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Summer policy lecture series : the Golden era of private-label brands?

03 Jul, 2018 News Center 1,256

Are you familiar with the current trend of rising popularity of Private-label Brands (PB) in Korea? Retail stores that we encounter most of the time in Korea, like GS25, 7-Eleven, CU, No Brand – are the most well-established examples of privately branded chains of convenience stores. However, how does the rise of the PB affects the well-being of National Brands (NB) and manufacturers? On 27th of June, Jinkook Lee, a researcher from the Korean Development Institute, presented his research on the effects of PB sales on the growth of retail and manufacturing industries and offered policy recommendations in maintaining market balance.

 Current trends in Korea

Private branding (PB), widely adopted by corporations of developed countries (ex.: Aldi & Lidl in Europe; Sainsbury in UK etc.), have become a key tool of boosting the performance of their retail chains. Although PB in Korea is relatively small, its growth has been significant, amounting to 9.3 trillion won, just in 2013 alone. Originally, PBs were cultivated from big discount stores. However, the current big shares of PBs are concentrated in the market of 24/7 convenient stores, which are galvanizing the growth of sales.  

What made the expansion of PB in retail industry possible?

First of all, there must be a market concentration in general retail, which means the retail industry has to have the largest stake in the distribution of manufactured goods, and possess strong buyer power. When retailers have a solid buyer power, they can engage in PB by planning production and labeling the goods to sell in specialized stores.

Second, the competitive spirit of retailers incentivizes them to switch to PBs. Price competition on the store shelves between national brand and corporate retailer products would reduce the price and retail margin. Alternatively, product differentiation offered by PB makes retailers set a stable retail margin and increase profit-maximization.

Who is affected and how?

In the case of retail stores’ sales, the micro-data on sales used in the study showed that an increase in the share of PB sales boosts the sales and operating profit of retailer stores. 1% increase in the PB sales resulted in spurring the profit by 11-33 % increase in sales.

In contrast, top manufacturers are hit by the cannibalization effect – PB sales pressing the NB sales. It may have resulted from the fact that retailers often copy the products of the best-selling NBs and set a cheaper price. 1% increase in the PB sales may incur almost a loss of 1.05 billion won for NBs.

Meanwhile, SMEs and micro businesses are observed to gain smaller profit ratio, and incur larger retail margin ratio than distributing NBs. This disadvantageous profit sharing mechanism for micro-businesses and SMEs are due to an imbalance in bargaining power in the retail industry.

What unfairness exists in the market? What to do?

Survey of firms on the PB development revealed that almost 10% out of 309 PB suppliers received unfair trade requests, such as lowering the supply price (34%), transfer of packaging cost and promotional expenses (22% and 12%), return of products (12%) etc.

With regard to such misconduct in trade, there must be a stricter control of PBs’ operations with disclosed information of the production cost when it is requested by the Fair Trade Commission. Violation of fair transactions must be met with tougher punishments. At the same time, the government should make efforts with market participants to achieve a shared growth in PB. It can only be achieved in the presence of fair transactions, along with negotiations over value-added prices and sales between all market players.

 

 


By Ranat RYSBEK (2017 MPP, Kyrgyzstan)