The influence of introducing a premium private label on customers’ assortment satisfaction

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MSc Marketing Management – Peti Sluiter 2

The influence of introducing a premium private label on customers’

assortment satisfaction

Author:

Peti Sluiter

Department:

MSc Business Administration, Marketing Management

Qualification:

Master thesis

Address:

Nachtwachtlaan 491, 1058ES Amsterdam

Student number:

S1927884

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Management summery

Since the late 1990’s, every major grocery retailer developed a credible private label offering. Private Labels (PL’s) can be described as products marketed by retailers instead of the national manufacturers (Keller, 2007). By developing these PL departments stores attempt to differentiate themselves from their competitors’ by introducing combinations of private label brands and national brands (Collins-Dodd and Lindley, 2003). PL’s were often introduced as 'best-value' products, to compete on price. But increasingly, retail chains have improved their quality, and introduced premium private labels in order to raise the image of the chain and to encourage consumer loyalty to the chain rather than to national brands (Steenkamp and Dekimpe, 1997 & Corstjens and Lal, 2000). Because of the highly competitive environment in food retailing, the growth of new product categories and new industry players, it is important for retailers to increase customer satisfaction (Hare, 2003). Therefore, this research indicates how the introduction of a premium PL effects the assortment satisfaction of the customers. Because store attributes such as, quality, price and variety, affect shopping habits and customers satisfaction in grocery chains (Doyle and Fenwick, 1974-1975), this research will find if these store attributes mediates the relationship between the introduction of a premium PL and assortment satisfaction. Besides, it is researched if the hedonic level of the product moderates the introduction of a premium PL and assortment satisfaction.

The central question of this research is: What is the effect of the introduction of a premium private

label on the assortment satisfaction of the customer and how is this effect moderated by the hedonic level of a product?

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Preface

After graduating at the Hogeschool van Amsterdam in Sports and Business my interest in marketing was developed during my job as a project manager for a sports marketing company. I decided to start my pre-master in Business Administration to make it possible to get my master degree in Marketing Management. The result of my journey is this final master thesis, which represents the end of my Master and the beginning of a new period.

I would like to thank my supervisor Laurens Sloot for his advice and feedback. Furthermore, I would like to thank my family and friends for their support during my study and during the process of writing this thesis.

Peti Sluiter

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Index

Management summery ... 3 Preface ... 5 Index ... 6 Chapter 1: Introduction ... 8 1.1 Background problem ... 8 1.2 Problem Statement ... 9 1.2.1 Research goal ... 11 1.2.2 Research question ... 11

1.3 Theoretical and managerial relevance ... 11

1.4 Structure ... 12

Chapter 2. Theoretical framework ... 13

2.1 What are private labels? ... 13

2.2 What is a premium private label? ... 14

2.3 Assortment satisfaction. ... 16

2.3.1 Definition of assortment satisfaction ... 16

2.3.2 Customer satisfaction in retailing ... 16

2.3.2 Perceptions of the assortment ... 17

2.4 Perceived quality ... 17

2.4.1 Definition of quality ... 17

2.4.2 Categorization in quality ... 17

2.4.3 Quality of private labels ... 18

2.4.4 Quality and satisfaction ... 19

2.5 Price perception ... 19

2.5.1 Definition price perception ... 19

2.5.2 Previous research in price perceptions ... 19

2.5.3 Price perception of private labels ... 20

2.6 Assortment variety ... 21

2.6.1 Definition of assortment variety ... 21

2.6.2 Importance of variety for consumers and retailers ... 22

2.6.3 Processing variety ... 23

2.7 Hedonic level of a product ... 24

Chapter 3. Conceptual model ... 26

Chapter 4. Research design ... 27

4.1 Supermarket chain Albert Heijn ... 27

4.2 Experimental research design ... 28

4.2.1. Between-Participants Design ... 28

4.2.2. Choice of product groups ... 29

4.3 Procedure ... 29

4.3.1 Pre-test ... 29

4.3.2 Experiment ... 29

4.4 Scale Development and manipulation of the variables ... 30

4.4.1 Perceived product quality ... 30

4.4.2 Price perception ... 30

4.4.3 Perceived assortment variety ... 31

4.4.4 Hedonic level of the product ... 31

4.4.6 Assortment satisfaction ... 31

4.5 Plan of analyses ... 31

5. Descriptive results ... 34

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5.2 Measuring the control questions ... 35

5.3. Reliability ... 36

6. Hypotheses testing ... 38

6.1 The effect of premium private labels on assortment satisfaction ... 38

6.2 The effect of introducing a premium private label on perceived product quality, price perception and perceived assortment variety, and their effect on assortment satisfaction ... 39

6.2.1 Perceived product quality ... 39

6.2.2 Price perception ... 41

6.2.4 Relationship between the mediators ... 44

6.3 The moderating effect of the hedonic level of the product ... 45

6.5 Revised Conceptual model ... 46

7. Conclusion and recommendations ... 47

7.1 Conclusion ... 47

7.1.2 Perceived quality ... 47

7.1.2 Perceived price ... 48

7.1.4 Hedonic level of the product ... 49

7.2 Managerial implications ... 49

7.3 Academic contribution ... 50

7.4 Limitations and further research ... 51

Reverences ... 53

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Chapter 1: Introduction

1.1 Background problem

Brand assortment is one of the aspects which have become particularly important in the last decade as a tool for retailers to influence their image and develop their own brand name. Most retailers carry manufacturer brands, but increasingly, they also offer private label products (Ailawadi and Keller, 2004). Private Labels (PLs) can be described as products marketed by retailers instead of the national manufacturers (Keller, 2007). PL products may have their own unique brand names or be branded under the name of the retailer (Ailawadi and Keller, 2004). By developing these PL’s departments stores attempt to differentiate themselves from their competitors’ by introducing combinations of PL brands and national brands (Collins-Dodd and Lindley, 2003). This development became big in the late 1990’s, when every major grocery retailer had developed a credible PL offering. Western Europe is the most developed PL region, with PL goods accounting for up to 43% of total consumer packaged goods (CPG) consumption in the United Kingdom. Today, nearly every U.S. and European household has purchased some PL products, and PL’s are present in almost every category in the store (Kumar and Steenkamp, 2007). There are more private labels on the market than ever before (Quelch and Harding, 1996).

