A recent study reveals that high-end retailers opening “off-price” stores, which offer less expensive merchandise, can lead to a decrease in customer spending at their flagship “full-line” stores. However, it simultaneously boosts spending at their online platforms.
“We have recently seen an increase in high-end retail chains opening off-price stores,” said Ram Janakiraman, co-author of the paper and R. Randall Rollins Distinguished Professor of Marketing Analytics at North Carolina State University’s Poole College of Management. “We wanted to see how this trend affects the behavior of existing customers and what that means for a company’s full-line stores and online retail operations.”
The study utilized data from a large anonymous U.S.-based high-end retailer operating full-line, off-price, and online stores. This data encompassed individual customer purchases over at least one year, including product returns.
“To be clear, this data was thoroughly anonymous,” noted Janakiraman. “We only know what consumers purchased, when and where they purchased it, and the metropolitan area where they were located.”
During the period studied, the retailer opened 10 off-price stores across various U.S. locations.
“This data set allows us to see what customer behavior was like both before and after an off-price store was opened,” explained Rishika Rishika, co-author of the paper and director of the Master of Management in Marketing Analytics program at NC State’s Poole College of Management.
Using advanced causal inference techniques on this extensive dataset allowed researchers to analyze changes in customer behavior concerning spending habits and shopping preferences.
“One finding was that customer spending at full-line stores decreased by about 14% when an off-price store opened nearby,” stated Janakiraman.
Rishika added: “Opening of off-price stores is very attractive to value-conscious consumers, which explains the substitution effect – customers who formerly shopped at the full-line stores switch to shopping at the off-price store.”
Additionally, Janakiraman highlighted another key finding: “We also found that when an off-price store opens, customers who live near that store increase their online spending by 18%. This increased spending is focused largely around both expensive products and ‘fit and feel’ products such as shoes or clothing.”
Rishika further elaborated: “This increase in online shopping appears to be driven largely by the fact that opening an off-price store means many customers now have a more convenient location they can use to return items they ordered online.”
While there is a decrease in spending at full-line stores due to these openings, Rishika emphasized: “It’s important to note that while spending at the full-line stores decreases, the overall effect for the retail chain is positive. Customers are spending more.”
Janakiraman concluded: “The relationship between retailers and customers can be extremely complex, and our work offers new insights with implications for high-end multichannel retailers who adopt an off-price store opening strategy.”
The findings are detailed in a paper titled “The Effects of Off-Price Store Opening on the Incumbent Channels of a Multichannel Retailer: Full-Line Stores Versus Online Store,” published in the Journal of Marketing Research. The research was conducted with contributions from Harsha Kamatham from University of Manitoba and Subodha Kumar from Temple University.
