Canary Categories

Past customer spending in a category is generally a positive signal of future customer spending. We show that there exist “Canary Categories” for which the reverse is true. The more customers purchase in these categories, the less likely these customers are to return to that retailer. The finding is robust and replicates at different retailers.

We show that the effect results at least in part from heterogeneity in preferences: different customers prefer different brands. Because retailers cannot stock every brand, some customers cannot always find their favorite brand. While these customers may purchase on the current trip, they are less likely to return to that store in the future.

We identify four factors that contribute to this explanation: the probability a customer finds their favorite brand, customers’ willingness to substitute brands, the cost and attractiveness of visiting other stores, and expectations about future brand availability. We use both field data and experiments to investigate these factors.

The findings have important implications for retailers’ assortment decisions. We show that the canary category effect arises at least in part because store assortments are not adjusted to local preferences. The existence of canary categories is a signal that local assortments need additional adjustment.