Private label strategy and customer loyalty.

ABSTRACT

Recently, the retailer as a store brand is one of the most important trends in retailing in order to increase their relative market power and their share of the total channel profit pie. Past studies have focused narrowly on either the post-consumption decisions of consumers or on loyalty development, failing to propose and to test a unique framework able to explain the whole evolutionary path of a customer-loyalty relationship. Grounding on the customer loyalty and relationship marketing literatures, our research attempted to identify the variables, private label strategy, intervening in the causal relationship between satisfaction and loyalty. Understanding the image of a retailer as a brand or how brands impact its customer satisfaction and loyalty are important issues both for retailers and the manufacturers who rely on them to sell their own branded merchandise.

In this research, an empirical study involving 245 subjects was conducted to test the model. In order to test the hypotheses underlying the model we run Structural Equation Modeling (SEM) to support the theoretical model and have implications for future research and customer relationship management. The results indicate that customer satisfaction and loyalty has a positive influenced by private label strategy. Keywords: Customer Satisfaction, Customer Loyalty, Private Label

1. INTRODUCTION

Customer satisfaction and customer loyalty is becoming an increasingly important factor in modern retailing--a market characterized by slow growth and intense competition. The extant literature has found the satisfaction-loyalty link by moderating variables. A study by Bloemer and Kasper (1995) went beyond this simple main effect between satisfaction and loyalty. They found that the relationship between customer satisfaction and loyalty was moderated by respondents on the evaluation of the brand choice. Mittal and Kamakura (2001) also address the link between satisfactions and repurchase behavior. Their major findings indicate that despite identical ratings on satisfaction, due to respondent characteristics such as age, education, marital status, sex, and area of residence, significant difference was observed in repurchase behavior. Past researches have cited the factors affecting customer satisfaction and loyalty (Sirdeshmukh, Singh and Sabol 2002) and have also discussed the relationships between them (Bitner 1995; Chaudhuri and Holbrook 2001). Our research has focused on the relationship between customer satisfaction and loyalty was moderated by private label strategy.

Over the past decade, retailers use manufacturer brands to generate consumer interest, patronage, and loyalty in a store. With the growth of competition, retailers compete with manufacturers for consumer pull to increase their relative market power and their share of the total channel profit pie (Steiner, 1993). In doing so, the rise of the retailer as a brand is one of the most important trends in retailing. Private label strategy can help retailers attract customer traffic and create loyalty to the store by offering exclusive product lines and premium products (Corstjens and Lal, 2000). In addition, Private label strategy can help project a lower-price image for retailers, increase their bargaining power over manufacturers and producers of major national brands, and lead to increased control over shelf space (Dunne and Narasimhan, 1999). With the overwhelming success of some private labels in European retail (e.g. Marks and Spencer, Asda, Tesco, Carrefour) and the popularity of President's Choice private label in Canada, strong retail brands have become the source of intense interest (Wileman and Jary, 1997). Some analysts expect that close to 50% of all EU grocery sales will be represented by the top ten retailers by 2005. Therefore, the cumulative power carried by these retailers and their store brands is significant (Lepir, 2001).

The purpose of this article is to (1) integrate the relationship marketing literatures that provide a better understanding of customer satisfaction and loyalty; (2) cast into the conceptual model and the research design, presenting the hypotheses and the method applied for defining the focal constructs and generating measurement scales and (3) present the results of structural equation modeling and discuss the findings of the study, managerial implications and directions for future research.

2. LITERATURE REVIEW

In this article, we present a field study of the effect of store branded product on consumer perceived value and the resulting influence on aspects of consumer behavior with actual shopping behavior used as an example. Satisfaction and loyalty are not surrogates for each other (Bloemer & Kasper, 1995; Oliver, 1999). It is possible for a customer to be loyal without being highly satisfied (e.g., when there are few other choices) and to be highly satisfied but not yet to be loyal. Retailer need to gain a better understanding of the relationship between satisfaction and loyalty to allocate their marketing efforts between satisfaction initiatives and loyalty programs. If, for example, the retailer finds that loyalty is associated with increased store branded product, it could directly focus on enhancing its private label strategy.

Our knowledge of moderating variables that may alter this relationship is very much restricted to macro variables such as the type of industry that firms compete in, the monopolistic nature of the environment, and the difficulty of switching to an alternative option (Jones & Sasser, 1995). Our research attempts to build and extend on the customer loyalty model by introducing moderating variables, private label strategy, that can paint a clearer picture of our understanding of the relationship between satisfaction and loyalty.

2.1 Customer Satisfaction

Satisfaction is generated when the customer's perceived value meets or exceeds his/her expected value. Satisfaction advances the relationship to the subsequent stages through repeated purchases and this serves to enhance the perception of the supplier's reliability. Such advances strengthen the positive attitude towards the supplier (also defined as trust) and allow the development of the relationship towards loyalty (Bitner 1995; Chaudhuri and Holbrook 2001).

