Discounters need to consider if and to what extent manufacturer brand sales ‘cannibalise’ their existing revenues and what their real contribution is to overall category performance. Also, they must be keen on retaining their discount positioning. For manufacturers it is interesting to know if their sales at discounters really come from new brand buyers, adding substantially to total brand sales. Their fear is that discount sales are diverted from their established retail outlets. This would contribute little to total brand sales. Even worse this could upset existing channel partners.

Opportunities and barriers for the manufacturer
Leading brand manufacturers are eager to fill the (limited number of) slots that become available in leading discounters. They see an opportunity to participate in the significant and rapidly growing market position of discounters and to reach the increasing number of shoppers they serve. In addition, brand manufacturers might see an opportunity to slow down the growth of private labels, which is fuelled to a large extent by the growth of discounters.
This is, however, not without a risk. A new channel may cannibalise the sales of existing channels. Existing buyers now have another choice of where to shop for the same manufacturer brands. Such ‘channel cannibalisation’ occurs when customers switch from the regular retailer to the discounter.
The incremental sales of introducing a manufacturer brand in a discount store will be substantially lower if most buyers at the discounters are existing buyers who simply switch stores. In addition, if the store switchers are now able to purchase their favourite brands at considerably lower prices, brand equity may suffer as well.
Channel cannibalisation will also have an immediate impact on mainstream retailers’ brand sales, which can put the manufacturers’ current retail relationships at stake. The continued growth of discounters puts increasing pressure on traditional retailers to operate more efficiently, which they partly try to achieve by putting more demands on their suppliers. Therefore, mainstream retailers are particularly concerned that the price of the popular manufacturer brands at the discounter will be lower than at the regular retailer.
Tough negotiations by discounters might result in an actual selling price at the discounter below the wholesale price charged from regular retailers. Therefore manufacturers need to carefully evaluate the incremental brand sales they hope to achieve, against the severe risk of harming current sales and channel relationships (by reducing sales in other channels or disrupting price levels).

Opportunities and barriers for the discounter
Adding attractive branded products in store is an important avenue for discounters to build stronger store loyalty. A more balanced offering of both private labels and manufacturer brands may enhance the discounter’s performance, as manufacturer brands are known to be major traffic builders that make the store attractive to the most profitable consumers.
Alternatively, discounters are concerned about manufacturer brands’ ‘net’ contribution to their performance. If a major part of manufacturer brands sales is obtained from discount shoppers that merely switch from their typical private labels or other brands to the newly introduced brand, manufacturer brands sales will come at the expense of existing brand sales. In that case the incremental sales might not justify the decision to add more manufacturer brands to the assortment. This product cannibalisation, induced by brand switchers, is a main concern of discounters.
Moreover, in-store brand switching may harm the discounter if the branded alternative provides lower margins than the established offerings. In addition, a major threat of adding manufacturer brands to the assortment in discounters is that discounters lose their focus as a cheaper alternative to mainstream supermarkets and risk evolving into a mainstream retailer.
Both the manufacturer’s and retailer’s decision on whether to add brands to the discount assortment will be affected by the brand’s potential to generate sufficient incremental sales, and by the likely extent of cannibalisation. So far, discounters do not have much experience in selling more innovative, heavily-advertised and frequently-promoted manufacturer brands. Moreover, their focus on offering the most competitive prices makes it unclear to what extent adding more expensive brands will contribute to their own and manufacturers’ incremental sales.

The manufacturer’s perspective
The success of listing manufacturer brands at discounters can be assessed via two criteria: incremental sales (the percentage of total brand sales at the discounter during the first year of the listing that are accounted for by consumers who before the brand introduction did not buy the manufacturer brand at any retailer); and cannibalisation (the percentage of brand sales in the discounter accounted for by buyers of that brand at mainstream retailers in the year before the listing).

Cannibalisation
Figure 1 shows an overview of the levels of cannibalisation across several European countries from the manufacturer’s perspective. Generally, cannibalisation is low in all countries with a majority of brands listed at discounters experiencing cannibalisation of less than 25 per cent (i.e. less than 25 per cent of the brand’s sales at the discounter came from buyers who purchased the brand in the year before at a mainstream retailer).
Spain has the highest number of brands experiencing cannibalisation of more than 25 per cent. Germany – also a market where hard discount is relatively strong – is second in cannibalisation levels. Great Britain however, is the opposite with a much lower percentage of brands experiencing cannibalisation levels exceeding 25 per cent. In Great Britain, discount market shares are lower, so this may indicate a correlation with cannibalisation levels; manufacturers reach mostly new buyers via the discount channel.

Incremental sales
Figure 2 shows an overview of the levels of incremental sales across the countries from the manufacturer’s perspective. Generally, the number of brands with incremental sales of over ten per cent is high in all countries. Spain and the Netherlands have relatively low levels of incremental sales.
Germany shows the opposite picture with highest levels of brands with substantial incremental sales of over ten per cent. This indicates that listing a brand at discounters in the country is quite effective to a manufacturer. In particular, Great Britain and France have attractive levels of both cannibalisation and incremental sales. From a manufacturer’s perspective therefore, these stand out as countries where it would be beneficial to manufacturers to list their brands at discounters.

The discounter’s perspective
Cannibalisation
Figure 3 shows an overview of the levels of cannibalisation across the countries from the discounter’s perspective. Generally, cannibalisation is high in all countries (over 75 per cent) with a majority of brands in categories studied in discounters purchased by existing category shoppers. Spain and Germany have the highest levels of brands which experienced cannibalisation of more than 50 per cent.
Across all the countries, there are fairly high levels of cannibalisation which implies that listing a brand does not attract as many new buyers (in percentage terms) as it does for the manufacturer.

Incremental sales
Figure 4 shows an overview of the levels of incremental sales across the countries from the discounter’s perspective. Generally, incremental sales are low in all countries (less than 2.5 per cent) with a majority of sales of brands in categories studied in discounters coming from people who purchased in the category before.
Great Britain has high levels of incremental sales. In general the results as outlined in the figure show that adding a manufacturer brand only rarely has a major impact on incremental sales for the discounter. This may indicate that many discounters are adding brands to their assortment in order to boost their quality positioning, rather than driving sales (or that adding a brand in the category does not gain enough in terms of appeal to lure many new buyers into purchasing it).

Conclusions
Both suppliers and discounters can benefit from selling manufacturer brands at discount stores. On average, more than three quarters of brand revenues at discounters are not cannibalised, as they come from buyers who have not purchased the brand before the listing. On average, manufacturers experience much less cannibalisation than discounters. Discounters tend to gain less from selling manufacturer brands, as a far lower percentage of the brand sales at their stores are obtained from new category buyers.
Yet, the large variation in cannibalisation losses and incremental sales observed between individual brands strongly suggests that managers should carefully evaluate the potential of each alternative offering before sending it to a discounter. Moreover, brands beneficial to the manufacturer are not necessarily beneficial to the discounter.