Although department stores already sell lots of PL’s, most retailers want to increase their PL shares even further (Kumar and Steenkamp, 2007). This, because private labels provide higher margins on each product compared to national brands and in turn greater profitability, and are therefore an attractive option. The higher margins primarily exist because PL suppliers have little market power, in contrast with national brands. In addition, manufacturers’ advertising costs are high for national brands, and these costs are reflected in higher wholesale prices of the brands (Kusum and Harlam, 2004). Alongside higher margins, PL’s create customer loyalty and create brand recognition (Kumar, 2008) and have a strong visual identity and brand message, which is increasingly being used to retain customer bases (McNeill and Wyeth, 2011).

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MSc Marketing Management – Peti Sluiter 9 premium PL’s is missing in the academic research, while ‘the emerge of the premium PL is one of the hottest trends in retailing (Kumar and Steenkamp, 2007)

A product or a brand can be more hedonic or utilitarian (Batra and Ahtola, 1990). Chitturi,

Raghunathan & Mahajan (2008) stated that utilitarian aspects of a product or brand refer to functional, instrumental, and practical benefits of consumption offerings, and hedonic aspects refer to their aesthetic, experiential, and enjoyment-related benefits. Both of these types of benefits contribute, in differing degrees, to overall goodness of a consumer good, brand or behavior. Many premium PL products are a little more special and different from the other PL- and A-brands. This raises the question: Are customers more satisfied with the assortment when these special, more expensive products are offered in hedonic or in utilitarian product categories?

1.2 Problem Statement

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MSc Marketing Management – Peti Sluiter 10 Introducing a premium PL will change several store attributes. First, the quality level changes. Some studies showed that store brands were becoming increasingly more popular because consumers had greater trust in the quality of these products (Salmon and Cmar, 1987) The changing perceptions may be due to the increased importance that the retailers/distributors are placing on quality control process to maintain more consistent levels of quality as well as on improving quality (Miquel et al., 2002) Moreover, increased investment in research and development and the implementation of strict quality control practices might be a sign of retailer/distributors realizing the important role that quality plays in the success of their PL products (Quelch and Harding, 1996, Hoch and Banerji , 1993). This study will investigate how the perceived quality mediates the effect between introducing a premium PL and the assortment satisfaction of the customers. The question is, if customers trust the quality of PL’s, does their perception of the overall assortment quality increase when a premium PL is introduced?

A second attribute which will be changed by introducing a premium PL is the price. Traditionally, PL’s have been priced below leading national brands. But there has been an evolution from PL’s that offer the consumer a lower quality product alternative for a lower price, to retail brands offering a true quality brand alternative (Burt, 2000). This higher quality brand also increases the price of PL’s. Premium PL’s have often prices as expensive as A-brands and sometimes even higher. Higher prices lead to a higher perceived quality and to a greater willingness to buy. And since Lupton et al. (2010) found that price is the most important purchase variable in buying PL’s, it is important to measure how this price of premium PL’s influence the price perception of the assortment. More products in a higher price category can change the assortment satisfaction level of the customers.

The final store attribute that will change because of the introduction a premium PL line is assortment variety, since it changes the options to choose from. Product variety influences a customers’ perception of a store (van Herpen and Pieters, 2002). In turn, perceptions concerning product variety can influence both satisfaction and store choice (Hoch et al., 1999) There is a growing evidence that customers tend to focus on the set of options they happen to observe in a particular context (e.g., the items on a shelf) and use that set to determine which, if any, of the options is attractive. This study will investigate if changing the assortment variety by adding a premium PL line will increase or decrease the level of satisfaction.

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MSc Marketing Management – Peti Sluiter 11 moderators influence the effect of a premium PL on assortment satisfaction, the probability for success increases and better advise can be given to retailers whether to introduce a premium PL or not. The moderating variable used in this study is the hedonic level of the product.

This study will focus on PL brands in the grocery-retailing industry, where PL’s are especially dominant. To measure the influence of premium PL’s on assortment satisfaction, the Dutch supermarket chain Albert Heijn will be used as a case study. The supermarket chain Albert Heijn is well known in the Netherlands, with 830 supermarkets located all over the country. The premium PL brand of Albert Heijn, AH Excellent, is used in this research to investigate how the assortment satisfaction of customers changes when the premium PL line is introduced or not.

1.2.1 Research goal

The main goal of this research is to get better insights for retailers on how the introduction of a premium private label effects the assortment satisfaction of the customers.

1.2.2 Research question

In this study we will research the effect of introducing a premium private label on the assortment satisfaction of the customers. The research question is:

 What is the effect of the introduction of a premium private label on the assortment satisfaction of the customer and how is this effect moderated by the hedonic level of a product?

In order to answer this research question, the following sub-questions are formulated: 1. What are private labels?

2. What is a premium private label? 3. What is assortment satisfaction? 4. What is the hedonic level of a product?

5. What is the effect of introducing a premium PL on assortment satisfaction?

6. How does the hedonic level of a product influence the relationship between the introduction of a premium private label and assortment satisfaction?

1.3 Theoretical and managerial relevance

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MSc Marketing Management – Peti Sluiter 12 to the study of Nenycz-Thiel and Romaniuk (2009), who found that consumers do see premium PL’s as a different group of brands compared to the value PL’s. In addition, this study looks at how introducing this group of brand contributes to the assortment satisfaction of customers.

The second contribution is to the study of Doyle and Fenwick (1974-1975). They found that store attributes, such as quality, price and variety, effect shopping habits in grocery chains. In this study we go a step further and take a look if these attributes mediates the effect of introducing a premium PL on assortment satisfaction.

Carpenter and Fairhust (2005) showed that utilitarian shopping benefits and hedonic shopping benefits had a positive impact on satisfaction. But makes this a difference when the hedonic and utilitarian products are premium private labels? The last contribution will show if the hedonic level of a product effect the assortment satisfaction if a premium private label is introduced.

From a managerial point of view, it is interesting to know how introducing a premium PL effects the assortment satisfaction of the customer. The benefits of introducing a PL line for the retailer are well known, but with the development of having a three tiered program a retailer has to decide if and which levels of PL’s he is going to introduce. In order to be able to predict purchase intentions and consequently purchase behavior of customers (Tsiotsou, 2005), managers need to understand the role of assortment satisfaction. For example, satisfied customers, influence profit (Anderson et al., 1994), are willing to pay higher prices and in the long run it leads to customer loyalty (Oliver, 1997). When taking this into account retailers can make the decision if a premium private label line fits their strategy and their developed image. If introducing a premium private label changes the price perception, quality perception and/or the perceived assortment variety, a retailer has to take this into account when it considers introducing a premium private label line.

