Is Nordstrom staring at a ‘no-growth’ retail future?

Discussion
Nordstrom's New Concept shop featuring a collaboration with Japanese publishing house Printings.jp - Photo: Nordstrom
Jul 11, 2019
Tom Ryan

In a scathing note, analysts at UBS described Nordstrom as a “no-growth retailer” that is suffering from eroding price perceptions and a “cultural shift” in shopper behavior.

Among the challenges, according to the report:

  • Losing appeal in special occasions/business wear: While Nordstrom has traditionally been a go-to place for business and special occasion attire, UBS’s recent survey finds consumers migrating to discount retailers for these items. Wrote Jay Sole, UBS’s lead analyst, in a note, “We think this reflects a cultural shift where consumers don’t think they need to invest in the type of high-quality merchandise available at Nordstrom for work as much as they used to.”
  • Further casualization: Wrote Mr. Sole, “Consumers are ‘dressing down’ more often in every part of daily life. This is not something we think [Nordstrom] can easily recover from.”
  • Expected pullback among wealthy: UBS data “suggests high-income US consumer spending will stay weak through the fall season,” the report said.
  • Eroding pricing perception: Only Gap and J.C. Penney had a larger year-over-year drop in price perception than both the full-line Nordstrom and Nordstrom Rack banners in UBS’s recent survey. The pricing perception of closer competitor, Bloomingdale’s, improved. With the high-end fashion market experiencing minimal growth, any market share loss at Nordstrom at the expense of even a small rival could “significantly” impact Nordstrom.
  • A more discount-driven environment: The rising cost of living and relatively stagnant income thresholds for the middle class are increasingly encouraging consumers, especially younger ones encumbered with high student debt, to favor low prices over quality. While Nordstrom “has historically been a share taker” with its stature just above traditional department stores such as Macy’s, it’s no longer in a position to take market share.

UBS said Nordstrom will likely have to increase promotions to change price perceptions and revive traffic, but that will come at the expense of gross margins. UBS added, “Plus, we also doubt [Nordstrom] can leverage SG&A at the new, lower sales growth rate we’re modeling.”

UBS cut its stock rating from “Buy” to “Neutral” and slashed its price target from $65 to $33.

DISCUSSION QUESTIONS: Do you agree with UBS’s assessment of Nordstrom’s current challenges? Are shifts in shopper behavior antiquating Nordstrom’s business model? What challenges cited in the article will likely be most difficult to overcome?

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18 Comments on "Is Nordstrom staring at a ‘no-growth’ retail future?"


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Mark Ryski
BrainTrust

Wall Street only cares about short-term results. While the challenges described by the UBS analyst are fair, his advice is completely wrong. Discounting to drive traffic may produce a bump in short-term results, but will ultimately exacerbate Nordstrom’s challenges. It’s clear consumers are changing, and so adjusting merchandising mixes to reflect this is what every thoughtful retailer should be doing. Nordstrom’s business model is premium product with premium service – they need to get back to their roots, focus on the market segment that they are great at and stop trying to “me too” with strategies that will please short-sighted Wall Street analysts.

Bethany Allee
BrainTrust
Mark is on the money again – Nordstrom needs to get back to their roots. Nordstrom delivers premium goods with premium service better than anyone. This is why they’ve succeeded and it is what will help them succeed going forward. Nordstrom has taken a modern spin on their premium services with their high-end click-and-collect service – this is a move in the right direction. As an avid Nordstrom fan and customer, the solution is simple. Nordstrom needs to educate consumers on their services. I frequently tell associates in my demographic, which I believe to be one of Nordstrom’s key demographics, that personal shopping services are complete free. That’s right: call Nordstrom, connect with a personal shopper, tell them what you want at the budget you want, show up at a designated time to a fitting room filled with items to meet your needs, pick what you want, pay, leave. Efficient. Effective. Brilliant service. Through simple education around their current business model and services, Nordstrom can drive better financial results. After educating the audience who is… Read more »
Georganne Bender
BrainTrust

Spot on, Mark. Those “me too” strategies kill what makes you stand out. When Nordstrom removed the piano and replaced it with the same music every other store has access to I thought, here we go. That piano represented more than music, it represented the brand. And it made it easier to change other things Nordstrom’s core customers expected to find on the sales floor.

Shep Hyken
BrainTrust

Every business goes through the pain of stagnation at some point. Some will realize it quicker than others and adjust. For some, it’s too late. Nordstrom is on top of the changing retail environment, trying to stay relevant. They have new in-store concepts, online offerings and more. I’m not convinced that Nordstrom has reached a “no-growth” (which can lead to its demise) place in the retail history books.

