Canary Categories

Abstract

Past customer spending in a category is generally a positive signal of future customer spending. Analyses of historical data at two retailers demonstrate that there exist “canary categories” for which the reverse is true. Purchases in these categories are a signal that customers are less likely to return to that retailer. The authors propose an explanation for the existence of canary categories and then develop a stylized model that illustrates four contributing factors: the probability that 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. The analysis uses both field data and experiments to investigate these factors. The findings suggest that canary categories exist (at least in part) because store assortments are not completely adjusted to local preferences. An implication is that canary categories are endogenous to each retailer; the same category may be a canary category at one retailer and a destination category at a competing retailer.