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Nordstrom’s Customers Are Skewing Younger. Here’s How it’s Retooling to Adapt.

On Thursday, Nordstrom Inc. unveiled a new strategy keying into the digital momentum it has built throughout the Covid-19 pandemic.

Branded “Closer to You,” the Nordstrom action plan is built on many of the pillars that have borne fruit in recent years, strengthening a focus on local, digital and off-price.

At a virtual investor event Thursday, CEO Erik Nordstrom reiterated that “putting the customer first” is “embedded” in the department store retailer’s “DNA.” The strategic reset, he added, targets where and how the Seattle-based firm will cater to customers, who have steadily skewed younger and more diverse while aging into the millennial sweet spot of high earners powering 50 percent of personal goods spending by 2024. These customers bifurcate along the premium and off-price divide, dovetailing with Nordstrom’s areas of expertise.

“How customers shop from discovery through delivery has evolved to become increasingly digital,” the chief executive said, citing how social media has replaced the merchant as a leading vehicle for discovery.

The retailer has made strides in linking all of its digital platforms, and integrated the off-price Rack site with full-price ahead of schedule, he said. Digital business now accounts for 50 percent of overall sales, up from 30 percent, he added, noting investments in increasing Rack’s brick-and-mortar presence.

Nordstrom will unlock growth, the CEO said, by continuing to go hard on its local market strategy, investing in Rack and tweaking its price ranges, and better integrating on- and offline to drive digital velocity. The company might have taken a leadership position more than a decade ago by commencing store fulfillment, but it has advanced those capabilities by now shipping from stores and adding in-store and curbside pickup as a result of coronavirus disruption. It also began offering virtual styling to serve customers from the security of their homes.

The company said its digital presence will reveal deeper customer insights, incorporate invaluable inventory analytics and accommodate a broader product offering. However, the retailer is not simply relying on the traditional wholesale model but considering a “less asset intensive” approach that aims to trim wholesale to 50 percent of stock, versus the typical 85 percent.

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In a paradigm shift, Nordstrom is embracing digital-first assortment planning, which can optimize inventory flow, amplify product offerings, and enable flexible fulfillment. The company will lean on its private labels while reducing the wholesale merchandise it has on hand, adding more drop-ship goods, and taking a revenue percentage from brands under a collaborative, shared ownership model.

Pete Nordstrom, president and chief brand officer, noted that 25 percent of online products come from drop-shipping retail partners, which “gives a brand control over shipping, while gaining our customers.”

Home, he added, offers a prime example of how digital-led planning can drive gains. Whereas home merchandise typically has been “constrained by 1,500 square feet of space” on the selling floor, e-commerce enables the retailer to display more items in the category without being beholden to the actual physical inventory. Customer choice increases threefold, which could triple or quintuple sales in the next three to five years, he projected.

The shift from store-based to digitally led planning could bump products from 300,000 to more than 1.5 million, Nordstrom executives said.

Meanwhile, off-price currently generates about $1 billion in sales, but could reach $2 billion over the next five years, said Geevy Thomas, president of Nordstrom Rack.

Roughly 80 percent of Rack stores are located in off-mall locations, with 70 percent in its top 20 markets. The retailer sees stores as part of three groups: doors primarily centered on price (which will be a growing area of focus), brand doors (which are the typical Rack store at the moment), and a hybrid door balancing price- and brand-focused inventory.

Nordstrom also is laying the groundwork to have Black and Latinx employees comprise a minimum of 50 percent of its mid- and senior-level people managers by 2025. “To be successful in these initiatives, we must build diversity and inclusion into our leadership expectations,” it added. “And we’ll measure our leaders on their performance in this area across the organization.”

Separately, the department store firm reiterated the outlook for fourth quarter 2020, stating that sales are expected to decline in the low 20 percent range versus the prior year. For Fiscal 2021, it expects revenue, including retail sales and credit card revenues, to grow more than 25 percent, with digital representing about 50 percent of total sales.

The company also said that the new strategy framework should grow revenue in the low single-digits annually from 2019 levels, with operating income forecasted to grow faster than revenue. Annual operating cash flow is expected to exceed $1 billion. In addition, annual capital expenditures are expected to be 3 to 4 percent of sales.