Consistent with Oliver (1999), we define satisfaction as the perception of pleasurable fulfillment of a service and loyalty as deep commitment to the service provider. Satisfying the end customer is strategically crucial to all channel members because it is seen as a means to competitive advantage (Day & Nedungadi 1994). Among its most strategic consequences, satisfaction leads to increased customer retention, decreased price elasticity, lower customer acquisition costs, and lower transaction costs (Anderson, Fornell, & Lehmann 1994; Lemon, White, & Winer 2002).

Kamakura and Russell (1989) hypothesized that the consumer's value model has three elements - price, the bundle of tangible deliverables (product/service attributes) and the bundle of intangible attributes. Past researches have consistently viewed customer satisfaction as being central to loyalty and improved financial performance (Anderson, Fornell, & Lehmann 1994). On the other hand, service quality has been found to be important to consumers who are purchasing products (Doyle, 1987; Shycon, 1992). Jillian, Geoffrey, and Lester (1997) indicated that retailers are likely to be able to impact on service quality more than on product quality, or even price. In order to get a more clear relationship between loyalty and customer satisfaction, we will take both sides of the arguments into considerations. Here we focus on the key variables associated with customer satisfaction: product quality, service quality, and relative price.

We have measured customer satisfaction by a single overall item. This decision can be justified considering the complexity of the measurement model, the risk of overlapping among constructs, and the results of the qualitative interviews, during which customers expressed some difficulties in associating the items proposed in previous studies (Oliver 1999) to the construct's facets. Furthermore, in previous studies, where a single item has measured customer satisfaction it has yielded good results (e.g.: Shankar, Smith and Rangaswamy 2003).

2.2 Customer Loyalty

We have defined customer loyalty - in a static perspective--as a latent factor in respect of indicators of behavioral, attitudinal loyalty (Pritchard, Howard & Havitz, 1992), and positive word-of-mouth (Sirdeshmukh, Singh and Sabol 2002). Several researchers in the past have emphasized the importance of considering both behavioral and attitudinal aspects of loyalty (Pritchard, Howard & Havitz, 1992). Behavioral loyalty focuses on the 'value of the customer to the brand' (Schultz & Bailey, 2000). Customer loyalty becomes more meaningful only when it translates into purchase behavior for the firm Purchase behavior generates direct and tangible returns to the firm as compared to the effects of pure attitudinal loyalty (which may be commitment or trust that need not translate into actual purchase behavior). Therefore, it is imperative for a firm to build behavioral loyalty.

"Attitude" has been defined as psychological tendency that is expressed by evaluating a particular entity with some degree of favor or disfavor (Eagly & Chaiken, 1998). Pure attitudinal loyalty of a customer without behavioral loyalty may provide only limited or no tangible returns to the firm. Then, what entails attitudinal loyalty? Attitudinal loyalty has been often defined in the context of brand as it captures the affective and cognitive aspects of brand loyalty, such as brand preference and commitment (Gremler & Brown, 1998). Attitudinal loyalty is similar to affective/cognitive loyalty proposed by Oliver (1999) and represents a higher-order or long-term commitment of a customer to the organization, which cannot be inferred by merely observing customer repeat purchase behavior. Attitudinal loyalty not only indicates higher repurchase intent, but also resistance to counter-persuasion, resistance to adverse expert opinion, willingness to pay a price premium, and willingness to recommend the service provider to others.

According to the Bass model (Mahajan et al., 1990), kinds of communication dominate a buyer's decision: advertising and word of mouth (WOM). Money (2004) examines whether customers in Japan and the US who use referrals to find business-to-business services (e.g., banking, advertising and insurance) are more likely to remain loyal to their service providers. He found the implications of the WOM (Word of mouth) referral process on switching behavior loyalty in cross-national and cross-cultural contexts.

Customers' loyalty to a service provider is influenced by their overall satisfaction with that provider. Most prior research has found qualified support for a positive satisfaction-customer retention relationship (Rust & Zahorik, 1993). Bolton (1998) found that the duration of a relationship between a customer and a service provider is longer when the customer is satisfied. Crosby and Stephens (1987) found that prior satisfaction increases the likelihood of a customer renewing her insurance policy. Rust, Zeithaml, and Lemon (2000) propose that the relationship between satisfaction and loyalty is positive, i.e., the more satisfied customers are with a service provider the more loyal they are to the service provider. Reicheld (1996), however, suggests that satisfaction is significantly related to loyalty only at very high levels of satisfaction. Therefore, the exact nature of the relationship between overall satisfaction and loyalty is an empirical issue. Based on these arguments, we hypothesize that:

H1: There will be a positive relationship between satisfaction and loyalty.