1.4 Structure

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Chapter 2. Theoretical framework

In this chapter the relevant academic literature will be discussed. By using this literature, answers will be found on the sub-questions mentioned in the introduction.

2.1 What are private labels?

The importance of private labels in frequently purchased consumer goods marketing has been clearly established over the past decade. Private labels (PL’s) are products that are marketed by retailers and not by national brand manufacturers (Keller, 2008). PL products may have their own unique brand names or be branded under the name of the retailer. They were introduced as 'best-value' products, to compete on price. But increasingly, retail chains have improved their quality. This, because selling many PL products has many advantages for the retailer. First, PL’s can be used by retailers to differentiate them concerning price and diversification compared to competing stores (Schneider, 2004). By using PL’s retailers can strengthen their position (Quelch and Harding, 1996). Effective marketing of store brands can create a captive clientele and make the chain less vulnerable to price pressures or aggressive attacks by the competition (Dick et al., 1995). Second, the percentage margins on PL’s are significantly higher than on national brands; thus, all else being equal, category percentage margins increase with store-brand share. Other advantages of introducing PL’s are that retailers can gain control over shelf space, can introduce lower prices to customers by controlling the costs, to have bargaining power to the manufacturers (Barta and Sinha, 2000; Tarzijan, 2004), to lessen the dependence of the store on national brands (Quelch and Harding, 1996) and to create loyalty to their store.

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MSc Marketing Management – Peti Sluiter 14 saying they consider some private label brands actually to be of a higher quality. This finding is also consistent with recent trends suggesting that a large number of consumers feel PL brands usually perform as well as or taste as good as nationally advertised brands (Fitzell, 1992). Quelch and Harding (1996) even argue that the more PL products of higher quality there are on the market, the more readily consumers will choose a PL over a higher-priced national brand.

Besides the advantages of PL’s for retailers, consumers may benefit from the growing success of PL brands in a number of ways as well. First of all, a wider variety of high-quality products is available for the customer to choose from. Second, the total expenditure for their shopping basket may be lower. And at least, for consumers who have developed store loyalty, the existence of a store label with a consistently high quality across a wide range of product categories can considerably facilitate the shopping experience (Steenkamp and Dekimpe, 1997).

2.2 What is a premium private label?

As we have seen, there is an evolution from PL’s offering the consumer a lower quality product alternative for a lower price, to retail brands offering a true quality brand alternative, reflecting the application of a clear marketing approach in the retail environment (Burt, 2000). Price may have once been the key to understand growing consumer preference for PL’s, but the proliferation of PL goods and marketing programmes comparable to international brands suggests other drivers may hold greater influence over consumers choosing these products (McNeill and Wyeth, 2011). This is where we find premium PL’s, which are high quality PL’s intended to compete directly with leading manufacturer brands on quality and image, not just on price (Corstjens and Lal, 2000). Premium PL’s are in many retail organizations part of a three tiered PL program. These three-tiered PL programs follow a “good, better, best” approach: They include an economy and a premium PL line in addition to the standard PL that has been around for a long time (Ailawadi and Keller 2004). Whereas economy PLs (also referred to as value or budget PLs) are no frills bottom-of-the-market PL’s that economize on more expensive ingredients to reduce costs, standard PL’s (also referred to as regular PL’s) imitate mainstream-quality manufacturer brands and are positioned as mid-quality alternatives (Kumar and Steenkamp 2007). Premium PL’s are at the top end of the market and deliver quality equal to that of national brands (NB’s) while typically still selling for a slightly lower price.

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MSc Marketing Management – Peti Sluiter 15 suggested that retailers should expand into three-tiered quality offerings as a means to reach a much wider consumer base: “Retailers seeking to expand (PL) share should consider broaden*ing PL+ penetration across … consumer segments through multi-tiered offerings. In order to achieve this wider customer base and a premium position retailers invest in attractive packaging and include words that imply premium, such as Finest, in the brand names. Many premium PL lines are now advertised, and have samples inserted in food magazines and distributed throughout retail outlets (Lincoln and Thomassen, 2008).

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2.3 Assortment satisfaction.

2.3.1 Definition of assortment satisfaction

By far, the most commonly used customer perceptual metric by managers is satisfaction (Gupta and Zeithaml, 2007), this is “because it is generic and can be universally gauged for all products and services” (including non-profit and public services). In research, customer satisfaction is clearly understood by respondents, and its meaning is easy to communicate to managers. The following definition of customer satisfaction can be given: ‘customer satisfaction is identified by a response (cognitive or affective) that pertains to a particular focus (i.e. a purchase experience and/or the associated product) and occurs at a certain time (i.e. post-purchase, post-consumption)‘ (Giese and Cote’s, 2000). Given this definition, a customer’s satisfaction with his/her shopping experience may be an outcome of the value provided by the shopping experience. Applying this to our study, we research assortment satisfaction as the level of satisfaction of the customers about the assortment. So, assortment satisfaction is a response that pertains to the assortment which occurs in a certain time.

2.3.2 Customer satisfaction in retailing

Because of the highly competitive environment in retailing, satisfaction is increasingly more important (Hare, 2003). If the shopping experience provides qualities that are valued by the customer, satisfaction with the store is likely to result (Hudleston et al, 2001). Satisfaction is a delightful degree of post-consumption evaluation or a pleasurable degree of consumption- related fulfilment (Birk, 2007). Thus, satisfaction is a level of overall pleasure or contentment perceived by a consumer, resulting from the quality of the product or service to fulfil the consumer’s expectations, desires, and needs (Mai and Ness, 1999). It is a critical measure of a firm’s success and has been shown to influence attitude, repurchase, and word-of-mouth communication, to be a good predictor of future purchase behaviour, to influence profit, and, in the long run, to lead to customer loyalty. (Huddleston et al., 2009)

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2.3.2 Perceptions of the assortment

Assortment is referred to as the depth of merchandise or the number of different items in a merchandise category. According to Levy and Weitz (2007), ‘the breadth and depth of the assortment in a merchandise category can affect the retailer’s brand image’, thus the retailer’s offer should ‘satisfy the customers’ needs and maintain their brand image with respect to the merchandise category but not too many so that their image is compromised’. Customers’ perceptions of assortment are supposed to affect both store satisfaction and store image positively (Ailawadi and Keller 2004). Since a large number of consumers feel PL brands usually perform as well as or taste as good as nationally advertised brands (Fitzell, 1992), expected can be that introducing a premium PL positively influence the perceptions of the assortment. Even Quelch and Harding (1996) argue that the more PL products of higher quality there are on the market, the more readily consumers will choose a private label over a higher-priced national brand. Therefore the following hypothesis can be formulated:

H1: Customers are more satisfied about an assortment that include a premium private label.

