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Is Nordstrom's Off-Price Strategy Hurting Its Mainline Business?

The department store chain’s off-price business is booming — but at what cost?
Source: Shutterstock
By
  • Limei Hoang

SEATTLE, United States — Has Nordstrom bet too heavily on the booming off-price sector?

On Thursday, the department store chain said strong demand in its off-price business helped offset a decline in footfall at its mainline locations in its 2016 fiscal year.

While the chain’s discount offering, Nordstrom Rack, reported a strong rise in sales to $4.5 billion, up 11 percent from the previous year, full-price sales declined by 2.7 percent to $9.7 billion, with sales at physical stores down 6.4 percent.

Of course, these numbers are no surprise, given the wider trends seen in the retail industry of declining footfall, rising competition from online retailers and changes in consumer behaviour towards value-driven offerings.

But unlike many of its competitors, Nordstrom has been able to remain above water, in part because it has spent the past few years rethinking its merchandising strategy and overall consumer experience, while at the same time investing in digital. For instance, in a move admired by much of the fashion industry, the company hired Opening Ceremony veteran Olivia Kim as vice president of creative projects in 2013. Kim’s innovative retail concepts have brought the retailer buzz.

“Nordstrom have been doing fairly well,” says Tiffany Hogan, senior analyst at Kantar Retail. “But are still a mall-based retailer, which is frankly why a good chunk of their sales have gone down. Especially in stores they are not seeing nearly as much traffic, not getting that footfall which historically drove a lot of sales in store.”

Nordstrom Rack hasn't been entirely helpful to Nordstrom department stores.

To supplant that footfall, Nordstrom has significantly ramped up its discounted offerings, adding 27 of its Nordstrom Rack stores in 2015, and a further 21 stores last year as part of a longer term strategy to tap into the growing consumer demand for off-price.

"We know that many customers shop with us both ways and we continue to believe that being able to serve customers in a variety of ways is good for our business overall," a spokesperson for Nordstrom said. "We find that the Rack is a great introduction for us to customers who may have never shopped our full-line channels, and it is our largest source of new customers to Nordstrom accounting for 6 million new customers in 2016."

While the mix of off-price and full-line has proven an effective short-term solution for Nordstrom and many of its competitors, it can also pose a problem, argues Neil Saunders, managing director of research firm GlobalData Retail.

“It’s a strange dynamic… From our data, Nordstrom Rack has definitely had a dilutive impact on Nordstrom full-line sales as about 24 percent of Nordstrom Rack customers also shop at Nordstrom stores,” he says. “So in some ways, Nordstrom Rack hasn’t been entirely helpful to Nordstrom department stores.”

However despite this impact, Saunders believes the strength of its off-price business has also helped insulate the department store chain from the wider downward trends in the market. Recently, mega-dicsounter TJ Maxx bullishly declared that it could open 1,300 more locations across the US and Canada.

“It has given Nordstrom a very solid business, just acting as a offset and a buffer from the declines in the full line department stores,” says Saunders.

But what are the implications for the long-term?

Hogan believes Nordstrom’s full line department stores may benefit from the number of customers being introduced to the brand through its off-price offering.

“Nordstrom Rack is the top driver of new shoppers to the Nordstrom family of stores,” she says. “Around 6 million new shoppers entered the brand through Nordstrom Rack this year. As we know, retail is cyclical, so obviously in a few years, or several years down the line, we may see a rebound in shoppers and they may want to spend a little more and then they would re-upgrade back to Nordstrom.”

Saunders argues that there are further opportunities for Nordstrom to learn from the success of its off-price business. “They have to replicate the success of Nordstrom Rack,” he says. “It pulls people in because there is always something interesting, and people will come regularly to see what’s new. Nordstrom’s full line really has to think about how it can, in its own sense, develop that same proposition.”

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