2.3 Private Label Strategy

Private label brands have made tremendous in-roads over the past two decades. Although the success of private labels has been limited to certain product categories and segments of consumers, retailers continue to expand the domain of private label offerings. For instance, the Sam's Club division of Wal-Mart Stores recently introduced the Member's Mark line of products in categories as diverse as cranberry juice and automobile tires. Reports have even hinted at the production of private label cars to be sold exclusively through the AutoNation retail network (see e.g., The Economist, 1998).

Sales of private label brands, also called "store brands," have been growing rapidly in recent years. Store brands, particularly when they include the store name or logo in the brand or on the package, can be viewed as an extension of the brand name of the store itself. Store brands represent an extensive and highly complex umbrella branding strategy. Dhar and Hoch (1997) who included the private label branding decision as one of the variables in their analysis of private label market share and found that putting the retailer's own name on the private label is positively associated with private label share. An unsuccessful brand extension potentially damages a parent brand only when there is a high degree of similarity or "fit" involved (Ahluwalia & Gurhan-Cali 2000). Of course, the retailer's image and reputation would be more vulnerable if the expanded product assortment is a private label branded under the store's own name.

Grewal et al. (1998) develop a conceptual model of the effects of store name, self-brand name and price discounts on consumers' evaluations and purchase intentions. Corstjens and Lal (2000) provide empirical evidence of a positive correlation between private label use and store loyalty using scanner data for one product category, and Ailawadi et al. (2001) show a positive association using survey data. On the other hand, Ailawadi and Harlam (2004) find that heavy private label users buy significantly less from a retailer than do medium private label users. Further, none of these studies can attest to the direction of causality in the relationship. As a result, it is by no means clear that private labels increase consumer loyalty to a retailer's stores. Based on these arguments, we hypothesize that:

H2: There will be a positive relationship between Private label strategy and satisfaction.

H3: There will be a positive relationship between Private label strategy and loyalty.

[ILLUSTRATION OMITTED]

3. METHOD

3.1 Sample and Data Collection

We collected data by intercepting shoppers in shopping malls and requesting them to complete a self-administered questionnaire. The questionnaire contained a number of items that were used to estimate the constructs of interest. Specifically, the various constructs were measured using Likert five-point scales. Of the 273 questionnaires distributed, 28 were excluded from the analysis due to incomplete responses. The remaining 245 usable responses represent a rate of 90 percent. Theses were drawn in order to validate the measurement and structural model. To check for response bias, we tested the difference in the means of attributes between the complete and incomplete responses. The test revealed that there was no difference between the two groups of responses. The sample is divided roughly between males (36.7%) and females (63.3%) Table 1 displays key descriptors of the sample.

3.2 Test the Model

Measure development followed standard research procedures (Churchill 1979). Reflective measures were adapted from existing scales, while the formative measures were new. The questionnaire document was peer reviewed and pretested on a student sample (n = 65), and items were reworded or dropped based on the pretest. We tested the assumptions underlying the use of Structural Equation Modeling (SEM). The SEM is a powerful method for electively dealing with multicollinearity (when two or more variables are highly correlated) which is one of the benefit of SEM over multiple regression and factor analysis. Maximum likelihood estimation in LISREL VIII (Joreskog and Sorbom, 1996) was applied to the covariance matrix (Table 2) in order to test the structural equations model. In terms of number of cases, some researchers argued that the minimum cases required to run structural equation analysis were about 200 and/or ten times the number of observed variables in the most complex construct. Anderson and Gerbing (1982) and Gefen, Straub, and Boudreau (2000) demonstrate that the required minimal sample size is around 100-150 cases for LISREL. This study, with 245 cases, is considered to be on the higher side of the required sample size to run the LISREL program.

4. RESULTS

4.1 Overall Model Evaluation

Determination of rejection is based on the path coefficients and their supporting statistics. Table3 shows the correlations among the constructs. With evidence of an acceptable measurement model, the structural model was then estimated. The proposed measurement model with two constructs and six indicators showed an adequate fit to the data: X2(12) = 46.53 (p < .01). However, the other fit indices were adequate, with RMR = .28, SRMR = .0052, GFI = .95, NFI = .94, NNFI = .92 and CFI = .95.

4.2 Test of Hypotheses

Table 3 shows the results of structural equation analysis. H1 predicted that customer satisfaction positively influence the customer loyalty. (t-value = 6.68). Our research offered the empirical study to identify the causal relationship between satisfaction and loyalty as in the past literatures. The test of hypothesis 2 and 3, the result reveals that private label strategy is the most significant factor contributing to customer satisfaction (t-value = 3.56) and customer loyalty (t-value = 3.15). This also indicates he reason that why sales of private label brands has been growing rapidly in recent years. Retail self-brands represent an extensive and highly complex umbrella branding strategy and could generate consumer interest, patronage, and loyalty in a store.