2.4 Perceived quality

2.4.1 Definition of quality

Product quality and product features are considered the most important product choice criteria in a study of Greek grocery customers (Baltas and Papastathopoulou, 2003). Quality can be can be defined as the totality of features and characteristics of a product or service that bear on its ability to satisfy stated or implied needs (Kotler, 2000). Many researchers distinct different categories of quality. Anderson et all (1997) distinct to categories; 1) quality that meets customer needs; and 2) quality that consists of freedom from deficiencies. Quality that meets customer needs refers to the design characteristics of a product-its attributes and features, as well as the way in which service is delivered (e.g., effort by personnel). Freedom from deficiencies refers to the degree to which the design is reliable with respect to the degree of variance customers experience in the set of features, feature levels, and service delivery.

2.4.2 Categorization in quality

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MSc Marketing Management – Peti Sluiter 18 production/operation quality and market quality. The production/operations mechanism improves process and design quality, reduces waste, and realizes operational efficiencies by fine-tuning internal operations. Quality improvements reduce the number of returns, complaints, and labour needed to fix problems with products. These efficiencies improve financial performance by reducing costs and by increasing product reliability, making products more attractive to customers. The market route focuses primarily on using improved quality to increase revenues, leading to higher profits. Customers are expected to compare the quality of products offered by competing companies, and choose the product that they believe to be the best. Quality improvements also attract new customers, enhance retention and loyalty of existing customers, and lure customers away from competitors whose products are perceived as lower in quality. Thus, the ultimate judgment about quality is rendered by the customer and it is relative to the competitors' offerings (Gale, 1994). In addition, customers may be willing to pay premium prices and increase their purchases because of improved quality.

A last categorization specific on store quality is done by Odekerken-Schroder et al. (2001) In this study they distinguish quality in ‘technical quality’, ‘functional quality’ and ‘relational quality’. `Technical quality’ relates to merchandise selection and product availability in the store. It expresses concerns of the consumer with regard to the breadth of the merchandise mix carried by the store, the depth of the various lines of merchandise, as well as the composition of the merchandise selection. Their study considers `functional quality’ as the extent to which a salesperson is courteous, friendly and provides information and assistance through his helpfulness, skills and knowledge. Finally, `relational quality’ is described as the opportunity for customers to interact with other individuals during the retail encounter. Consumers may perceive relational quality as a result of customer-to-customer interactions and friendships as well as customer-provider interactions. In this study the ‘technical quality’ quality of the store will be measured.

2.4.3 Quality of private labels

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H1a: The quality perception of the customer is higher when a premium private label is added to the assortment than when it is not.

2.4.4 Quality and satisfaction

Improvements in quality result in satisfied customers who in turn spread the word through word of mouth, which then leads firms to advertise the high quality of its offerings (Rust, Zahorik, & Keiningham, 1994). Customers are also willing to pay more if they are satisfied with the quality (Homburg, Koschate, & Hoyer, 2005). Rust and Oliver (1994) proposed two differences between perceived quality and satisfaction. They considered perceived quality as a more specific concept based on product and service features whilst satisfaction can result from any dimension (e.g. loyalty, expectations). Moreover, a company can have a certain degree of control over perceived quality. In line, Shah (2009) found that perceived quality was an antecedent of consumer overall satisfaction. Other research has advocated that increases in revenue and profitability through improving quality are achieved primarily because better quality leads to customer satisfaction, (Anderson & Mittal, 2000) loyalty, and customer retention (Bennett & Rundle-Thiele, 2005). Therefore the following hypothesis is developed:

H1b: Perceived quality of the assortment is positively related to assortment satisfaction.

2.5 Price perception

2.5.1 Definition price perception

Measuring price perception is important because it is a variable which influence the value of a product or service given by the customer. Value is “the consumer’s overall assessment of the utility of a product based on perceptions of what is received and what is given” (Zeithaml, 1988, p. 14). Thus, a consumer’s perceived value represents “a trade-off between the quality and benefits they receive in the product relative to sacrifice they perceive by paying the price” (Monroe, 1990, p. 46). Perception is the process by which people select, organize, and interpret information to form a meaningful picture of the world.

2.5.2 Previous research in price perceptions

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MSc Marketing Management – Peti Sluiter 20 product and service innovations. This body of work on price perceptions and adoption of innovations has produced significantly differing findings. Related to price perceptions, Goldsmith and Newell (1997) found shopping innovators to be less price sensitive than later buyers, whereas Korgaonkar and Smith (1986) reported no associations between purchase behaviour and price consciousness. A study of Munnuka (2008) proposed that customers’ price perception of mobile services predicts significantly the customers’ levels of price sensitivity. She suggests that customer’s price perception is closely related on her perception of quality, value and other beliefs. Nagle and Holden (2002) believe that price merely represents the monetary value a buyer must give to a seller as part of a purchase agreement.

Besides these findings about price perceptions, Lichtenstein et al. (1993), argue that price is a multidimensional cue that possesses two roles: positive roles and negative roles. The positive role is the psychological view which explains that consumers may perceive high price as an indication of quality, status, and/or prestige, which positively affects their decisions (Lichtenstein et al., 1990). In this view, the price of a product signals the consumer that the product is of high quality or prestige. The negative role takes a look from an economic perspective, the price of a product can negatively affect consumers’ purchase behaviour. That is, higher prices can repel consumers away from purchasing a product as a result of consumers’ implied monetary sacrifices, in terms of money outlay, and non-monetary sacrifices, in terms of psychological consequences and/or lack of benefits received from the products. These two different roles of price have been found to have strong predictive validity on consumers’ marketplace responses and behaviours across cultures. Consumers in general are likely to use price information to determine products’ value and/or quality (Dawar and Parker, 1994).

