minating a market and even driving out competition – Costco and some other large American chains have done this repeatedly in the US, dotting the map with stores that are within spitting distance of each other. Most retailers, however, try to avoid cannibalising to the extent that it’s possible, attempting to optimise individual store sales by spreading their real estate portfolios. But what about the effect on a retailer’s full-price stores of opening factory outlet stores? This has long been a question for debate – does an outlet store have an adverse effect on sales and profits by transferring sales that would otherwise have been made at the full-price store? In the US, where the modern factory outlet industry started, the centres were usually located well away from urban areas where the full-price stores were. This was partly due to lower land costs that suited the outlet economic model, but it was also underpinned by the widely held belief among outlet retailers that if they were too close to their regular suburban mall stores it would undercut full-price sales. In Australia, factory outlets have always been in (sub)urban areas close to regular retail stores. The better outlet centres trade well, and there has always been a suspicion that cannibalisation occurs to some extent. However, the interactions between outlet and full-price stores are complex and have rarely been clearly quantified. Recently, outlet and off-price centres in the US have been opened ever closer to regular shopping centres. Nordstrom is one highly successful retailer that has been particularly brazen with respect to opening its off-price units close to its full-price stores. In Seattle, it opened one of its off-price Nordstrom Rack stores almost directly across the street from its downtown flagship. Nordstrom’s executives have gushed about the positive interaction between the two store types. One told The Seattle Times that 60 per cent of Rack’s customers also shopped at the regular Nordstrom stores. That tells you there’s a crossover, but still doesn’t eliminate the possibility of cannibalisation and overall reduced sales. Outlet stores a net positive? Now, researchers in the US have formally analysed the relationship between outlet and regular retail stores. They’ve come up with probably the first hard empirical evidence that outlet stores are a net positive for the full-line stores. The study, by Gonca Soysal of University of Texas and Lakshman Krishnamurthi of Northwestern University, is entitled How Does Adoption Of The Outlet Channel Impact Customers’ Spending In The Retail Stores: Conflict Or Synergy?, and has been published in the journal Management Science. The authors obtained a dataset from a large US retail chain consisting of transactions made by more than 100,000 customers over a period of 25 months. Econometric analysis of the dataset revealed some key insights, namely:    Customers who shop at both the outlet stores and regular full-price stores (the authors refer to the latter as ‘retail’ stores) actually do spend less overall across the two channels than customers who only shop at the regular stores ($597 per year versus $658 per year). However, and this is a big point: when multichannel customers adopt the outlet channel, it leads to an increase in spending at the regular store. This positive effect of outlet store adoption on regular store spending is large: a 43 per cent greater probability of shopping at the regular store in a given month. This translates to a 34 per cent increase in spending at the regular store.    There was no clear evidence of cannibalisation. On the third point though, there is a caveat: the authors point out that this particular retailer had permitted only a minimal flow of merchandise from full-price to outlet store. Most of the merchandise in the outlet stores was specifically made for that channel. This is now typical of most US factory outlet retailers – very little of the merchandise is clearance product emanating from the full-price store. The vast majority is ‘made for outlet’. Thus, shoppers see the outlet product as distinct, while still upholding the basic values of the brand. If the Nordstrom experience and the results of the new study are generally transferrable, it indicates that shoppers are becoming acquainted with a brand through the outlet, then upgrading to the full-price store experience. In Australia, the situation is somewhat different, in the sense that the factory outlet stores are still used primarily for clearance purposes. This means it can be more difficult for a retailer to market its outlet store as a clearly differentiated unit (except on price). Does this result in greater potential for cannibalisation? We don’t really know, though everyone will have an opinion. One thing is for sure though – the outlet centre industry worldwide has been one of the most vibrant retail sectors of the past 10 years. Retailers are increasingly leaning towards the belief that having an outlet presence is a net benefit to full-line stores. This new study from the two US academics provides further evidence they are right. Michael Baker is principal of Baker Consulting and can be reached at michael@mbaker-retail.comand www.mbaker-retail.com. Want more Inside Retail? Subscribe to Inside Retail Weekly now and get our premium print publication delivered to your door every week.