External environmental factors can deeply shape customer behavior and contribute to uncertainty in retail operations. In this study, we use field data from a national fashion sporting goods retail chain to empirically study the effect on retail store performance from one important but underappreciated external environmental factor, air pollution; and investigate the potential mechanism of this air pollution's impact. We find that air pollution has an inverted U‐shaped effect on store traffic, which is attributed to a shift of customers between offline shopping and other activities with different air pollution exposure levels. The variation in store traffic caused by air pollution further leads to a U‐shaped relationship between air pollution and the retail conversion rate. In addition, air pollution can affect customer composition as well as the perceived utility of products, reflected by more men's wear and less sportswear sold in hazy weather. In view of the globally increasing air pollution problem, especially in the context of climate change, our findings highlight the importance and value of taking air pollution into account in operations and marketing management.

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