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Nordstrom, the Last Great American Department Store?

What was once a humble regional chain is now, to some, the great hope of multi-brand shopping in the US. But is Nordstrom’s fun-loving, high-low merchandising strategy enough to withstand the retail apocalypse?
Inside Nordstrom Local in West Hollywood | Source: Courtesy
  • Lauren Sherman

LOS ANGELES, United States — Melrose Place, the few short blocks of West Hollywood retail best known for the soapy evening drama named after it, is rarely bustling. And yet, some of the world's most discerning brands, from The Row to Isabel Marant and Bottega Veneta, have made a home here, likely betting on the few who will drop thousands of dollars in one afternoon than the many who will drop hundreds.

Last fall, a somewhat peculiar addition joined the cohort of shops, which currently includes Marc Jacobs, A.P.C. and Rachel Comey. Right on the corner, jutting out onto Melrose Avenue, is a bare-bones storefront branded "Nordstrom Local."

There’s not much to say about the space (which, in turn, says so much). Unlike Nordstrom’s jazzy, natural light-powered flagship at The Grove, arguably Los Angeles’ most famous outdoor mall, the vibe at this Local — the first of its kind in the country — is far more subdued.

Perhaps that's because the store isn't really a store. It's certainly not a sprawling, multi-brand department store like the other Nordstroms in America and Canada. Actually, it doesn't sell anything. Not really. Besides two or three last-minute gifting items, Nordstrom Local's major selling point is its services, including custom tailoring from Trunk Club, an online personal styling vehicle à la Stitch Fix that it acquired in 2014 for $350 million. There is also an on-site tailor, a nail salon and dressing rooms to try on online orders shipped directly to the store, with personal stylists on hand to advise.

Inside Nordstrom Local | Source: Courtesy

On the afternoon of Boxing Day, one of the busiest days of the year for retailers, the foot traffic to Nordstrom Local was minimal. A few curious tourists breezed in and out, that’s it. For Nordstrom, the Local concept is a work in progress. And that’s okay. Because it’s trying something new.

Over the past two decades, a penchant for the new has wholly defined the current incarnation of the 117-year-old Seattle-based retailer, which is still led by descendants of its founder. Nordstrom is certainly navigating the so-called "retail apocalypse" with an attitude that differentiates it from its competitive set, which begins with Macy's and reaches all the way up to Bergdorf Goodman. In fact, many believe that the company's willingness to experiment and invest in the new — even within the confines of a legacy firm that must answer to public shareholders — will allow it to emerge triumphant in the end.

That notion will be tested over the next two years as the retailer — which currently operates 122 full-price stores in the US and Canada, as well as 232 off-price Nordstrom Rack locations in the US — opens a men’s store in Manhattan this spring and a women’s store just a few blocks away in the autumn of 2019. It will mark the first time Nordstrom has ever operated a full-line outpost in Manhattan proper, inserting the company into one of the most competitive shopping cities in the world. If Neiman Marcus’ plans to open in Hudson Yards go as planned, it means Nordstrom will be operating within a two-mile radius of every single one of its core competitors.

Nordstrom's New York push comes just as the going is getting really, really tough for mall-based retailers, which continue to see their market share scythed away by online competitors and other industry disruptors. Thus far, however, Nordstrom has fared better than most. "Nordstrom is much more willing to take chances," says Steven P. Dennis, a retail consultant and former Neiman Marcus executive. "They're willing to try different things and invest in new ideas and companies."

While Nordstrom does not report its results for fiscal 2017 until March 1, it projects that net sales will increase more than 4 percent, with sales at stores open at least one year up about a half percent and earnings for shareholders on the higher range of earlier predictions. Earlier in 2017 the company entertained a sale, reportedly nearing a deal with private equity firm Leonard Green & Partners. However, those talks were tabled in October when the two parties could not reach an agreement, which would have required Nordstrom to raise debt to help finance the deal.

With a sale off the table for now, Nordstrom must focus on increasing shareholder value while improving its batting average with customers. Two noteworthy decisions it made in the early 2000s — to invest in new technology and to diversify its product offering — continue to drive its strategy today.

Some investments have failed, resulting rounds of cost cutting that have included job losses. Analysts suggest that Nordstrom overpaid for both Trunk Club and HauteLook, the flash sales site it acquired for $180 million in stock — plus an additional $90 million potential payout contingent on performance — in February 2011.

