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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.