Don’t Call It a Department Store | BoF Professional, News & Analysis

Retail might be in a state of constant flux, but one thing is for certain: no one wants to be called a “department store” anymore.

Those gargantuan odes to pre-internet convenience — a way of shopping that now often feels disorganised, out-of-touch and above all, unnecessary — represent the past, not the future.

However, Erik Nordstorm, chief executive of the Seattle-based retailer founded by his great grandfather in 1901, said that his generation is not the first to reject the moniker. His father, Bruce Nordstrom, would bristle when people would refer to Nordstrom as a department store. He liked calling it a “fashion speciality store,” instead.

“I didn’t know what he was talking about then, but I do now,” Erik Nordstrom told BoF this week. “That’s just not what we are. The minority of our business is a physical store attached to a mall.”

Call it what you want, but Nordstrom is reckoning with many of the same challenges other multi-brand, multi-category retailers are facing right now. How do you stay above water in an increasingly crowded market where you’re not only competing with hundreds of other multi-brand retailers, but also the brands themselves?

Like many of its competitors, Nordstrom suffered during pandemic lockdowns and expects to be down more than 20 percent in the fourth quarter of its fiscal year, ending January 31, 2021. But online sales have increased, just as they have for other players, and are expected to make up half of the company’s revenue going forward.

The company expects revenue to increase by more than 25 percent in its 2021 fiscal year, surpassing 2019. In the next few years, it projects sales will increase by $3 billion to $4 billion with most of that growth happening in 2021. However, there are further challenges ahead.

“An improvement from the lamentable sales figures does not represent a return to normality, let alone to robust trading,” Neil Saunders, managing director at GlobalData Retail, said in a recent note, adding that he believed, “Nordstrom’s recovery will be slow and painful and that the business will struggle to pick up where it left off before the pandemic hit.”

At Nordstorm’s presentation to investors on Thursday, executives laid out its plan for differentiating itself further from the ever-growing pack of challengers. Will it be enough?

Plan: High-touch customer service remains a key brand differentiator. Nordstrom has long prided itself on its high level of customer service, starting with a generous return policy. But as consumers rely on multi-brand retailers less as their go-to, one-stop shops, it has implemented other services to keep up the foot traffic.

At its seven small-format Nordstrom Local stores located in neighbourhoods of Los Angeles and New York like West Hollywood and the Upper East Side, services including “buy online, pick up in-store,” clothing alterations and the ability to return purchases from any Nordstrom have only grown in popularity during the pandemic.

Instead of opening more Nordstrom Local outposts, and in turn, signing more retail leases, the company has been rolling out these services at select off-price Nordstrom Rack locations in its 20 top markets, which make up 75 percent of its overall sales. In its top 10 markets, this approach has helped widen its customer base by 20 percent. (A significant 11 percent of Nordstrom online purchases were picked up in-store during the holiday season — and 20 percent during the week of Christmas — a service offered at all Nordstrom Rack locations.)

“What we’ve heard from customers is that they want to be served on their terms,” Nordstrom said.

Challenge: From free shipping to easy returns, online challengers and legacy players alike have invested heavily in making convenience and customer service a top priority. Nordstrom will need to continue to add services in order to satisfy customer expectations.

Plan: Double down on off-price. Nordstrom believes its high-low approach — offering products across several price tiers — means there is an opportunity to expand its off-price Nordstrom Rack business by $2 billion in the long term without damaging its brand equity. While off-price sales in the third quarter of 2020 decreased by 32 percent, it remains the number one source for acquiring new customers because it’s growing so fast online and there are more than double the number of Nordstrom Rack stores than there are full-price locations. (In 2019, off-price generated nearly $5.2 billion in annual sales, up 4.5 percent from a year earlier.)

In order to get there, the company plans to offer a wider range of price points — in particular, lower-priced items — and use those online-to-offline services like “buy online, pick up in-store” to jumpstart foot traffic. It also plans to expand in categories like beauty, where there is further customer demand.

Challenge: Nordstrom’s advantage in the off-price space is its online presence, which it augmented with the $270 million acquisition of Hautelook in 2011. (A decade later, the Hautelook brand is going to be phased out, although the company said it now generates $1.4 billion a year online in the off-price space.)

However, while many off-price competitors, including TJX-owned TJ Maxx and Marshalls, have not found a way yet to make online work, they still to dominate the market. Nordstrom will also have to continue to manage brand perception so that their main line isn’t cheapened by the off-price experience, ensuring this is not a race to the bottom.

Plan: Further boost online by offering a broader range of products across categories — and becoming less reliant on the wholesale model. While Nordstrom’s online sales increased during the pandemic, it is losing market share as more competitors get serious about e-commerce.

“Customers have become accustomed to having a supersized collection online,” Erik Nordstrom told BoF. “In our business, there’s a perishability to products and the traditional wholesale model carries risk. To deliver the selection our customers want, we’re going to have to have more models.”

The plan, then, is two-fold. First, Nordstrom wants to expand its selection, increasing the styles available on the site from 300,000 to 1.5 million. Unencumbered by physical store space, it hopes to increase its home goods inventory by five times in the next three to five years, chief brand officer Pete Nordstrom said during the investor presentation.

It also wants to offer brands as many ways of selling products on its website as possible. That means, while the traditional wholesale model will remain, some brands will be sold through a drop-ship model, others will be sold through e-concession and some will cut a deal to share revenue. The goal is to reduce wholesale to 50 percent of sales, down from 85 percent.

What this offers brands — especially those that are increasingly reliant on direct sales to drive the majority of their revenue — is flexibility. It also gives Nordstrom an opportunity to test out brands that it might not be ready to buy upfront, or test out more daring styles created by brands it already works with on a more limited basis.

Brands get the exposure that comes with selling on a large website like Nordstrom.com while not giving up as much as the profits as they would in a wholesale agreement.

Challenge: Nordstrom has worked hard over the past two decades to establish a very particular point-of-view. It’s the place where the majority of American shoppers buy their first luxury item, but it also sells affordable products. It’s done the best job of updating its merchandising and brand mix to reflect modern tastes, from its news-making “pop-in” concepts to its embrace of influencer-led brands. But as many pure online players have found, the broader your selection gets, the more difficult it is to maintain that specialness.

And today, there is simply more competition than ever, both from traditional competitors ranging from Macy’s to Saks Fifth Avenue, to online players from Amazon to Farfetch, but also from a new crop of venture capital-funded marketplaces, such as The Yes, that are betting their own curation skills will win the customer over. Gaining market share will be difficult.

Plan: Personalise, at scale. At Thursday’s investor event, chief technology officer Edmond Mesrobian presented a data-driven plan to connect customer brand profiles across platforms and serve up product recommendations that not only fall in line with the prices and tastes of a particular customer but also manage to surprise and delight them.

In some ways, Nordstrom is ahead of many of its legacy competitors because it started investing in digital technology two decades ago. In 2018, it began building a new analytical platform that gathers all of its data in one place, using 70 different machine-learning algorithms to help make sharper recommendations to customers. As the data pool grows, the recommendations will, the company hopes, get better and better.

“It allows us to differentiate a Vineyard Vines hoodie from a Good American hoodie,” Mesrobian said.

Challenge: If Nordstrom gets discovery right — finding the right item at the right price for the right customer — full-price sell-through rates will likely increase. Its plan to do so is complex and multi-layered. However, many competitors have similar ambitions, and making discovery pleasurable online remains extremely hard, even with the most robust set of data.

“This gets right to the heart of our business challenge,” Nordstrom said. “Discovery is a strength of ours and it has to be.”

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