Others bets — from buying a stake in inventory-management software Dsco to offering free shipping to customers long before it was the industry norm — have proven wise. About 25 percent of Nordstrom sales were online in 2016, and analysts project that number could increase to half over the next five years.

Nordstrom houses a mix of luxury and accessible brands | Source: Courtesy

At the same time, Nordstrom began investing in good taste. One of the nearly magical things about the store is that one can shop Sam Edelman and Céline in the same space, with each product given equal weight in terms of presentation and validity. The idea is to make the consumer feel good no matter what they can afford. “Nordstrom sits in a really nice, accessible-luxury space where they’re a clear step up from the boring middle-market department stores, and a step down from places like Neiman Marcus and Saks Fifth Avenue, which are just unaffordable,” Dennis says. “They’re also channel agnostic, which has positioned them to fundamentally have a better customer experience.”

Pete Nordstrom — one of three brothers who have served as co-presidents since 2015, in an unorthodox but effective arrangement, they posit — is the man driving the store's high-low merchandising strategy. The executive, a great grandson of founder John W. Nordstrom, started working at the downtown Seattle store as a stock boy when he was 12. By 16, he was selling shoes out on the floor. "I was learning all of these things at the ground level," he says with a sleeves-rolled-up attitude. "But never once did I think I might someday run the company. I just thought that it was a pretty good summer job, and I was happy to have it."

His first real imprint on the business was a stomp. In the early 1990s, he was working as a regional buyer at a cluster of experimental, small-format stores that the company had opened just years before. It was the height of the grunge era, and he took a chance on Dr. Martens boots and Birkenstock sandals, which were trending. (Birkenstocks remain one of Nordstrom’s largest accounts.)

By 2000, Pete Nordstrom was running the merchandising programme, where he could make bigger and bigger bets. Inspired by the likes of Colette, whose €20 surprise goodie bags were often as satisfying a purchase as a €2,000 handbag designed exclusively for the legendary Parisian concept shop, he began to incorporate more high-end designer product into the mix, bringing on well-regarded independent boutique owner Jeffrey Kalinsky to lead the efforts.

“I won’t say it wasn’t without its challenges,” says Kalinsky — whose namesake stores Nordstrom also acquired — of convincing brands to work with Nordstrom during the early days of his tenure. “However, the industry has really gotten to know and like Nordstrom. They’re absolutely the very best partner, and the industry knows that and recognises that.”

Unlike Saks Fifth Avenue and Neiman Marcus, which pushed further upscale in the late-2000s in order to attract high-net-worth customers, and unlike Lord & Taylor and Macy's, which strived to service the "value"-oriented consumer who was increasingly turning to fast fashion and discounters, Nordstrom aimed to go wide. For instance, a shopping cart can currently be filled with both $19.99 Fitflops and $10,000 Yves Saint Laurent crystal-embellished boots. "It's a sweet spot that nobody else is really catering to right now," says Bridget Weishaar, senior equity analyst at Morningstar. "Nordstrom is offering a very curated selection. Other companies like Macy's are competing a bit more head-on with Amazon and missing that specialisation."

"Why should we have a customer leave our store when they like Nordstrom?" Pete Nordstrom asks. "We want it to be a collection of the best stuff the world has to offer. No one really wears a head-to-toe designer outfit. It's Vans and Valentino." Today, the designer business has the fastest consolidated annual growth of any category the retailer sells. It's the tension between the cheap and chic that gives Nordstrom its unique energy and makes it fun to shop.

We want it to be a collection of the best stuff the world has to offer. No one really wears a head-to-toe designer outfit. It's Vans and Valentino.

The influence of Olivia Kim — the retailer’s vice president of creative projects, who first made a name for herself as a buyer at Opening Ceremony — is increasingly felt. Not only does she oversee the rotating “pop-in” concept, which garners plenty of attention and press every time it changes over, she also works with brands like Nike and Hermès to create specialised shop-in-shops that better resemble art installations. Then there’s Space, the new-designer showcase where shoppers can find the likes of Sofie D'Hoore and Vetements. She’s now in charge of the brand advertising campaigns as well.

Product is key to Kim — who likes to throw a Kenzo sweatshirt in between Nike sweatpants on a rack — as is the way they are presented. “I don’t want it to feel transactional,” says Kim, who was introduced to Pete Nordstrom by Kalinsky. “Instead, I want people to come in and experience the space, and come back again and again.”