Ryan Mathews
BrainTrust
Characterizing Nordstrom as a “no-growth retailer” assumes that it is incapable of course correction. That’s a charge that has more to do with management than merchandise, but — at least as summarized — that’s not what UBS is saying. No question the “middle prestige” market is eroding — losing sales to discounters on the low end and specialty clothiers on the high end. As to the ongoing trend to more and more casual clothing in the workplace, for “special occasions” or other venues, there’s probably no scalable turning back. I assume in some retro moment suits and ties may return among the hipper-than-thou set, but the “Dress For Success” formula seems to have run its course unless you define polo shirts and flip flops as dressing up. I’m not sure about the whole idea that wealthy people will cut back. After all, if conspicuous consumption isn’t one of the perks of being wealthy, why be wealthy? Finally, on the price perception issue, that’s far more fixable than altering the course of contemporary fashion. So while… Read more »
Neil Saunders
BrainTrust
I agree with the conclusion of the report. It will be very challenging for Nordstrom to engineer growth in the near term. However, I do not entirely concur with the report’s rationale for this; I think it misses some nuances. The main issue Nordstrom faces is a disparity in performance by location. In big, urban markets Nordstrom’s full-price stores are performing better. The concentration of more affluent consumers and higher demand for modern, fashionable apparel helps the business achieve solid numbers. However, in smaller urban areas and suburban malls, the business performs less well and is increasingly struggling to connect with shoppers who don’t want to pay Nordstrom prices or are deterred by assortments that they see as too contemporary. This doesn’t mean Nordstrom has no customers, but the customer numbers required to support the economics of a big department store business are weakening and the decline in shoppers is getting progressively worse. There is a question mark over how Nordstrom can turn around performance in stores outside of the big cities. More localized ranging… Read more »
Steve Dennis
BrainTrust

Nordstrom has consistently been one of the best managed retailers on the planet for decades and one I use often in my keynotes as a positive example of “remarkable retail.” Having said that, they are a relatively mature brand having nearly maxed out on new full-line and Rack locations and already being deeply penetrated in commerce.

But the no-growth future is too harsh. I believe with a few adjustments, as well as realizing the potential from more Nordstrom Local stores, they can continue to grab market share albeit at a slower pace than the last few years.

Ron Margulis
BrainTrust

There is a round of consolidation coming in retail and Nordstrom could very well be a target at the lower stock price UBS seems to believe we will be seeing soon. This will only act to strengthen e-commerce players as those amalgamating the traditional retail banners try to find synergies with both merchandising efforts and property plays.

Cynthia Holcomb
BrainTrust

Nordstrom’s middle-market customer, those between contemporary and designer, are the consumers Nordstrom needs to address quickly. When I say quickly, the fact that UBS’s assessment is even being discussed reflects the direct impact of the decade-old Nordstrom decision to embrace centralized buying and to continue “dumbing down” large key item “fashion” basic programs.

A decade or so ago, Nordstrom had regional buyers and fashion novelty for the middle market customer, creating a reason to buy, even at a higher price. The miss for Nordstrom is huge online assortments which are difficult to shop, leaving stores filled with non-competitive, expensive key item fashion basics. UBS has pointed out the obvious; the shift in shopper behavior is not new, ask Macy’s and others. To be relevant Nordstrom needs to return to exciting the customer in the middle by taking a fresh look at private brand pricing and product. There they should have room to play catch up. Nordstrom is a master of reinvention.

Rich Kizer
BrainTrust

Our company has a mantra that we always share in retailer presentations: “10 percent of your business changes every year whether you like it or not. Make no changes and in only three years you are 30 percent behind the world.” Retail sustainability is created by the act of changing at least 10 percent a year – every year. The world has high regard for Nordstrom. There will always be shifts in the market, and those who are successful will be those who take chances and change. The talent at Nordstrom has never avoided the “change” and will find the combination. Just watch.

Mohamed Amer
BrainTrust

For Nordstrom, a no-growth future can only happen if management sits on their hands; that is extremely unlikely. Moreover, changing shopper spending need not force Nordstrom to change what the brand has stood for on the retail landscape. In fact, doing so would turn a mere bump on the road into a growing sinkhole. The UBS recommendations are akin to throwing in the towel before the first punch.