2.5.3 Price perception of private labels

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MSc Marketing Management – Peti Sluiter 21 schema formation. Low quality was the strongest negative driver for PL’s and NB’s categorization, with risk as a close second.

Since past research has found that the perceived quality differential is an important determinant of the difference in price consumers will pay for a NB over a PL, the findings of Nenycz-Thiel and Romaniuk (2009) suggest that because of the perceived quality differential, the price elasticity of PL brands, (when prices increase), will be greater than for NBs. A study of Dhar and Hoch (1997) shows that PL brand sales increase as the price advantage towards NB’s grows (Hoch, 1996) and retailers with higher differences in prices between national brands and store brands yield higher market shares for the latter. In a study of Lupton et al. (2010) about differences in perceptions of PL’s between Chinese and US university students, results showed that price is the most important purchase variable for US respondents. The data indicate that customers who are more comfortable with the quality of PL products are more willing to purchase a PL product, especially when the product saves money. Since premium PL’s does not save money and does not have a price advantage towards national brands, we developed the following hypothesis:

H1c: The price perception of the customer is more negative when a premium private label is added to the assortment than when it is not.

Costs can be monetary – thus determined by the sales price of the acquired product – or non-monetary, given that in order for customers to obtain certain beneﬁts, they must use their available time, make physical and mental efforts and even remedy certain difﬁculties that can appear in the purchase process. These two kinds of costs make up the total perceived price associated with the acquisition and therefore perceived price should exercise a negative effect on customer satisfaction (Pedraja, 1998; Pedraja and Yague, 2002). A study of Homburg et al. (2005) showed that there is a negative effect of a price increase on repurchase intentions. This makes the following hypothesis:

H1d: A high perceived assortmentprice is negatively related to assortment satisfaction.

2.6 Assortment variety

2.6.1 Definition of assortment variety

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MSc Marketing Management – Peti Sluiter 22 well formed or are dynamic, perceived variety matters even more because of the desire to become educated about what is available while maintaining flexibility. Variety perception also matters when the variety-seeking motive operates (Hoch et al, 1999). Many studies have been done in assortment variety. In most of these studies assortment variety is seen as the number of options available for the customer within a product category. However, in this study assortment variety can be defined as the diversity of brands within a product category. It is about the differences among the options.

2.6.2 Importance of variety for consumers and retailers

Retailers have long recognized that consumers value the variety of a store’s assortment. Consumers care about variety for a number of different reasons. First, shoppers would rather go to a store and find exactly what they want. Greater variety and larger assortments increase the probability of a perfect match (Baumol and Ide 1956). Therefore, perceptions of variety should influence store choice except when tastes are well defined and purchase is routine (i.e. consumers know what product they want and with certainty which stores carry it). Second, when tastes are not well formed or change over time, variety offers the consumer option value (Reibstein et al. 1975). Perceived variety will matter more when preferences are uncertain and in fact the desire to maintain the flexibility inherent in a varied assortment may be the key factor driving store choice (Kahn and Lehmann 1991). Third, consumers may care about variety because of an innate desire to consume different alternatives within or across occasions. The variety seeking motive is driven by satiation (McAlister 1982) and the need for stimulation achieved through exposure to novel stimuli and changes from the status quo (Helson 1964).

Retailers care about variety because customers value variety. However, whereas customers are almost always better off with greater variety (Huffman and Kahn 1998), firms have to balance the demand side against the supply side (Balderston 1956). Offering more varied assortments increases R&D, manufacturing, distribution, and sales costs. An operations perspective admits heterogeneous tastes, but also recognizes that some esoteric tastes may be too expensive to satisfy. Retailers worry that when consumers do not find preferred items or perceive that a store carries less-varied assortments, they will be less likely to return when searching for or making subsequent purchases. Stated another way, the belief is that short-term response to assortment is less than long-term response.

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H1e: The perceived assortment variety of the customer is higher when a premium private label is added to the assortment than when it is not.

2.6.3 Processing variety

In order to discover how customers value variety, it is important to know how they process variety in a product class. Customers form simplified categorizations or schemas in order to keep track of the complicated knowledge involved with learning about a product class (Alba & Hutchinson, 1987), and then process new information received about the product category according to these schemas. When the external organization of the product assortment (i.e., the arrangement of a retailer’s display of the assortment) is congruent with consumers’ internal schema, consumers are able to perceive the variety of the assortment more easily. This congruency between internal schema and external display organization should also simplify processing of the display, leading to more positive affect about the display and more satisfaction with the assortment (Stayman, Alden, & Smith 1992). This display-driven positive affect and satisfaction with the assortment should lead to higher satisfaction with choices made from the display. However, if the organization of the product assortment in a retail store or on a web page is not congruent with consumers’ internal schema, then the reverse will occur. Consumers will be confused by what they observe and will have to expend additional processing effort to recognize and categorize the various items in the assortment (Biehal & Chakravarti, 1986). Consumers may decide not to expend this additional effort, but even if they do expend some cognitive effort, it may not be enough to understand the differences among the objects (Payne, Bettman, & Johnson 1990), and therefore consumers may not perceive the extent of the variety offered. Furthermore, if consumers are confused and perceive less variety, they will be less satisfied with the assortment offered. So, an important challenge for the retailer is to match the external organization of the product assortment with the consumers’ internal schema in order to make the customers satisfied.

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MSc Marketing Management – Peti Sluiter 24 perceptions of variety, greater perceptions of variety increases determination, and greater self-determination increases consumers’ satisfaction. These results lead to the next hypothesis:

H1f: Perceived assortment variety is positively related to assortment satisfaction.

2.7 Hedonic level of a product

A consumer’s choice of a product or store is driven by both hedonic and functional considerations (Childers et al. 2001; Hirshman and Holbrook 1982) Hedonic considerations relate to fantasies, feelings, fun, and enjoyment. Functional considerations relate to needs, value, fundamentals, necessity, essentials, and problem solving (Barbin, Darden, and Griffin 1994). Besides the hedonic and functional considerations, the product and brand itself can be more hedonic or utilitarian (Batra and Ahtola, 1991).

