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August 29, 2025
Are Off-Price Concepts Proven Winners for High-End Retailers?
A new university study finds that when high-end stores open off-price locations, sales at nearby full-line flagship stores decline. However, customer spending increases online by enough to offset the cannibalization.
The researchers at North Carolina State University’s Poole College of Management conducted the study because they noticed a number of high-end retail chains recently opening off-price stores, citing Nordstrom Rack and Saks Off Fifth as examples.
For the study, the researchers analyzed data provided by a large, anonymous high-end retailer based in the U.S. that operates full-line stores, off-price stores, and an online store. During the time frame covered by the data set, the retailer opened 10 off-price stores in the U.S.
Off-Price Stores Can Eat Into Nearby Full-Line Store Sales, Study Suggests, But Online Balances the Scales
A key finding was that when a retailer opened an off-price store, sales at their nearby full-line stores decreased by about 14%. However, customers who live near that store increased their online spending by 18%.
The increase in online spending was focused largely around “both expensive products and ‘fit and feel’ products, such as shoes or clothing,” according to the researchers.
Researchers found new customers (i.e., those acquired via the retailer’s off-price stores) tend to spend less, return products at a higher rate, purchase lower-priced items, and are in a lower-income group compared to the retailer’s “regular,” or typical full-price, customers. Regular full-line customers were found to spend less at the off-price stores, but return their online purchases at a higher rate to the off-price stores as compared to the value-conscious customers.
Off-Price Stores Seen as Return Havens
The researchers concluded that the reason online sales increase is because with the opening an off-price store, customers now have a more convenient location to return items ordered online.
“It’s important to note that while spending at the full-line stores decreases, the overall effect for the retail chain is positive,” said Rishika Rishika — co-author of the paper and director of the Master of Management, Marketing Analytics program in NC State’s Poole College of Management — in a press release. “Customers are spending more.”
The study comes as the big mainstream off-pricers, including TJX Cos., Ross Stores, and Burlington Stores reported second-quarter results ahead of expectations as consumers trade down. The appeal of the treasure hunt shopping experience was also cited as a factor.
Nordstrom Rack, first debuting in 1973, has become Nordstrom’s primary growth vehicle with 277 Racks in operation at the close of 2024, versus 92 Nordstrom full-line stores.
Opening new Rack stores “continue[s] to be an excellent investment as they deliver well in excess of their cost of capital with a relatively short payback period,” CEO Erik Nordstrom said last year on a call with analysts.
He further noted that Rack is Nordstrom’s “largest source of new customer acquisition, accounting for over 40%,” with a quarter of retained Rack customers migrating to the Nordstrom full-price banner within four years.
The CEO also cited the omnichannel benefit identified in the study. Said Nordstrom, “We consistently hear how customers enjoy the convenience of shopping between our banners, taking advantage of the services we offer, including cross-banner in-store returns, buy online, pick up in-store, and alterations.”
Among other high-end stores, Saks operates about 100 Saks Off 5th locations, while Bloomingdale’s operates 16 Bloomingdale’s Outlet locations.
At the mid-tier level, Bloomingdale’s sister banner, Macy’s, operates 20 Backstage locations, including many inside existing Macy’s locations. In the recent first quarter, Backstage outperformed the full-line stores in regions which they both operate by several hundred basis points.
Belk opened its first Belk Outlet in 2023 and has 17 such locations. One luxury chain moving away from off-price selling is Saks-owned Neiman Marcus, which now has five Last Call outlet locations — versus as many as 43 in 2015.
Discussion Questions
Has opening off-price concepts been proven to offer more benefits than drawbacks for high-end department stores?
Are the opportunities and risks in such concepts any different versus mid-tier department stores opening off-price banners?
Poll
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There is nothing wrong with higher-end retailers operating off-price concepts, provided the brand distinction between full-price and off-price is kept clear. The two formats also need a degree of operational separation: off-price cannot simply serve as a dumping ground for unwanted inventory from mainline stores. Nordstrom tried this approach on several occasions, and it damaged sales. Off-price works because of the treasure hunt experience, not because of racks filled with stock that won’t sell at full price.
As for whether running both concepts is successful, the answer depends on the retailer. In Nordstrom’s case, Rack has generated incremental revenue that the mainline business would not have captured alone. There is more incrementality than cannibalization.
