Does private-label production by national-brand manufacturers create discounter goodwill?

Discount stores have a private-label dominated assortment where national brands have only limited shelf access. These limited spots are in high demand by national-brand manufacturers. We examine whether private-label production by leading national-brand manufacturers for two important discounters (one hard and one soft) creates discounter goodwill. We estimate a selection model that is based on a sample of 450 manufacturer-category combinations from two leading discounters (Aldi in Germany and Mercadona in Spain), and we show that private-label production is indeed rewarded: national-brand manufacturers that are involved in such practices have a higher likelihood of procuring shelf presence for their brands. Moreover, while powerful manufacturers are intrinsically more likely to obtain shelf presence with soft discounters, manufacturers with less power can compensate for this by producing private labels. No such dependence on power exists for hard discounters.However, not all national-brand manufacturers are equally likely to produce private labels for discounters. We find that national-brand manufacturers are less likely to do so when: (a) they experience more sales growth, (b) it is more difficult to produce high-quality products in a specific category, (c) they invest more advertising support into their brands, and (d) they introduce more innovations. Moreover, a higher price differential relative to the discounter's private labels makes national-brand manufacturers less likely to engage in private-label production for hard discounters.