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H2: The hedonic level of a product moderates the positive effect between introducing a premium private label and assortment satisfaction.

Together this research will research the following hypotheses:

- H1: Customers are more satisfied about an assortment that include a premium private label. - H1a: The quality perception of the customer is higher when a premium private label is added

to the assortment than when it is not.

- H1b: Perceived quality of the assortment is positively related to assortment satisfaction. - H1c: The price perception of the customer is more negative when a premium private label is

added to the assortment than when it is not.

- H1d: Perceived price of the assortment is negatively related to assortment satisfaction. - H1e: The perceived assortment variety of the customer is higher when a premium private

label is added to the assortment than when it is not.

- H1f: Perceived assortment variety is positively related assortment satisfaction

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Chapter 3. Conceptual model

After the detailed theoretical foundation, a conceptual model can be designed. Aim of this thesis is to investigate effects of the introduction of premium private labels on assortment satisfaction, which is mediated by perceived product quality, price perception and perceived assortment variety. Another aim is to find whether the hedonic level of the product and the assortment size moderates the relationship between the introduction of premium private labels and the assortment satisfaction. Based on literature and dimensions of assortment satisfaction we designed the following conceptual model. Relations between variables are explained in our hypotheses in the following section.

+ H2 H1a + H1b + H1c - H1d - H1e + H1f +

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Chapter 4. Research design

The purpose of this research is to detect the effects of introducing a premium private label on assortment satisfaction. In addition we want to find whether the hedonic level of the product type moderates this effect. Before researching these effects, this chapter will start with a short introduction of the supermarket chain Albert Heijn which is used as a case study. Then the research design and the description of the data collection procedure will be discussed. The chapter ends with the scale development and manipulation of the variables.

4.1 Supermarket chain Albert Heijn

To measure the effects of introducing a premium private label line the choice of the shop or brand in which the introduction is made is important. The decision is made to research the premium private label line in the supermarket chain Albert Heijn. The supermarket chain Albert Heijn is well known in the Netherlands, with 830 supermarkets located all over the country. To serve their customers with the right offers at the right place, Albert Heijn has three other store formats besides the normal supermarkets, which are AH XL, AH to go and the AH online web shop.

The assortment of Albert Heijn consists of: - All famous A-brands;

- AH private label, almost 7500 products of good quality for a lower price; (showed in Figure 2) - AH Excellent, more expensive products which are a little different than other products, what

makes it possible to create unique food or unique experiences; (showed in Figure 3)

- AH Puur en Eerlijk, products which are produced or bought with extra care for people, animal, nature or milieu; (showed in Figure 4)

- Euro Shopper, the economic private label products, good products for discount prices. (showed in Figure 5)

Figure 2: AH Private Label

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MSc Marketing Management – Peti Sluiter 28 Figure 4: AH Puur en Eerlijk

Figure 5: Euro shopper

4.2 Experimental research design

4.2.1. Between-Participants Design

This research contains three constructs. One independent variable; The introduction of a premium private label, one moderator; Hedonic level of the product, three mediators; Perceived product quality, Price perception and Perceived assortment variety, and one dependent variable; Assortment satisfaction. It requires causal research to find the effects of a brand store experience, because it involves a causal relationship between an input variable and dependent variable. Causal research that fits with our research problem is an experimental research design (Malhotra, 2010, p. 250). To measure effects of introducing a premium private label line on assortment satisfaction, a Between-Participants Design is used. Four randomly assigned group of the same size are formed, in which experimental conditions will be compared. The experimental research design is showed in Table 1.

Low hedonic level High hedonic level

Assortment without PPL M(SD) M(SD)

Assortment with PPL M(SD) M(SD)

Table 1: Experimental research design

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4.2.2. Choice of product groups

The choice of the product groups showed on the print screen of Albert.nl is very important in this research. If the product groups are not perceived in a correct manner, this will influence the effects and results. Therefore a pre-test is done which will be discussed later in this research. The decision is made to use coffee and chocolate for the hedonic product groups and penne (pasta) and olive oil as utilitarian products. So, one group participants had to give their opinion about penne and coffee, and the second group about chocolate and olive oil.

4.3 Procedure

4.3.1 Pre-test

To be sure that the product groups chosen for this research were perceived in a correct manner, a pre-test is performed. Before the procedure of collecting data, the pre-test showed if the four product groups were reliable and valid. This research is all about perceived experience, so it could be that a consumer does not experience chocolate as a hedonic product. A pre-test with in total 10 people showed that they perceived the product groups (utilitarian vs. hedonic) the way that was expected. To be totally sure that the way in which the product groups are perceived will not influence the results, another manipulation check will be found in the results. This will show how the product groups are perceived by all respondents.

4.3.2 Experiment

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4.4 Scale Development and manipulation of the variables

To measure the three constructs, research has been done to the most appropriate scales. The

questionnaire eventually developed and distributed can be found in Appendix A. The questionnaire is developed with questions based on already existing frameworks from the academic literature, sometimes adjusted to fit this research better. Whether the assortment satisfaction is positive or negative will be measured with a seven-point Likert scale, which is also be done by Reardon and Srivastava (2001), who measured several elements which will be measured in this research as well. Because we want to know if there are differences in assortment satisfaction between the four groups, all groups will get the same questions

4.4.1 Perceived product quality

Regarding to the perceived product quality, the following statements had to be answered based on Huddleston et al (2009) and Reardon and Srivastava (2001); ‘The brands of product X are high quality brands’; ‘I trust the quality of these brands’; ‘The brands of product X have consistent quality’.

4.4.2 Price perception

The prices of the premium private label line of Albert Heijn vary across the categories. Sometimes they are about the same price as the most expensive A-brand, and sometimes less expensive. If these prices are used in this research, this will not give clear results because participants can perceive the prices in one group as less expensive because the premium private label line is less expensive compared to the A-brands. At the other hand, if prices are about the same price as the A-brands they can perceive the assortment as more expensive. Therefore the price will be manipulated by making the private label brand in all product groups as expensive as the most expensive A-brand. Besides this, the price will also be manipulated in combination with the weight of the product. Often, within a product category, the weight of the products varies between brands. Therefore prices can be very different. To make sure this will not have influence on the results, all products showed at the print screen have the same weight, and the prices are re-calculated.

