structure,  managers  of fluid
of private  label  brands  on  number  of firms  in  milk processing plants were asked to expess  an
local markets, (2) shifts in market shares and (3)  opinion  about  various  statements  concerning
managers'  reactions  about  the  overall  effect  of  market  structure.  They  were  asked  to  assign
private  labeling on market structure.  numerical  values  to  these  statements  ranging
156from  -99  (strongly  disagree)  to  +99  strongly  Table  2.  REACTIONS  OF  MANAGERS  TO
agree).  All  were  asked to respond  regardless of  STATEMENTS  CONCERNING  THE
whether  private  label  brands  were  packaged  IMPACT OF PRIVATE  LABEL  BRANDS
by their firm. Thus, the analysis could be divided  OF  MILK  ON  MARKET  STRUCTURE,
into two parts, responses  of (1)  those  who  pack-  KENTUCKY  FLUID  MILK  PROC-
aged private label brands and (2) those who  did  ESSORS,  1972
not.  The individual  statements,  means,  and  F
values  are shown  in Table  2.
Mean  Score
With  Without
____________Statement  Private Private
Label  Label  F  Value
Table  1.  NET CHANGE IN MARKET SHARES OF  1.  Private  label  contracts  are  advantageous
to  large  processors  45.6  65.4  0.08 FLUID MILK PROCESSORS  IN SELEC-
2.  Private  label  brands  of  fluid  milk  have
TED KENTUCKY  MARKETS  PRIOR TO  forced  some  small  processors  out  of
business  59.9  59.6  0.00 AND  FOLLOWING  THE  INTRODUC-
3.  Private  label  brands  of  fluid  milk  have
TION  OF  PRIVATE  LABEL  BRANDS  forced  small  processors  out  of  some
markets  44.2  58.2  0.58
4.  Private  labeling  is  one  way  for  re-
Market Shares (Percent)Reason  for  Change  tailers  to  gain  market  power  59.8  57.1  0.03
Reason  for  Change
Prior  Following  5.  Private  label  brands  inject  a  greater
Lexington  market  (population:  131,000)  degree  of  risk  fris  in  processor  because  business  is  in  large  lumps  79.4  51.7  5.02
Processors
6.  Private label  brand  contracts  between
B  10  35  Packaged  the  private  label  brand  staility  in  markets  34.  59.0 
C  20  30  Paper  containers C  20  30  Paper  containers  stability  in  markets  34.6  59.0  0.66
D  15  10  Loss  to  private  labels
E  25  *  Out  of  business
F  10  *  Out  of  business
G  *  2  Expansion  of  distribution  area  *Analysis of variance was used to test
H  *  1  New firm
I  *  1  Expansion  of  distribution  area  for  differences  in responses  by  the  two  groups
J  *  1  Expansion  of  distribution  area
(those  that packaged  private label brands and Paducah  market  (population:  34,008)
Processors  those  that  did  not)  to  each  statement.  An  ob-
A  2  4  N/A  served value of F greater than the value given in
B  7  *  Lost  counter  space  to  private  label  e  t  gi
C  4  8  Packaged  one  private  label  the  F-distribution  table  at  .05%  signficance
D  55  57  N/A
E  32  30  Loss  to private  labels  (4.24) indicates a significant difference between
F  *  1  Expansion  of distribution  area  the two  groups. the two  groups.
Bowling  Green  market  (population:  28,000)
Processors
A  25  35  Packaged  private  label  **Significant  difference  at  the
B  45  45  No  change  5%  level.
C  20  Out  of  business
D  1  *  Out-of-state  firm  - retraction
E  9  *  Out-of-state  firm  - retraction
F  *  15  Expanded  distribution  area
G  *  1  Expanded  distribution  area
H  *  1  Expanded  distribution  area
I  *  3  Expanded  distribution  area
It has generally  been  accepted  that private
aMarket shares were computed  from  label  accounts  are particularly suited to large-
a combonation  of primary data collected  from  scale  processors.  Since  many  such  accounts  are
processors and data from other sources.  For the  with  food  chains,  the volume  required could  be
Lexington and Bowling  Green markets, the com-  quite large. All respondents tended to agree that
parison was made during the period of one year  private  label  accounts  are  advantageous  to
prior to and one  year following  the introduction  larger firms.  It is possible,  too, that some  firms
of private label  brands. Because  of limited data  might not be able to handle certain private label
for the Paducah area, the comparison was based  accounts because  of the size  of their operations.
on market shares two  years prior and one  year  A reduction in the number of firms operating
following,  in  any  market could  come  through  processors
being  forced  out  of  a  market  area and/or  out
*Processor either entered or left mar-  of business.  If a processor is given  the chance  to
keting  area  during  the  period  under  study.  handle a private label account and refuses to do
157so,  someone  else  will  probably  be  more  than  counts, rather  than on any formal  contractural
willing.  It is also possible that a  processor  will  basis.
