Photo: Nordstrom
Does Nordstrom’s growth depend on Nordstrom Rack?
Ever since Nordstrom launched its Rack concept, the retailer has maintained that its flagship department stores needn’t worry about cannibalization from the off-price format. While management continues to hold this view, quarterly reports make clear that Rack’s business is growing while the company’s department stores are not.
During the second quarter, comp sales of Nordstrom Rack and nordstromrack.com increased 5.3 percent while the company’s full-price off and online businesses declined 2.3 percent.
Nordstrom currently operates 121 department stores in the U.S., Canada, and Puerto Rico as well as 200 Rack locations. Plans call for the retailer to add 15 more Rack stores this year with a goal of having roughly 300 operating in the U.S. and Canada by 2020.
To be sure, Nordstrom’s full-line business still accounts for more than 70 percent of the company’s total, but the company’s Rack unit continues to grab a greater share of the whole.
On the earnings call (via SeekingAlpha), Mr. Nordstrom described the Rack business as being “a more consistent business the last couple of years than the full-line stores” while also suggesting full-line has shown improvement that the company expects to continue building on.
Michael Koppel, Nordstrom CFO, added that Rack’s numbers have also benefited as a result of the off-price division’s e-commerce site. This, he offered, has skewed the comparisons between Rack’s growth versus the performance of Nordstrom’s full-price stores and websites.
“You have to look at the relative maturity of the online channel in the full-price sector versus the off-price,” said Mr. Koppel (via SeekingAlpha). “And we’re one of the few that actually have an online offering off-price. Most off-price is done in-store.”
Discussion Questions
DISCUSSION QUESTIONS: Should Nordstrom stakeholders be concerned that the company’s recent growth has been driven by the Rack business? What has you encouraged or discouraged about Nordstrom’s future prospects across its divisions?
Poll
BrainTrust
Bob Amster
Principal, Retail Technology Group
Adrian Weidmann
Managing Director, StoreStream Metrics, LLC
Just because a book was written 20+ years ago about how wonderful you are doesn’t mean you are in 2016. Until someone owns the customer experience in their legacy stores, Nordstrom will still struggle. More discounts aren’t the answer, as I wrote in Don’t Be The Luxury Retailer That Had To Close Due To Discounting.
If I were a JWN shareholder, I’d be happy that the company is growing the Rack business. It’s good to have a growth vehicle in light of the well-documented issues with both the traditional department store business and the near-luxury brands like Coach, Michael Kors and Ralph Lauren. And Nordstrom has always been very cautious about opening its full-line stores.
This being said, the company’s brand reputation is really built on the success of its full-line stores. I shopped my local Nordstrom on Saturday (newly opened in Milwaukee last fall) and I wonder whether a little more attention to the store’s value positioning — without hopping on Macy’s promotional carousel — might help its traffic levels and reduce its clearance levels more effectively.
No. They should support the growth of Rack. It is an extension of the business and in the right cities and locations it is a major retail player. Nordstrom Rack makes Nordstrom a place for more to shop — high-enders and mid-end channel.
The key is to not over-stuff or start creating products for Rack. That ruins the outlet image. Stay true to Rack’s focus.
It’s the curse of being a public company. As a whole, the company is doing well. If only the family still owned the business, they’d be laughing all the way to the bank.
The traditional department store business is and will continue to be a no-growth (or declining) business. When a company finds itself in that position it must make some changes. Too often in this situation companies have said, “Gee, if we go in this direction we will kill our current business.” The results have always been that if they didn’t kill their current business, someone else would.
If you have success with a flat or even declining business model, use the assets generated by it to start new and more promising business models.
Nordstrom has a choice. They can serve the customer and the market that wants the Rack business model or they can let someone else do it. The impact on the basic Nordstrom business will be the same either way. You choose.
A business person goes to where the market may be. As a marketer, it deeply saddens me to find Nordstrom moving down-market to grow. But they’re not the first. It’s my understanding that Brooks Brothers has more outlets than first-line stores.
Nordstrom is testing other strategies; for example, Trunk Club. The worst thing you can do is nothing.
Shareholders shouldn’t be concerned that growth is coming from Rack business. If it is truly also getting an edge from e-commerce, even better. Hopefully the Rack strategy keeps the Nordstrom brand from a discounting spiral because they have a separate group of stores for that. Have Nordstrom stick to the high service standards and bi-annual men’s sale and let Rack play to a different segment.
I think the stakeholders would be concerned if the company wasn’t adapting to the times and changing the business to fit where the opportunity is in the marketplace. Having a great brand that helps you sell tons of “off-price” bargains is a very viable strategy. If the market to grow the full-price stores isn’t there then finding a complimentary vehicle makes perfect sense.
Rack is growing because of its price points. Low-end stores with a relevant selling model are growing. So shareholders are happy that division is performing.
However, US retail is in crisis due to job elimination and wage stagnation. GDP growth remains below 1.5%. Therefore the core business is under extreme pressure.
Stores in malls are at risk, both department and specialty. Last Friday, the NRF acknowledged that the US is over retailed with growth going to “off price” outlets. Shareholders must be very concerned as the future for the core is cloudy at best. It is a fierce share game.
With Macy’s closing 100+ stores, Nordstrom shareholders are conflicted: in some locations it gets to experience a bump, and if Macy’s gets its act together, a stronger competitor in other locations is problematic.
Retail ain’t for sissies!
Part of the “master plan” and strategy with the Rack was to bring Millennials into the Nordstrom fold with the off-price model … extend credit cards, get them in to the data-base and loyalty program, etc. As they grow older and their earning power/income increases, when the time is right, target them for migration over to the Nordstrom mainline brand, etc.
Still sounds like a good customer strategy from here, and you see department store rivals doing similar.
Just a simple question here for our readers. Since we are all consumers, would you rather pay full price or a discounted price for clothes, shoes, food, cars, or for that matter anything you are looking to buy? The answer is DISCOUNTS, and upscale super high-end stores are starting to move more and more into the discount format, as they really don’t have a choice today. I’m sure others may disagree, but look at what we are dealing with, as consumers are trained to wait for the super deals. This trend will continue for as long as I’m alive.
Can you win consumers over on your high-end stores, and command full price? Yes, but that market is shrinking, and finding ways to provide discounts is what we all are looking for. If you are unwilling to provide a value along with great service, there is a good chance someone nearby or online will. Whole Foods now has 365, and other stores are offering lower price formats every day, including online. So it is vital to stay sharp on your pricing or risk becoming a ghost town, as consumers’ shopping habits have changed, and they aren’t going to give up the discounts anytime soon.
Concerned: yes; worried (or disapproving): no. Most businesses grow by emphasizing either price, selection or service. Clearly Nordstrom grew with the latter two, and just as clearly the Rack concept represents a shift to the first. So it DOES represent a conceptual change and it’s a movement into a crowded field. But what alternatives are there? Hopefully they can find ways, even in the discount model, to maintain the personalized approach they’ve always been known for.
Nordstrom’s actions reflect their goals. They are building Rack stores because they reflect the needs of their customers. Nordstrom’s traditional retail model has to be overhauled, or it will go the way of other department stores and eventually perish. This is a wake up call for all department stores, since their model is a dinosaur in the retailing world.