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4.4.3 Perceived assortment variety

The assortment variety will be manipulated by showing two groups the assortment with the premium private label included and two groups the assortment without the premium private label. Adding the premium private label will give the participants other options to choose from. The order of rank will be the same in all situations. The products will be showed in alphabetic order, which is also be done by Albert Heijn on Albert.nl. To measure the perceived assortment variety two sources are combined. The different components are measured by the components of Huddleston et al (2009), as well of Reardon and Srivastava (2001). Participants were asked to answer the following questions; ‘Albert.nl has a large variety of brands within the product group’; ‘In this product group Albert.nl offers the assortment from which I could always make the right decision; ‘In this product group Albert.nl has a good product selection’.

4.4.4 Hedonic level of the product

The hedonic level of the product will be manipulated by showing the participants different types of products. First, the participants see a utilitarian product (olive oil or penne), followed by a hedonic product (chocolate or coffee). To measure whether a product type is perceived more utilitarian or hedonic, six terms of Batra and Ahtola (1991) are used. They reported their development of an eight-item semantic differential scale purportedly measuring the hedonic and utilitarian components of attitude toward products. The following items will be measured for the utilitarian component; useful/useless, necessary/unnecessary, wise/foolish, and the hedonic component by the items pleasant/unpleasant, nice/awful, attractive/unattractive.

4.4.6 Assortment satisfaction

To measure the level of assortment satisfaction of the participants, one question will be asked: How would you rate the assortment of product X of Albert.nl? (rate between 1-10) The higher the rate, the more satisfied the customers will be.

4.5 Plan of analyses

Several tests will be done to measure the hypotheses of this research. The ‘Baron and Kenny Steps’ are used to measure the relationship between de independent variable (X) , dependent variable (Y) and the mediators (M). Some small changes are made in this steps to fit this research better. The ‘Baron and Kenny Steps’ includes the next four steps:

- Step 1: Show that the initial variable is correlated with the outcome. Use Y as the criterion variable

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MSc Marketing Management – Peti Sluiter 32 nominal variable, just a regression analysis will not give clear answers. Therefore a Paired sample T-test will be performed.

- Step 2: Show that the initial variable is correlated with the mediator. The ‘Baron and Kenny Steps’ use M as the criterion variable in a regression equation and X as a predictor. However, because X is nominal in this research, we use again a Paired sample T-test.

- Step 3: Show that the mediator affects the outcome variable. Use Y as the criterion variable in a regression equation and X and M as predictors.

- Step 4: To establish that M completely mediates the X-Y relationship, the effect of X on Y controlling for M should be zero.

To measure the effect of the hedonic level of the product two steps will be taken:

- Step 1: A regression analyses to show if the hedonic level of the product has effect on the

assortment satisfaction.

- Step 2: A regression analysis to measure if the hedonic level of the product has effect on the

relationship between the introduction of a premium private label and assortment satisfaction.

Table 2 gives an overview of how the hypotheses will be measured.

Hypothesis Variables Tests

H1: Customers are more satisfied about an assortment that include a premium private label.

Introducing a premium private label,

Assortment satisfaction

Regression analysis

H1a: The quality perception of the customer is higher when a premium private label is added to the assortment than when it is not.

Quality perception

Paired sample T-test

H1b: Higher perceived quality has a positive effect on assortment satisfaction.

Quality perception,

Assortment satisfaction Regression analysis

H1c: The price perception of the customer is more negative when a premium private label is added to the assortment than when it is not.

Price perception

H1d: A higher perceived price has a negative effect on assortment satisfaction.

Price perception,

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MSc Marketing Management – Peti Sluiter 33 H1e: The perceived assortment variety of the

customer is higher when a premium private label is added to the assortment than when it is not.

Perceived assortment variety

H1f: A higher perceived assortment variety has a positive effect on assortment satisfaction.

Perceived assortment variety,

Assortment satisfaction

Regression analysis

H2:The hedonic level of a product has a positive effect on the relationship of introducing a premium private label and assortment satisfaction.

Introducing a premium private label, Hedonic level of the product, Assortment satisfaction

Regression analysis

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5. Descriptive results

In this paragraph the representativeness, the influence of the control questions on the independent variable and the reliability of the data sample is described.

5.1. Representativeness

In this research, only the Dutch population is used to measure the effects of introducing a premium private label line. Both man and woman were approached, above the age of 18 years old. Different groups of people were asked to fill in the questionnaire. Friends, family, colleagues and relatives filled in the questionnaire. This research focuses on the premium private label line of Albert Heijn. It did not matter if people never shopped at Albert Heijn or often shop at the supermarket. In the questionnaire participants were asked how often they shop at Albert Heijn and later on we will see if this influences the results.

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MSc Marketing Management – Peti Sluiter 35 and 39,7% often shops often at Albert Heijn (go between 5 and 9 times to Albert Heijn out 10 supermarket visits). Albert.nl is not visited by many participants before. 5.1% visited the site many times and 20% did that just a few times. The other 74.4% never visited the website before.

5.2 Measuring the control questions

Now we know that the sample is representative, it can be measured if the control questions have influence on the level of assortment satisfaction. In Table 3 can been seen that none of the control variables have significant effect on the assortment satisfaction of the customers. The persons who are doing the groceries and number of persons in the household have some effect on the assortment satisfaction, but this effect is just not significant.

Mean St. Deviation F-value P-value

Gender - Man - Woman 6,76 6,89 ,85 ,99 2,05 ,153 Age - between 18-34 year - between 35-54 year

- older than 55 year

6,86 6,87 6,80 ,91 1,06 ,86 ,16 ,849 Household - 1 person - 2 persons - 3 persons or more 7,04 6,67 6,89 ,93 1,09 ,83 2,66 _,072 Income - less than €15.000 - between €15.000 and €25.000 - between €25.000 and €35.000 - between €35.000 en €45.000 - more than €45.000 7,04 6,34 6,74 7,04 6,92 ,77 1,23 ,85 ,88 ,87 4,71 ,163

Person who is doing the groceries

- yes - no 6,86 6,84 ,84 1,00 3,79 ,053

Doing groceries at Albert Heijn

- between 0-3 times out of 10

6,73 7,04 6,75 ,92 ,87 ,72 2,29 ,369

Ever done groceries at Albert.nl

- no, never - yes 6,84 6,90 ,91 ,93 ,23 _,599

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MSc Marketing Management – Peti Sluiter 36 The next step is to check the reliability of the constructs variety, price, quality and the hedonic level of the product.