Newly renovated Nordstrom’s are bright and modern: many rely on natural light; fixtures are modular and there are few sharp delineations between spaces. “It’s an open canvas where we can move things around,” explains Dawn Clark, senior vice president of store design. “You don’t want it to be boring. You want to have a sense of excitement and energy.”

Nordstrom extends that openness to the business arrangements it has with designers, including a drop-ship e-commerce model, which allows brands that don’t have a large e-commerce presence to sell a wider range of product online without risk to Nordstrom. It also extends to the kinds of brands it engages. The “pop-in” with direct-to-consumer brand Everlane for the launch of its first-ever denim collection was one of the most successful in the programme’s history. (The company declined to clarify how it defines success, however.) “We’ve been working really hard in the last few years to work differently with different types of brands,” says Tricia Smith, the executive vice president who leads women’s designer, activewear and lingerie. “Finding brands quickly has probably required the most work.”

Nordstrom has also convinced specialty retailers like Topshop and Madewell, which typically do not sell to multi-brand stores, to join its list of suppliers. While Topshop has struggled to penetrate the US market with its own stores, it remains one of Nordstrom’s top vendors.

Nordstrom's Planned Manhattan Flagship | Source: Courtesy

Madewell, too, has benefited from the partnership, which launched in 2015 with 15 locations. Today, the label — which has, for the past few years, been a bright spot for beleaguered owner J.Crew — is in 120 Nordstroms, including those in Canada. “We were not set to work as a typical wholesale partner,” says Madewell president Libby Wadle. "Nordstrom worked within the confines of our calendar and our organisation and logistics.” Today, the channel makes up a “meaningful” portion of the Madewell business. In 2018, the J.Crew Group will begin selling childrenswear line Crewcuts and J.Crew Mens there, too, in addition to Madewell and J.Crew Womens.

While selling good product in a place consumers actually want to spend time is at Nordstrom’s core, so is being nice. Known for its famously flexible return policy — including the ability to exchange items with no receipt for a gift card — Nordstrom was ranked number eight in analytics firm Prosper’s “2016 Customer Service Champions,” which evaluates retailers on merits including ease of returns, friendliness and helpfulness. Nordstrom was the only store carrying high-end brands to rank in the top 25.

But all that goodwill only goes so far. The market remains challenged for any retailer operating a wholesale model, and the fact that Nordstrom was not able to secure the finances to take the company private in the fall indicates that others are not convinced it will emerge from the retail apocalypse a bigger, more profitable company. While Nordstrom said in November that it would once again explore options in 2018, the family seems determined to maintain some semblance of control. (They currently own over 30 percent of the business.)

To the family, that means not selling to another retailer, and certainly not to Amazon, another Seattle-based business. In many ways, Nordstrom looks like an ideal purchase for Amazon: the department store owns the upscale fashion shopper in the same way Whole Foods owns the upscale food shopper. While Amazon might have already won over that consumer in other categories, food and fashion have been more challenging. But Pete Nordstrom isn’t having it. “Any kind of suggestions or rumors about Amazon are only that,” he says of the suggestion that Amazon should indeed make a bid. “We’ve never talked to them, we have no interest in selling to them. That is not a part of our agenda at all. ”

Some analysts question whether there is upside for a buyer considering Nordstrom: unlike many of its competitors, its store count is just about right, but that means growth will need to come from other channels. Its off-price business is also more developed than many of its competitors, meaning there is less room for accelleration in that area. “Some of it can come from additional Nordstrom Rack stores, yes, but a lot of it can come through e-commerce and investments,” Weishaar says. “They want to test more creative growth avenues, as they have with [Nordstrom Local]. There’s recognition that the retail experience has to change and they are willing to invest and test and try, but that’s very difficult to do as a public company.”

However, others are bullish on Nordstrom’s potential. In early January, J.P. Morgan upgraded the stock from “underweight” to “neutral,” thanks to its focus on services and store experience, predicting that its margins will rebound. Analyst Matt Boss also suggested that the Trump administration’s corporate tax cuts could lift its free cash flow.

But besides a potential sale, Nordstrom’s big news for 2018 is New York, where it will face its toughest competition yet. “We understand what we’re up against, but we’re prepared,” he says. “What we learned a long time ago is that, if we do the job well, people respond to that.”

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