The opportunity ahead for Nordstrom is real and significant but requires renewed branding effort that highlights the store’s high quality products and legendary service. This will validate purchase decisions by current customers and begin to tap new customers. There’s nothing predestined in Nordstrom’s future, the company has the leadership and talent to create the growth future it desires.

Gene Detroyer
BrainTrust

With department store revenue down 3.5 percent YTD, it sounds like no growth is a pretty good position.

Nordstrom has been famous for the three pair of shoes policy. A customer (likely a woman) asks to try on a pair of shoes and the salesperson brings out three pair, judging she may also like and buy the others.

Just thinking about shoes and anecdotal observations … Walk the sidewalks of midtown NYC at 5 p.m. as people come out of work. What do you see on the people’s feet? Or go to an elegant restaurant that no longer has that sign “no sneakers” and see how many women (and men) are wearing sneakers.

I had dinner last night at a clearly business-oriented restaurant. The men wore no ties, few jackets and jeans.

There is a change in lifestyle and culture and that doesn’t even address the growth of online which alone antiquates the department store business model.

Georganne Bender
BrainTrust

Categorizing Nordstrom as a no-growth retailer is harsh. You only have to look at Nordstrom Local and some of the other things they have implemented lately to know Nordstrom is capable of reinvention.

As a consumer, I wish they’d get on with it. Our local Nordstrom stores are clean and bright and there are plenty of knowledgeable salespeople to help you when you need it. But the merchandising is boring and frankly the product isn’t much better. I’m a shopper; I also spend a lot of time in stores as part of my job. When I can walk through a store several times in one month and not be enticed to buy anything, there’s a problem. Nordstrom used to be a special place to shop, but lately it’s been just another store.

Brent Biddulph
BrainTrust

Something that analysts tend to “lose in the numbers” because, frankly, it is difficult to measure – cultural obsession on quality and customers, and reciprocal customer brand loyalty. Maybe it’s something in the water there in Seattle, as some of the most beloved retail brands (Costco, Starbucks, Amazon, Nordstrom) seem to have an innate ability to not only carve out and own a retail niche, but to have the pulse on changing consumer preferences, successfully evolving along the way.

I agree with the challenges outlined by the UBS analyst, but the analysis does not take into consideration activities underway to continue to adapt (e.g. Nordy Club revamp) and continuing to invest (test and learn) by leveraging data, emerging technology and AI to enhance brand image and improve the customer experiences both online and in-store beyond many traditional retail competitor capabilities.

Bob Phibbs
BrainTrust

I concur with the conclusions because I’m a Nordstrom shopper. They have lost the magic and live on the fumes of decades ago customer service. Now I have found that service mythical – it doesn’t exist in reality. I don’t think management sees the need or has the will to admit something is wrong and just keeps bringing in smaller and smaller/expensive brands. Product won’t save you – people will.

Patricia Vekich Waldron
Staff

I’m a long-time Nordies shopper, have a personal stylist and a fan … however, I must admit that I used to watch for and look forward to their special events, and now it’s not even on my radar.

Ananda Chakravarty
BrainTrust

Nordstrom is still recovering from the passing of its visionary leader, but it will take a lot more to snuff out such a strong market beacon. I can’t remember the book I read it in, but quality matters. The example was, would you pay $100 to buy a new, high quality product (I think it was cookware) that will last 10 years or $10 to buy a product that lasts just one?

Nordstrom has quality. I seriously doubt there will ever be a real shortage of weddings, graduations, celebrations or even business dealings that will be more than a slight bite into their business model. There are whole new untapped growth markets for Nordstrom’s such as international, omnichannel services and more. If retail is moving towards experience, the focus on casualization if the product is already less important and hence will have less impact. Doesn’t Nike already sell Air Jordan’s at a premium?

Nordstrom will adapt as needed.

Craig Sundstrom
Guest

Shrinking slices of a shrinking pie … no, it’s not a very appealing future, is it? That “casual” replacing “dressy” is a long-term trend is undeniable. How many people still wear suits, at least on a daily basis? Nordstrom has very little control over this trend. But “casual” isn’t the same as sloppy. Plenty of retailers like J.Crew, Pendleton and (even) the GAP made a fortune selling clothing that was casual, but well made and, yes, expensive. Nordstrom’s real battle is to fight the flip-flop culture … every time and every way they can. (“Collaboration is the new competition” anyone?)

But regardless, the next 30 years won’t be like the last: Nordstrom went from being a regional player to a national powerhouse, often picking up from the fast-fading nameplates in the ADG and Fields empires. It won’t be doing that again.

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