5.3. Reliability

To measure the reliability of our variables a reliability analysis is conducted to check if the scales used were reliable. Reliability can be considered as the extent to which a scale is consistent when measured repeatedly (Malhotra, 2007). In order to determine if our measures are internal consistent reliable, we have applied the Cronbach’s Alpha. The Cronbach’s Alpha coefficient varies from 0 to 1, and a value of 0,6 or more indicates satisfactory internal consistency reliability (Malhotra, 2010, p. 319). This analysis is performed for the variables perceived assortment variety, perceived price, perceived quality and hedonic level of the product.

The first variable ‘perceived product quality’ a Cronbach Alpha of 0,757. ‘Perceived price’ has a Cronbach’s Alpha of 0,708, and ‘perceived assortment variety’, has a Cronbach’s Alpha of 0,848. This means that these three variables are all an internal consistent reliable.

To see if the items used to measure the hedonic level of the product indeed measures the hedonic level, a factor analysis is first applied (Malhotra, 2010). This analysis showed that the items can indeed be factorized into two factors. Both, the measurement of the utilitarian product and the hedonic product showed that we can factor the items into two factors, because at both products the Eigenvalues are then more than 1 (1,44 for the utilitarian product and 1,58 for the hedonic product) and the percentage of variance is also more than 60% (67,293% for the utilitarian item and 77,149% for the hedonic item). Besides, the utilitarian product has a KMO of 0,705 which is more than the critical 0,5 value and a significance level of 0,000 at the Bartletts test and the hedonic product a KMO of 0,714 and also a significance level of 0,000 at the Bartletts test. The component matrix shows that indeed the statements about to what extent the product is wise, useful and necessary belong to the factor ‘utilitarian product’ and the other three statements about to what extent the product is pleasant, nice and attractive belong to the factor ‘hedonic product’. Cronbach’s Alpha for the utilitarian item is 0,718 and when we include all items and for the hedonic product the Cronbach’s Alpha is 0,799. In this research only the hedonic level of the product will be measured, so later on in this research the utilitarian level will not be used anymore.

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Constructs Included measures

Independent variable Introduction of premium private label

Mediator Perceived product quality

(α = 0,757)

- The brands of product X are high quality brands -I trust the quality of these brands

- The brands of product X have consistent quality Perceived price

(α = 0,708)

- Product X is not expensive at Albert.nl

- When you buy product X at Albert.nl, it is a bargain - At many other supermarkets, product X is more expensive than at Albert.nl

Perceived assortment variety (α = 0,848)

- Albert.nl has a large variety of brands within the product group

- In this product group Albert.nl offers the assortment from which I could always make the right decision - In this product group Albert.nl has a good product selection

Moderator Hedonic level of the product

(α = 0,799)

- To what extent do you think product X is pleasant - To what extent do you think product X is nice - To what extent do you think product X is attractive Dependent variable Assortment satisfaction How would you rate the assortment of product X of

Albert.nl?

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6. Hypotheses testing

Now we know that our data is reliable and representative, this chapter will give the answers on the hypotheses of this research. The influence of the dependent variable ‘introducing a premium private label’ on the independent variable ‘assortment satisfaction ’will be measured, as well as the effect of the mediators ‘perceived product quality’, ‘price perception’ and ‘perceived assortment variety’, and the moderator ‘hedonic level of the product’.

6.1 The effect of premium private labels on assortment satisfaction

The first hypothesis formulated in chapter 2 is:

H1: Customers are more satisfied about an assortment that include a premium private label.

With a regression analysis is measured if introducing a premium private label has a positive effect on the assortment satisfaction of the customer. This test showed that when a premium private label is included, the assortment satisfaction is higher (F = 25,408, P = 0,000). To gain more information a paired sample t-test is performed. In Figure 6 can be seen how many participants gave which rate to the assortment. Table 5 shows that participants who reviewed the assortment with the premium private label included rated the assortment significantly higher (M=7,11) than the participants who rated the assortment without a premium private label (M=6,31). Both, regression analysis and the paired sample t-test showed that we accept the first hypothesis, customers are more satisfied about an assortment that include a premium private label.

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Mean St. Deviation T-value P-value

Average rate assortment

excl. PPL 6,31

1,31

-7,39 ,00 Average rate assortment

incl. PPL 7,11

1,08

Table 5: Mean value and significance level of assortment satisfaction

6.2 The effect of introducing a premium private label on perceived product quality,

price perception and perceived assortment variety, and their effect on assortment

satisfaction

The following hypotheses were formulated to measure the effect of the mediators in this research:

- H1a: The quality perception of the customer is higher when a premium private label is added

to the assortment than when it is not.

- H1b: Perceived quality of the assortment is positively related to assortment satisfaction. - H1c: The price perception of the customer is more negative when a premium private label is

added to the assortment than when it is not.

- H1d: Perceived price of the assortment is negatively related to assortment satisfaction. - H1e: The perceived assortment variety of the customer is higher when a premium private

label is added to the assortment than when it is not.

- H1f: Perceived assortment variety is positively related assortment satisfaction

The following paragraphs show if these hypothesis will be accepted or rejected.

6.2.1 Perceived product quality

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Mean St. Deviation T-value P-value

High quality brands (excl. PPL)

4,63 1,29

-1,43 ,155 High quality brands

(incl. PPL)

4,91 1,37

Constant quality brands (excl. PPL)

4,92 1,05

-,19 ,848

Constant quality brands (incl. PPL)

4,95 1,24

I trust the quality of these brands (excl. PPL)

5,00 1,32 -3,30

,001 I trust the quality of these

brands (incl. PPL)

5,56 1,01

Perceived product quality (excl. PPL)

4,84 1,22

-2,02 0 ,05

Perceived product quality (incl. PPL)

5,14 1,21

Table 6: Mean value and significance level perceived product quality

Figure 7: Perceived product quality

To measure the total ‘perceived product quality’ the three questions are combined to one variable. With a paired sample T-test we found that introducing a premium private label has a positive effect on the perceived product quality of the assortment (T = -2,025, P =0 ,046), with a mean of 4,84 for the assortment without the premium private label, and a mean of 5,14 for the assortment with a premium private label. This means that hypothesis 1a can be accepted.