not be given the opportunity to package a privateOBSERVATIONS  AND IMPLICATIONS
label.  In either case,  much needed volume  may
be lost. Managers of both groups tended to agree  Evidence suggested that private label brands
that small processors had been forced out of some  of milk had indeed affected the market structure
markets  and,  in  some  cases  out  of  business,  of the three  local  fluid  milk  markets  studied.
because of private label brands.  While some instances of firms being forced out of
There has  been concern over the possibility  a market area were cited,  perhaps the greatest
that  retailers  have  gained  market  power  via  recognizable  shift  occurred  in  market  shares.
private label brands.  Retailers know that these  Although  small  shifts  in  market  shares  are
brands will sell and are shifting to them. There  normal and expected for most markets, the most
is  some  competition  for  private  label accounts  noticeable  shifts  recorded were  attributable  to
and  competition  usually  breeds  lower  prices,  introduction  of  a  private  label  brand  into  a
better service or both. Again, these lower prices  market.
could be extended to the processor's  own brand,  This leads  to  some  interesting  implications
thereby giving an impression  of increased  mar-  for  both market  structure  and the competitive
ket  power.  Individual  handlers  appeared  that  behavior of firms. First, the lumpiness of private
some  bargaining  power  had  shifted  to  the  label accounts leaves firms in a vulnerable posi-
retailer.  tion because the  loss of one  account could shift
If a processor  has most of his business  con-  market shares drastically.
centrated  on  trying  to  fulfill  private  label  ac-  Secondly,  private  label  brands  can  have  a
counts, there is always the possibility that these  significant influence on barriers to entry of new
accounts will be terminated suddenly, leaving a  firms. Characteristically,  private label accounts
firm  with  much  less  business than  before.  An  are relatively  large.  The small firm is not only
extreme case could cause the firm to close. While  unable  to handle  such  accounts  but would  be
processors  expressed  similar opinions,  a signifi-  at a competitive  disadvantage in trying to com-
cantly greater  number  of those  packaging  pri-  pete pricewise in a market dominated by private
vate  labels were aware of the increased risk as-  labels.  Thus,  both  the  number  of  firms  in  a
sociated  with  private  label  contracts.  Perhaps  market  and  market  shares  become  inaccurate
some  processors  had  actually  experienced  the  measures  of the  competitive  situation in  some
sudden  loss  of an important  account,  whereas  given  market.  The  presence  of  private  label
those  managers  not  packaging  private  label  brands  injects  a new  dimension into our struc-
brands could only speculate about the possibility.  tural framework.
An  attempt was made  to determine if man-  Private labeling  and shifts in market struc-
agers  thought that a more stable market situa-  ture, in turn, influence the competitive behavior
tion could be brought about through contractural  of individual firms. This aspect has been explored
agreements  between  processors  and  retailers.  more  fully in a previous publication  [3].
Processors  generally  agreed  that variations  in  One final observation:  the reactions of plant
price and volume could be decreased.  However,  managers regarding the overall impact of private
the number agreeing differed in the two groups.  labeling on market structure largely reinforced
Evidently,  fewer  of  those  packaging  private  case study findings. The conclusion reached from
label  brands  had actually  experienced  any  in-  both  sets  of data is  that the  introduction  of a
creased stability. This is not surprising, however,  private label brand of milk into a local market
since  it was found  that  most operated  private  can  and  likely  will  influence  the  structure  of
label  accounts  very  similar  to  their  other  ac-  that market.
158REFERENCES
[1]  Bain, Joe S. Industrial  Organization,  2nd Edition, New York: John Wiley and Sons, Inc.,  1969.
[2]  Beck, Robert  L. "Private  Labeling:  Nonprice  Competition  in Reverse," Journal of Farm  Eco-
nomics, 49:  1401-05, Dec.  1967.
[3]  Beck, R.L. and R.G. Alvis. "Impact of Private Label Brands of Milk on Competition in Fluid Milk
Markets, Journal  of Dairy Science, 57: 746-51,  June  1974.
[4]  Chamberlin, Edward H. The Theory of Monopolistic  Competition, Cambridge: Harvard University
Press,  1947.
[5]  Fallert,  Richard  F.  "A Survey of Central Milk  Programs in Midwestern  Food  Chains,"  USDA,
Marketing Research Report No. 944 (North Central Regional Publication No. 211), Dec. 1971.
[6]  Williams, Sheldon W., et.al. Organization  and Competition in theMidwestDairyIndustries,  Ames,
Iowa  State University Press,  1970.
159I

PRIVATE LABELING OF MILK AND THE IMPACT ON MARKET STRUCTURE

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