Retail

Why Nordstrom Is Embracing Change

Spring and summer have not been terrifically encouraging times for department stores of nearly all stripes, or retailers in general. With the exceptions of a few standout bright spots — Walmart, TJX and H&M spring to mind — as the results rolled in from the first financial quarter of 2016, it became pretty clear that the slump observed during holiday 2015 was less an aberration brought on by warmer than expected whether.

In fact, Q1 2015 was mostly better for department stores than Q1 2016 was, despite the fact that Q1 2016 included multiple weather events that shut down commerce in whole sections of the country for days and (in Boston anyway) weeks at a time.

To say department store retail is in need of something of a makeover is an understatement at this point.

And the makeovers are proliferating.

JC Penney has a new CEO, a new store design and has embraced the “store-within-a-store” concept more than any other department store player, mostly through its increasingly close partnership with Sephora. Macy’s has opened its own discount chain, Backstage, and is saying good-bye to its CEO Terry Lundgren after 13 years the helm. And while those are the more headline-making switches, changes big and small are proliferating across the ecosystem. Supply chains are being re-imagined, apps are becoming more common and more complicated, and marketing is becoming more diffuse as advertisers are trying to keep pace with an ever proliferating number of platforms attracting customers eyes — the list goes on.

The times they are a-changin’ in retail.

And  given the volatile environment, it would be surprising if Nordstrom did nothing differently these days, given that department store retail’s recently enhanced gravity has been weighing down their sales and revenue as well. Same-store sales dropped 5.4 percent last quarter and its share price fell by 50 percent between Q1 2015 and Q2 2016. Net income was $46 million during Q1, down from $128 million in 2015 at the same time.

All in, Nordstrom dropped its full-year outlook for sales to 2.5 percent to 4.5 percent, down from a previous guidance of 3.5 percent of 5.5 percent. They are also forecasting further drops to same-store sales in the 1 percent range, a big step back from the previous prediction of flat growth at worst and slight gains of 2 percent at best.

And though eCommerce represents over 20 percent of Nordstrom’s total sales, it only grew by a little over 10 percent last quarter, despite the fact that average quarterly growth for eCommerce in the U.S. during Q1 was 16 percent, according to the U.S. Census Bureau. And that is a somewhat disturbing result given the degree to which Nordstrom has invested in leveling up its eCommerce presence over the last few years. It purchased startups Haute Look and Trunk Club, took a prominent investment stake in Shoes of Prey and piloted some showroom spaces with them, and even funded a digital innovation lab all their own.

Whatever else one might argue, Nordstrom certainly didn’t fail to see the digital economy coming, or try to prepare for it — even if the payoff they’ve gotten in that 10 percent growth range is clearly south of what they would want.

So what comes next? A mix of cost-cutting and out-of-the-box thinking.

The Cuts 

“Our first quarter results were impacted by lower than expected sales,” said Blake Nordstrom, co-president of Nordstrom in a post earnings call with investors. “In response we have made further adjustments to our inventory and expense plans.”

What those adjustments would like were less known at the time of the earnings call, though store closures were announced.

More eye-catching, however, have been some of the larger projects that have been tabled, especially considering Nordstrom’s aggressive push into expanded eCommerce offerings over the last few years.

As of June 15, Nordstrom announced via public letter that it officially canceled the construction of a fulfillment center in an unnamed city on the West Coast. The mayors of Fresno and Visalia, California, both received copies of the letter, and while it’s unclear at just what stage the selection and construction process had reached before Nordstrom cut the cord, the reason offered for the cut was the changing retail landscape around them.

“Since our teams first met a year ago, the pace of change in retail has continued to increase,” Nordstrom said. “What’s most important is to evolve our business to best serve our customers. We will continue to invest across our business to competitively position us for long-term success and to deliver the products and experiences customers want.”

And it looks like it’s going to get small before it gets larger. as Nordstrom followed that first supply center cut with the announcement of a second one. Nordstrom announced last week that it would be shutting down its Trunk Club subsidiary’s fulfillment center in Chicago by August 2017. That will cut 250 full-time and part-time jobs.

Going forward, Trunk Club will leverage Nordstrom’s regular fulfillment network.

Nordstrom did leave itself an out by explaining that it would revisit its eCommerce needs in four years’ time — so things could change and break toward the more expansive, but for now contraction seems to be the order of the day.

Out Of The Box With Tesla 

Which isn’t to say that Nordstrom has abandoned thinking differently about retail, though it does seem to be moving some of that creative focus away from the digital realm and back toward the store experience itself.

Hence last week’s surprising announcement that Nordstrom’s menswear sections in some locations will be getting one of department store retail’s more unusual additions: cars.

In an interview with Fast Company, Tesla VP of North American Sales Ganesh Srivats confirmed that his company would be showing off one of its Model X electric SUVs inside a specially constructed temporary boutique inside a Nordstrom location at Los Angeles’ The Grove shopping complex. At 400 square feet, the Tesla store-within-a-store will allow shoppers to mix and match interior styles and take Tesla-guided test drives, all the while spending more time inside a Nordstrom while they’re at it.

“[We’re] bringing Nordstrom customers a Tesla experience, and I think for Nordstrom as well, it’s like, ‘How can we target Tesla’s audience?’” Srivats told Fast Company.

With a sticker price of $80,000, the Model X might be too rich for even Nordstrom shoppers’ tastes, but with the more affordable Model 3 scheduled to hit the market next year at a price point somewhere in the $35,000 range, it makes sense that Tesla would want to start laying groundwork among generally affluent consumers now.

The Tesla-within-a-Nordstrom setup will run through the end of 2016 and possibly longer if Nordstrom likes what it hears from its customers.

“We’re focused on listening to our customers and seeing how they respond to this type of differentiated experience,” the retailer said in a statement.

So what will Nordstrom’s customers tell them?

That remains the question — and the one that most needs an answer. The hope is that by getting trimmer and more inventive, Nordstrom can turn the tides on some of those headwinds.

The next few rounds of results will let us know if the ideas are working.

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