How Does Adoption of the Outlet Channel Impact Customers’ Spending in the Retail Stores: Conflict or Synergy?

We investigate how adoption of a retailer’s factory outlet channel impacts customers’ spending in the retailer’s traditional retail store channel. In recent years, many retailers have added exclusively sourced factory outlet stores into their channel mix to achieve market expansion and customer segmentation. However, the impact of adoption of this lower‐quality, lower‐price alternative channel on spending at the retailer’s higher‐quality, higher‐price retail store channel is not clear. Customers adopting the outlet channel might increase their spending in the retail store channel because of the opportunity to become familiar with the brand at a lower price point or transfer of positive associations formed through patronage of the outlet channel to the store channel. Customers adopting the lower‐quality channel might also decrease their spending in the retail store channel because of brand dilution or cannibalization. To investigate this issue, we use a unique individual‐level panel data set from a specialty apparel retailer from a period during which the retailer opened many factory outlet stores. This allows us to study how purchase behavior changes after customers adopt the outlet channel while carefully controlling for alternative explanations including customer heterogeneity and selection effects. We find that although customers who adopt the outlet channel spend less with the retailer compared to store‐only customers, the difference cannot be attributed to the impact of adoption of the outlet channel. After controlling for heterogeneity and selection effects, we uncover a positive spillover to the retail store channel from adoption of the outlet channel. Customers who adopt the outlet channel not only make incremental purchases at the outlet channel, but also increase their spending in the retail store channel after adoption. The increase in spending is due to more frequent retail store purchases and not to larger per‐purchase expenditure. This paper was accepted by J. Miguel Villas‐Boas, marketing.