How private labels are lulling us into higher prices

There has been quite a bit of press lately about the rise of private labels (house brands) in Australian supermarkets like Coles and Woolworths, and speculation about what this means for brand manufacturers.  An IBISWorld prediction cited in The Age has house brands growing from 23 to 30 per cent share of the $70 billion grocery market in the next five years, and companies like Heinz, De Bortoli and Goodman Fielder are publicly lamenting the dominance of house brands.  As most of us visit a supermarket every week, I thought it was worth examining private labels from a behavioural perspective to understand why we are shifting our consumption to house brands. 

How do private labels work from a behavioural perspective?
Private labels are behaviourally persuasive for a few reasons;

• Rules of thumb - in order to deal with the level of stimulation and choices available to us, we operate on auto pilot a lot of the time, using rules of thumb to guide our decision making. Private labels simplify our shopping experience because they create one simple rule - "buy this brand because it is good value".
• Self-herding - private label branding stretches across multiple product categories. The effect is that if I purchase and am satisfied with one category, I will be more prone to repeat my decision for that and extended categories rather than having to trial an alternative brand.  It's worth noting the risk for the private labels here - a poor experience of one category can poison all others. 
• Relativity - to understand whether something is good value, we compare it with similar items.  Our tendency is to stay away from the extremities - too expensive or too cheap - and settle for something that is somewhere closer to the middle.  Amongst others Woolworths have "Woolworths Select" and "Homebrand" and Coles have "Coles" and "Smartbuy"house brands.  This enables them to use one of their brands as their loss leader, leave the supplier's brand as the most expensive and their second brand as the attractive option in the middle. 

How our behaviour is changing the supermarket industry
By influencing individuals, private labels are changing the market in a couple of ways;

• Short-term bias - we are strongly swayed by the immediate rather than long term, and this has significant consequences for the supermarket industry and why brand suppliers are so worried.  We shoppers are buying for now - selecting items that meet our requirements in terms of utility and budget, and house brands are more than ever meeting this brief.  The risk with this behaviour is that through our actions, in this case buying house brands, we are slowly driving brand suppliers out of the market.  We are being lulled into a future of diminished choice, diminished competition and ultimately, higher prices.
• Drop in the bucket effect - along with our short-term bias, it is hard for us to contemplate how our individual purchase decisions can impact the whole supermarket industry.  We think that our actions are simply drops in the bucket that cannot have a broader implication, and this plays right into the hands of the supermarkets who know that engaging an individual is their path to engaging the mass.  

Lessons for other businesses
The rise of private labels clearly shows that shopper behaviour can be changed and new habits formed.  House brands have gone from being a dirty little secret in your pantry to a sign of 'smart' buying.  For all businesses it means that there are opportunities for growth by understanding how to influence consumer behaviour, and what better rule book than the field of behavioural economics to change the game?  See you at the check out.


(Image from http://www.foodmag.com.au/news/demand-for-private-labels-set-to-double-in-2025--r)

Are you the next News of the World?

We are all susceptible to what has happened at News of the World, a UK newspaper that has been shut down on the back of alleged phone tapping.  We are susceptible because each of us is faced with moral, ethical and legal challenges through the course of our work lives, and these challenges are often so iterative, so imperceptible that little by little, the line falls behind us and we may not even realise.  Behavioural economics can help us understand a couple of the forces at play so that we can better withstand these challenges to our personal and professional integrity.

Self-herding

We tend to follow decisions we have made before because it is more efficient, so that if a situation arises that is similar to one we have previously encountered, we default to the road travelled.  The first time a compromised action is taken, it may have been discussed, agonized over and been made reluctantly. But we don’t cope well with cognitive dissonance – trying to hold conflicting views simultaneously – and we are therefore very good at justifying to ourselves the actions we’ve taken.  The seal has been broken and from this point on, we tend to follow our decisions again and again.  Aside from never crossing the line, what can you do to stop the self-herding cycle?  Two things.

First, you need a circuit breaker and this will often come from outside the work culture in which you are operating (after all, that’s where the behavior began).  A mentor, friend, confidante will help you by giving you fresh perspective on your situation and your options, one of which may very well being changing your employment circumstance. 

And second, take yourself back to the first time you made the decision. What were your choices and how do they compare to subsequent decisions?  We can easily fall into the trap of thinking situations are the same because we have a tendency to apply unconscious short-cuts and rules of thumb to fast track decision making, so by forcing our decision-making back to conscious deliberation we can interrupt self-herding.  

As for cognitive dissonance, recognise why you made the first decision and why it made you uncomfortable. Use the sick feeling in your stomach as mental fortitude to not take the action again.

Herding

Whereas self-herding tackles our propensity to replicate decisions we have taken, herding is about following the actions/decisions/values of others.  This is where the culture of an organisation can become absolutely toxic if morally ambiguous behavior is tolerated (let alone encouraged) within a business because more and more staff will be swayed to act in the same way.

What can you do if you want to change a toxic culture?  Get up to speed with the principles of change management. Chip and Dan Heath have written an excellent book, “Switch: How to Change When Change is Hard” which covers the need to appeal to both conscious and unconscious motivations within people to encourage change.  Outlining the penalties of inappropriate behavior (such as phone tapping) in a policy document, may appeal to the rational mind, but not prevent the behavior if it is otherwise condoned. When employees see for example that dubiously sourced articles are published, or that commission is paid on sales made in breach of policy, then those behaviours will continue and spread through the organisation.  The herd is a very powerful force to harness – your challenge is to ensure that the herd is pointing in the right direction for your business objectives.

Always remember that organisations do not cross the line, people do. Therefore understanding two key influencers of behaviour – our own prior decisions and those of the herd – is central to operating ethically, legally and morally, and ensuring we don’t become the latest news of the world.   

As always, if you have a business issue for which you would like a behavioural economics perspective, drop me an email at peoplepatterns@gmail.com. Until next week, happy herding.

Image from http://www.epltalk.com/wp-content/uploads/2011/07/news-of-the-world.jpg