10 February 2021
The Weekly

Nordstrom unveiled its new ‘Closer to You’ long-term growth agenda, which calls out the Rack off-price chain, the market strategy and digital sales as Nordstrom’s biggest growth opportunities for the future. The objectives are to broaden the digital assortment from 300,000 items to potentially 1.5mn over the next three to five years; inject lower price offerings into the Nordstrom Rack off-price matrix, and extend the reach of its three-year-old market strategy. In addition, Nordstrom expects to report fourth-quarter sales down in the lower 20% range compared to the year-ago period. In its third-quarter earnings report, Nordstrom reported year-to-date sales down 36.4%. Nordstrom for the fourth quarter expects to report positive earnings before interest and taxes, positive operating cash flow and EBIT margin deleveraging by about 5%. Aside from targeting a wider customer base, the Closer to You game plan includes adopting personalization ‘at scale’ and creating a ‘unified view’ of the customer and the inventory across selling channels. In 2021, Nordstrom’s market strategy will be extended from 10 to 20 markets, in total representing 75% of the retailer’s volume and covering its top-volume markets. The strategy started as an experiment in Los Angeles three years ago and has become a powerful enabler for the business.

The market strategy entails leveraging the physical assets of Nordstrom’s full-line department stores, Nordstrom Rack and Nordstrom Local to increase services, conveniences and merchandise choices, and speed deliveries. For example, shoppers can return items bought online or at Nordstrom department stores to a Rack or Nordstrom Local location, which may be closer to them. Nordstrom sees the strategy as strengthening customer engagement and the company’s customer-centric culture.

In an attempt to gain share from less expensive off-pricers such as T.J. Maxx, Ross Stores and Burlington Stores, the ‘Closer to You’ agenda calls the more upscale Nordstrom Rack to extend its range with more products at lower prices, and additionally, Nordstrom executives are keen to expand Rack’s footprint to mid-sized markets. Generally, Rack stores are situated not very far from Nordstrom full-line department stores in major markets. Opening Rack units do not require much advance planning, and last October, the division launched order fulfilment capabilities from the stores. Rack stores have been recast into three categories: price doors, which will distort to lower average prices; brand doors that stay largely unchanged, and hybrid doors, mixing price and brand store characteristics. For the Rack off-price chain overall, the average selling price will decline, but transactions will increase transactions, as Rack will attain new customers to expand price stores in new markets. Beauty, home, kids and active are high growth categories at the Rack. Sales should double sales in those categories over time. Rack should contribute about $2bn in incremental sales over the long-term, bringing the division to about $7bn in sales. The division generated $5.2bn of Nordstrom’s $15.5bn in revenues in 2019.

Nordstrom operates 100 Nordstrom full-line stores; 249 Racks; seven Nordstrom Local service hubs; nordstrom.com; nordstromrack.com; nordstrom.ca.; HauteLook.com, TrunkClub.com and two clearance units. For 2021, Nordstrom expects revenue, including retail sales and credit card revenues, to grow more than 25%. Digital is seen representing about 50% of total sales, consistent with recent 2020 levels, which were at 54%. After 2021, revenue is expected to grow single-digits annually from 2019 levels; operating income is seen growing faster than revenue, and EBIT margin, as a percentage of sales, is expected to exceed 6%. Pre-COVID-19, Nordstrom started gradually building its home assortment, primarily across sheets, towels, decor and cookware. An aggressive strategy for Nordstrom’s relatively small home business is being drawn up. Athleisure, a strong category, accelerated its growth during the pandemic, and an activewear hub was recently launched on the website, Nordstrom noted. For the last three years, the retailer has been investing in the kids business, adding equipment such as high chairs and strollers, which the company never sold before. But the fastest-growing category for Nordstrom is designer merchandise, which is expected to do even better in the second half. Affluent shoppers have not let up on the luxury purchasing during the pandemic, because they are not spending much on travelling and dining out, and because luxury is very much a feel-good kind of purchase. 

Nordstrom’s urban flagships in places like Manhattan, Portland, Ore., and Los Angeles have been most impacted due to people fleeing cities for less dense areas. To achieve its goal of broadening the digital assortment from 300,000 items to potentially 1.5mn over the next three to five years, Nordstrom will deepen commitments to private label, dropshipping and revenue sharing. Over time, 50% of Nordstrom’s merchandise should be procured through traditional wholesaling, versus 85% currently. In Nordstrom’s last Anniversary Sale, over one-quarter of the sales via Nordstrom.com were fulfilled by dropship. Nordstrom is moving from a transactional way of doing business into a collaborative way, which in a lot of ways share the risk.