5. CONCLUSION

This study has made a number of contributions to the existing body of research on customer loyalty program. In the first place, we have defined customer loyalty as a latent factor in respect of indicators of behavioral, attitudinal loyalty, and positive word-of-mouth. In addition, we focus on the key variables associated with customer satisfaction: product quality, service quality, and relative price. Secondly, past researches have cited the factors affecting customer satisfaction and loyalty and have also discussed the relationships between them. The results of our study articulate the underlying process by which the satisfaction-loyalty relationship can be strengthened and also provides managerial implications of how companies can better manage customer relationships by using such findings. Finally, our research identifies the variables, private label strategy, intervening in the causal relationship between satisfaction and loyalty. Understanding the image of a retailer as a brand or how brands impact its customer satisfaction and loyalty are important issues both for retailers and the manufacturers who rely on them to sell their own branded merchandise.

5.1 Limitations and Future Research

As with most research, this study also has its limitations. We operationalized customer retailer loyalty as the customer's attitudinal and behavioral preference for the retailer. As was mentioned earlier, it should be noted that loyalty as a "relative attitude," an appraisal of a behavioral choice relative to its alternatives (Dick and Basu, 1994). Day (1969) argued that for true loyalty to be in effect the customer must both have a favorable attitude towards a product and purchase it repeatedly. The attitude component distinguishes between true loyalty and "spurious" loyalty due to high switching costs or a dearth of other choices. Because the evaluative nature of attitude towards something, in this case the retailer, may develop over time and have lasting duration (Eagly & Chaiken 1998), this aspect of loyalty includes a more enduring tendency that generalizes across multiple purchase instances. Merging these two perspectives, we conceptualize customer retailer loyalty as the customer's attitudinal and behavioral preference for the retailer when compared with available competitive alternatives.

Also, some limitations might be related to collecting our data and interpreting our results. A first limitation might be the omission of important variables. For example, additional tangible elements in the retail mix such as pricing and promotion, product quality and assortment, and service quality could be added as additional antecedents of trust or commitment. Another potential shortcoming in the study is common method bias. We used one single questionnaire to measure all constructs included, so perhaps the strength of the relationships between these constructs may be somewhat inflated. A third potential limitation is related to the measurement of purchase intention. The true meaning of purchase intention may only be partially captured given that its measure was based on self-reports. Database information could be used as input for measuring actual purchasing behavior. The confidence in our results could be strengthened with access to behavioral data on customer purchase histories that are not subject to potential recall loss. It would then be possible to look at longer strings of purchases and to perhaps incorporate contextual information. These recognized shortcomings could inspire researchers to define their future research agendas.

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Kuan-Chang Kuo, National Taipei University, Taipei, TAIWAN

Kuan-Chang Kuo is a Ph.D. candidate at Department of Business Administration, National Taipei University, Taiwan. Currently he is a Lecturer in Business Administration at De Lin Institute of Technology, Taiwan.

TABLE 1: DESCRIPTIVE OF THE SAMPLE (n=245)

             Count        Percent

Gender

  Male       90           36.7
  Female     155          63.3

Age
-25          41           16.7
25-40        106          43.3
41-55        60           24.5
>55          38           15.5

TABLE 2 COVARIANCE MATRIX

CS1      CS2      CS3      CL1      CL2      CL3      PLS

CS1    0.461
CS2    0.354    0.778
CS3   -0.276   -0.091    1.489
CL1    0.473    0.761   -0.156    3.216
CL2    0.399    0.893   -0.178    2.297    3.322
CL3    0.414    0.782   -0.189    2.241    2.483    2.987
PLS    1.192    2.465   -1.303    3.898    3.943    2.431   81.827

Notes: CS=Customer Satisfaction, CS1=Product
quality, CS2=Service quality, CS3=Relative price
CL=Customer Loyalty, CL1=Behavioral loyalty,
CL2=Attitudinal loyalty, CL3=Positive WOM
PLS=Private Label Strategy

TABLE 3: LISREL RESULTS

Path                    Hypothesis   Symbo       Standardized   t-value
From        To                       I           parameter
                                                 estimate

Customer Satisfaction
  [right arrow]
  Customer Loyalty      H1 (+)       [beta]72    0.61           6.68 **
Private Label
  Strategy [right
  arrow] Customer       H2 (+)       [gamma]21   0.24           3.56
Satisfaction
Private Label
  Strategy [right
  arrow] Customer
  Loyalty               H3 (+)       [gamma]11   0.19           3.15 **

[X.sup.2] 46.53; d.f.=12; p=.000; RMR=.28; SRMR=.0052 ; GFI=.95;
NFI=.94; NNFI=.92; CFI=.95 * Significant at the .05 level.;
** Significant at the .01 level.