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UPDATE: Is Nordstrom Becoming an Off-Pricer?

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(Editor’s note: Since last week, when we originally published this article, Nordstrom has graciously supplied us with detailed information on its planned store openings, online business developments, sales performance, and customer strategy, some of which has been included below.)

Is upscale department store Nordstrom gradually shifting its business model from that of an upscale department store offering luxury merchandise and off-the-charts customer service to an off-price retailer selling designer brands at deep discounts?

If you think that sounds crazy, then consider the facts: Since the first quarter of fiscal 2010, the company has opened 73 of its Nordstrom Rack off-price outlet stores, compared to a total of only 5 additional  Nordstrom full-line stores (nine new stores were opened, of which two were relocated, and two stores were closed). It plans to open another 79 Rack stores by 2016, but only 11 full-line stores, with five in the U.S., five in Canada, and one in Puerto Rico. (The company has announced that two full-line stores will be closed in early 2015.)

Also, in the last six years, Nordstrom Rack’s share of company revenue has doubled to almost a quarter of the total, while full-line sales have dropped from 90 percent to 63 percent of sales. Company management has announced that Rack will be the main driver of future growth and a more significant part of the business over the next few years.

By 2016, online and Rack combined are expected to represent over 50 percent of total sales. In addition to Nordstrom.com, which did $1.6 billion in full-line online sales last year, the company operates HauteLook, the flash sale site it acquired in 2011, which did $330 million in sales last year, and the newly launched Nordstromrack.com, to accelerate its online, off-price business.

Nordstrom is not the only upscale retailer getting into the off-price game, of course. Neiman Marcus operates around 40 of its Last Call stores in outlet malls, Saks Off Fifth is a major growth strategy for new parent Hudson Bay, and specialty apparel brands from Chicos to Burberry operate a growing number of outlet stores.

Why is Nordstrom moving down this road in such an uber-aggressive way? Because, quite frankly, that’s where the opportunity is. Traffic at malls, where most of the company’s full-line stores are located, is steadily declining as e-commerce takes a larger and larger bite out of brick-and-mortar sales, and as consumers turn the quest for ever-lower prices into almost an Olympic sport.

After enjoying double-digit growth in each of the prior three years, total Nordstrom revenue increased by only 3 percent last year, to $12.1 billion, with full-line store sales down 3.3% (negative 2 percent on a same-store sales basis) to $7.7 billion. Rack sales, on the other hand, grew 12 percent last year (same-store sales grew by 2.3%), to $2.7 billion, after three years of 20 percent annual growth, with positive comps every year. If these trends continue, it might not be many years before Rack threatens to overtake full-line as the company’s biggest division.

The company recently opened an expanded fulfillment center in San Bernardino, California to service the off-price business, with another one planned to be built in Pennsylvania to support the growth of full-line e-commerce on the East Coast. The $1.2 billion in technology investment planned for the next several years will help Nordstrom become a true omnichannel retailer—and, arguably, to help Rack ride the coattails of Nordstrom’s customer-centric model in a more seamless way. It is probably safe to assume that the Nordstrom.com fulfillment facilities, if needed, could also be used to accommodate growth in the off-price e-commerce business as well, giving the company more flexibility to meet customer needs.

A spokesman for Nordstrom told Sourcing Journal: “Our customers have been telling us for some time they want to shop the Rack online and we’re excited that Nordstromrack.com gives us the ability to further serve the customer where the customer wants us to be.”

An important question here is, of course, will this focus on Rack damage the flagship Nordstrom brand? Will the retailer continue to be known for phenomenal service and luxury fashion once the consumer gets an image in her mind of Nordstrom, by virtue of its Rack format, as a place to rummage through excess inventory of last season’s Dolce & Gabbana? Because, if that happens, the future of Rack will be at risk as well.

Management claims there is significant overlap between the Nordstrom and Rack customer, though doesn’t divulge how much. Company CEO Blake Nordstrom has told analysts and the media that by opening Racks in close proximity to full-line Nordstrom stores, they can introduce more young families to the flagship and ultimately get them to shop there.

Not everyone agrees. Industry analyst Marie Driscoll, who covers both luxury and outlets, feels that the Rack customer and Nordstrom full-line customers have a different approach to shopping. “Basically the full price department store shopper is a fashion consumer whose priority is the latest styles, whereas the outlet shopper likes brands, but places top priority on value. She is happy with last season’s (tried and true) fashions.”

Driscoll feels that the overlap between the two shopping types is about 15 percent which, if true, means that Nordstrom is attracting a whole new set of customers at Rack stores who won’t necessarily shop in its full-line stores.

Regarding possible damage to the brand positioning, she said: “There’s definitely a slippery slope in terms of brand positioning and potential for cheapening the Nordstrom brand.”

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