November 10, 2005

The Importance of Branding for Big-Box Stores

A friend of mine was recently bemoaning the disappearance of small stores and old-time department stores, where clerks knew the products and had information and advice that we, as customers, could trust. Understandably, he is frustrated when he walks into a Big Box store, asks a clerk a question about a product, and the clerk starts looking at the box to read whatever is there (as if my friend, perhaps because he is a sociologist, is unable to read that information himself).

One reason Big Box stores have become so successful has to do with the success and reliability of brand names and branded products (yeah, yeah, I know changes in technology, the legal environment, and relative factor prices play a role, too):

If we want to buy a standard household appliance, we can search the internet or consumer magazines for information about quality and reliability, and then go shopping; Alex Tabarrok at the Marginal Revolution last year posted on the importance of the internet in this regard.

But even if we didn't have the internet to search for information about product quality, big box stores would still become important by emphasizing low prices for well-known branded products. The strength of the branding replaces our need to rely on store clerks for information.

So when I want to buy something, I just go to a big box store and buy it at a low margin -- there's much less need to rely on knowledgeable clerks because the brand names themselves convey tonnes (hey, we're metric in Canada) of information.

From a different perspective, what I'm suggesting is that the knowledge we have about different branded products is a necessary condition for the existence of many Big Box stores. If we as customers didn't know about the qualities of different brands, or if we couldn't learn about them through experience or word-of-mouth or advertising or the internet or something, then Big Box stores would not be able to just schlep out the merchandise and sell it. If they tried that, customers would not shop there but would go to the full-service stores that provided more point-of-sale information about the products they carried. And without branding, there wouldn't be a free-rider problem that is so often identified with resale price maintenance arguments.

Here is Russell Roberts' excellent piece on the impact of Big Box retailers on the quality of life (link via his piece in Cafe Hayek).

I wonder what will become of the importance of product branding as Walmart develops and markets more of its own, in-house brands and products.

Posted by TheEclecticEconoclast on November, 10 2005 at 09:23 PM