A high-end retailer may very well be able to operate an off-price store, just as a oil company or an airline or…any company might be able to operate an off-price retailer (indeed, Mobil once owned Montgomery Ward) …there’s a word for that: conglomerate. The real question, of course, is what synergies can be developed between the two segments; and, as a related issue, does attempting to create – one might argue “force” – those synergies possibly compromise one, or both, of the segments? So far retailers have adopted a middle-of-the-road approach: related, but different names and separate physical stores emphasize that many of the attributes, like full service, are not shared, but other attributes, such as fashion leadership or quality should be. The extent to which that latter premise is fulfilled will determine whether or not the attempt succeeds. Of course the reason for the push is that the high-end segments simply aren’t performing well: this is an expansion driven by weakness, not strength.
It’s also driven by an illogical demand for eternal growth. There’s a great book Small Giants which looks at companies which chose not to grow and remained quite healthy. Unfortunately, markets demand growth no matter how irrational the demand might be. I wrote about this issue in a recent blog post. https://www.douggarnett.com/complexity-in-business/complexity-small-giants-and-the-myths-of-growth/
At the risk of overgeneralizing, I’m thinking that firms that choose to remain small are very personalized (single-proprietors, partnerships, family owned, etc). The downside, of course, is the succession problem. (Frost may have been right, sadly: “Nothing Gold Can Stay”)
Some are. Some are quite large. In his book he considers Anchor Steam, Clif Bar, Righteous Babe Records, and Zingerman’s Community of Businesses. As to Frost, I expect that also includes rapidly growing companies as they, also, cannot stay. The cycle of build, rebuild, decay, re-establish is, I believe, independent of whether someone tries to stay small… Burlingham notes we just don’t hear of the small ones — but only about public companies and VC funded ones — less than 1% of US companies who dominate conclusions about what it takes to succeed in business.
The study looks at one retail chain. So it is useful and interesting but doesn’t tell us of any universal approach. So the answer seems to be “it depends”. My son worked at The Rack for example and encountered many shoppers quite confused between the brands and due to inconsistent policies. My guess – and it’s only a guess – is that stores need to be wary of this approach. Especially, the unexpected long term damage of confused shoppers can turn into quite a serious problem.
Nordstrom Rack accounts for 40% of new customer acquisition, with 25% of those customers eventually migrating to full-price within four years. Once customers experience a brand’s quality and service at off-price, the full-price positioning becomes more justified rather than less; moreover, Rack functions as a logistics hub for online returns.
Can high-end retailers execute off-price without compromising their core brand? The winners will be those who treat off-price as a customer acquisition channel, not a margin recovery mechanism. The losers will be traditional department stores (think Macy’s Backstage) that can’t make this transition effectively. They’re structurally stuck in the middle—too expensive for value seekers, too compromised for luxury shoppers.
There’s a shocker. When given abundant opportunity, customers will trade down. My own opinion is that the off-price business carries more downside than upside. I totally support the off-price business as a vehicle for clearance and liquidation of prior season inventory. The off-price business as a growth vehicle is a dangerous, slippery slope. It’s a study in geography and demographics in addition to being a study in branding, brand promise and marketing. What’s the right balance between regular and off-price? (Store count and sales.) What’s the appropriate proximity of off-price stores to regular price stores? “Sweep.” Is end of season inventory ‘swept’ out of regular price stores and liquidated in off-price stores, thereby enhancing the regular price nature of regular price stores? Or is there a steady diet of sale inventory in regular price stores AND off-price stores…??? It’s the steady diet of ‘sale’, off-price stores, factory stores, TJX, Ross, Burlington, etc, that makes me nervous about the future of regular price stores. Sure, Nordstrom Rack is a customer acquisition and growth vehicle. And my guess is that the financial folks behind taking Nordstrom private will emphasize Rack even more. Gulp.
Is Macy’s happy with it’s frequency of One Day Sales? Is having Backstage in-house turning out to be a strategic success?
What do we think the regular price business is going to look like in 2030 given the currently prevailing thinking about off-price?
Off-price stores do draw sales away from nearby flagships, but they also open doors to new customers and make returns more convenient, which often drives higher online spending. The challenge is finding the right balance.
If off-price is managed thoughtfully, it can support the broader brand and strengthen omnichannel growth. If not, it risks diluting the flagship experience. For retailers, the question is less about whether to pursue off-price and more about how to integrate it without undermining the core brand.