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Policy Study

Policy Study

The Economic Effects of Expanding Private Brand of Large Retail Chains

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  • Author LEE. Jinkook
  • Date 2017/02/28
  • Series No. Policy Study 2017-02
  • Language Korean
SUMMARY Large retailer’s private brands(PB) originally started out as Me-too commodity of manufacturer’s brands. In recent years, however, PB is pulling the growth of domestic retail market based on product diversification and quality improvement. This paper analyzes the growth trends and growth factors of PB market in Korea. Further, the paper constructs micro-level PB data and conducts surveys over a thousand manufacturers in order to estimate how the growth of PB market affects overall sales and profits of retailers and manufactures.

The results show that the growth of PB market has been driven by structural changes of retail industry, including a market dominance of large retailers and an increased competition among them. In addition, the study indicates that the growth momentum has shifted from large retail industry to convenience store industry since the late 2000s.

The regression analysis finds that an increase in PB sales tends to raise overall sales and profits of large retailers. This verifies the economic incentives of large retail store who have struggled for increasing PB sales. Regarding effects on the manufacturing industry, the increased PB sales is likely to enhance the overall sales of small business, without affecting their profits. This discrepancy between sales and profits is found to be driven by unfavorable division of profits, applied to small manufacturers.

Finally, the survey results reveal that high level of substitution between PB and NB can further reduce the opportunity for NB launches, and that manufacturers tend to respond passively to unfair trade practices, mainly due to their concerns about potential disadvantages they may receive from large retailers.
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