In recent years, most European retailers have been working to develop their distributor own brand (DOB) product lines, sometimes by extending own brand into new categories, sometimes by widening the assortment in categories where it is already present. While the latter option is motivated by strategic image considerations, the decision to enter new categories is based on the popular belief that introducing own brand improves a category’s overall profitability for the retailer. However, experience suggests that this belief may not always be justified, and that European retailers seldom have the necessary information systems to monitor product profitability in an accurate and timely manner.

Profitability varies by category

When DOB is introduced in a new category, the expectation is that it will improve overall category profitability by: (1) increasing the number of units sold by improving perceived value; (2) reducing average buying costs and, since the reduction is only partly passed on to the consumer, raising the retailer’s absolute margin; and (3) increasing other revenues such as promotional investments paid by manufacturers to counterbalance the additional threat of this "new" in-store competition (Exhibit 1). However, an exhaustive analysis indicates that the...