If your image of an outlet mall is stores stocked with defective goods that retailers want to unload at bargain basement prices, think again. Today, many retail brands have opened outlets as a way to sell an exclusive, though lower-quality, product line at a reduced price. In fact, factory outlets are currently the fastest growing segment of the retail industry.

Despite this, retailers know little about what effect outlet stores have on their customers’ shopping habits. Namely, how does opening an outlet store affect purchases at the retail store?

Perhaps outlet stores capture new customers who would not otherwise shop at the retailer at all. But outlets might also cause retailers to lose customers due to cannibalization or brand dilution. Cannibalization occurs when retail customers shift to outlet stores, lured in by their lower prices. Brand dilution happens when customers start buying less because the lower prices and quality of the outlets’ offerings turn them away from the brand altogether.

Lakshman Krishnamurthi, a professor of marketing at the Kellogg School, and Gonca Soysal, at the University of Texas at Dallas, examined the shopping habits of customers at a large national specialty apparel retailer to explore the impact of opening outlet stores.

Their research yielded good news for brands that adopt this strategy: customers who began shopping at outlet stores also increased their spending at the retail stores. “There was a positive spillover,” Krishnamurthi says.

Careful Comparisons

This study differs from past research in an important way.

Previous studies looked at the effects of “multichannel” shopping: What happens when a brand has a brick-and-mortar store and then begins selling online or through a print catalog? In those cases, essentially the same products are sold in each channel.

“That literature finds that the more channels a customer uses, the more they spend,” says Krishnamurthi. In other words, being given additional channels to choose from seems to reinforce existing shopping habits.

But outlet stores offer customers not just a different purchasing experience, but a distinct line of products. “There is vertical differentiation,” Krishnamurthi says. “There’s a higher-price and higher-quality option, and then you open an outlet where products are lower price and lower quality.”

“Once customers adopt the outlet channel, they increase spending in the retail-store channel.”

For this study, Krishnamurthi and Soysal looked at a leading specialty-apparel company that operates over 300 retail stores and nearly 100 factory outlet stores in the United States. The outlet stores carry their own exclusive products, similar in style and fit to those at the retail stores, but of lower quality.

The researchers analyzed purchasing data from a sample of more than 100,000 customers over a 25-month period. Their dataset included how many items a customer purchased at a specific store and how much they paid for each item, as well as credit-card, debit-card, or check data, which were used to track customers as they moved from store to store.

The researchers wanted to know how starting to shop at an outlet store would affect a customer’s retail-store purchasing habits. But simply comparing groups of existing customers—some of whom shop at outlets and some of whom do not—can be misleading, says Krishnamurthi. “Customers who choose to shop at only the retail store might be completely different from those who shop at both retail and outlet.”

However, the researchers got lucky in this regard because the retailer opened many new outlet stores during the period studied, meaning many customers who had previously lived far from an outlet store suddenly had access to one. This allowed the researchers to zero in on how retail shopping behaviors changed for individual customers when they started shopping at an outlet.

Spending Trends

The researchers found that, overall, the customers who shop at both retail and outlet stores spend about 10 percent less than retail-only customers. “This goes against the generalization you see in the literature, that multichannel customers buy more. We had the opposite finding,” Krishnamurthi says.

But what happened to spending among customers who started shopping at both retail and outlet stores, but previously only shopped retail? The researchers found that these customers actually increase their spending in the retail stores. This suggests that cannibalization and brand dilution are not factors when new outlets open.

Customers who started shopping at an outlet increased their annual retail-store visits from about 3.5 to 5. Over the course of a year, on average, these customers spent an additional $155 at retail stores, which represents a 34 percent increase over what they used to spend there.

“Once customers adopt the outlet channel, they increase spending in the retail-store channel,” Krishnamurthi said.

Outlet-only shoppers were not much of a factor. The researchers found that only two percent of customers in their sample fell into this category.

The upshot is that although customers who shop in both types of stores spend less than retail-only customers—both shopping less frequently and making fewer purchases when they do shop—the overall impact on the brand of having both types of stores is positive.

Of the existing retail shoppers drawn to outlets, Krishnamurthi says, “These are folks who, on average, before the outlet, were lower spenders anyway at the retail store. Once they start buying at the outlet, the positive effect is really nice. They weren’t spending much at the retail store before, but now they’re shopping there more frequently. Now they’re spending more.”

Positive Spillover

What is the explanation for this somewhat surprising “positive spillover” effect?

The researchers hypothesize that it could be the result of customers becoming more comfortable with the brand at the outlet store. This leads them to shop more often at the retail store, perhaps for different items that cannot be found at the outlet.

Soysal suspects that perhaps price-conscious consumers are able to experiment at the outlet store at a lower price point.

“You can take more risk, then move up to the retail channel,” Soysal says.