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As Nordstrom Recasts Itself Under ‘Closer to You’ Model, Digital Sales & Rack Take Starring Roles

Sheena butler-young, deputy editor.

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Nordstrom Inc. today unveiled a new business strategy, dubbed Closer to You, which sees the department store employ key learnings from COVID-19, including heightened focus on digital and its off-price business.

During its 2021 virtual investor presentation today, CEO Erik Nordstrom said the retailer’s digital revenues have already risen — from 30% in 2019 — to represent 50% of its overall sales. Meanwhile, as the company studies fundamental shifts in the demographics and preferences of its core customers, it expects Nordstrom Rack — and its connectedness to the mainline stores —to become increasingly important.

“[Our] new direction is centered on unlocking the full power of the digital first platform that we have built by significantly expanding the aperture of who we serve and where and how we serve them,” Erik Nordstrom told investors. “ We have two powerful, interconnected brands that create a unique value proposition for our customers. We have built on this advantage through the investments we have made to create a connected experience across our digital and physical assets.”

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Since announcing its market strategy in 2018, Nordstrom’s chief said the company has expanded the integration of Nordstrom Rack “faster than scheduled.”

“Nordstrom Rack is the premier of price destination offering in-demand products and a treasure hunt experience at compelling price,” he added.  “Importantly, Nordstrom Rack also serves as an entry point to our platform as the largest source of [new-to-Nordstrom] customers.”

Regarding overall digital acceleration, the chief exec went on to tout the company’s ongoing acceleration of omnichannel services such as buy online, pick-up in store, curbside pickup and contactless payment options as well as its efforts to grow its dropshipping capabilities.

“We enabled online order pickup and in-store fulfillment more than ten years ago at Nordstrom and we continue to scale and optimize the customer experience,” he said. “Notably, we recently expanded ship-to-store fulfillment and order pickup to include both Nordstrom and Nordstrom Rack.”

The executive said the company’s strategy boils down to a focus on three areas: extending the rollout of its market strategy to its 20 top markets that represent 75% of sales and integrating Nordstrom Rack assets; broadening the reach of Nordstrom Rack by expanding its price range and better connecting physical and digital inventory helping to boost its incremental revenues to $2 billion over the long-term; and increasing the “digital velocity” of Nordstrom Inc.’s overall business.

All told, Nordstrom expects to reach $17 billion in sales over the medium term; expand profit margin with the potential to sustain 6% or higher EBIT margin going forward; a “significant improvement” in ROIC; and “consistently” generate more than one $1 billion in operating cash flow annually.

Nordstrom today reiterated its Q4 2020 outlook and continues to expect sales during the period to decrease in the low 20% range relative to the prior year and positive operating cash flow and earnings before interest and taxes. The company also introduced its fiscal year 2021 financial outlook, calling for revenue, including retail sales and credit card revenues, to grow more than 25%, with digital representing 50% of total sales and positive EBIT.

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Nordstrom is rethinking the department store model

By Hilary Milnes

American department store Nordstrom is responding to tough times with a radical rethink of its business model. At its Investor Day presentation on Thursday, the company announced plans to reduce traditional wholesale from 85 per cent to 50 per cent of overall sales.

That means many more sales will come from drop ship (shipping products direct from the brand to the customer), concessions and revenue share deals. Nordstrom is looking to offer more distribution options to brands as well as more assortment to its customers. Diversification also protects Nordstrom from risks associated with the wholesale model, including inventory overhead and cyclical markdowns. The move represents a pivotal shift, coming in the aftermath of a pandemic that exposed and accelerated the weaknesses associated with wholesale, including the pace of the promotional cycle and amount of unsold inventory.

“This is a monumental step signifying change in a department store model. I would not underestimate what a major step this is,” says Robert Burke, chairman and CEO of New York-based consulting firm Robert Burke Associates. “I’m sure other retailers will follow suit, because they have struggled with how to come up with a formula to address their immediate issues.”

By Kati Chitrakorn

Pete Nordstrom, president and chief brand officer, said the new model will increase product assortment available online to 20-fold more than in-store. That will resonate with customers both at Nordstrom and its off-price counterpart, Nordstrom Rack. At the same time, these new options have the potential to attract new brand partners, some of whom may be wary of the traditional wholesale model.

“We have to move away from a transactional way of [working with brands] and more to a partnership,” Pete Nordstrom said on Thursday. “When you build trust and you’re transparent, it’s not about offloading risks onto brand partners. It’s sharing risk to make business happen with greater speed, risk and agility.”

Department stores have been hit particularly hard by the Covid-19 pandemic and the resulting retail fallout. Nordstrom competitors Barneys and Neiman Marcus have gone bankrupt, while Macy’s, which owns Bloomingdale’s, is closing 20 per cent of its stores.

Nordstrom, which was early in adopting online-offline technology like kerbside pickup, returned to profitability in the third quarter ended 31 October 2020. Sales were still down 16 per cent compared to the same period the prior year. Nordstrom expects to return to pre-Covid levels this year, with 25 per cent revenue growth driven by e-commerce and sales at Nordstrom Rack.

By Elektra Kotsoni

By Kirsty McGregor

By Vogue Business in partnership with Worldpay

Empty streets at a Nordstrom store in NYC during the coronavirus pandemic.

Before the pandemic, some brands were shifting away from traditional bricks-and-mortar wholesale retail. For Nordstrom and other department stores, options like the concession model and drop shipping offer brands more control. Pete Nordstrom said that while the retailer does “lose some control, we have confidence in our brand partners”. Burke says trusting brands to handle customer information and fulfilment “may be the cost of this type of partnership”.

Drop ship, concession and revenue-share models provide more flexibility. Farfetch’s drop ship model enables it to sell goods from luxury boutiques worldwide, while Selfridges’ concession model has proved profitable.

This type of flexibility has made Nordstrom an appealing retail partner to digitally native brands. An example is Blueland, which sells eco-friendly cleaning kits on Nordstrom.com through a traditional wholesale model but also appreciates the potential of drop ship. “With wholesale, it shows a commitment to our product and our brand,” says Blueland co-founder and CEO Sarah Paiji Yoo. “The beauty of drop ship is that we would hold the inventory and have flexibility based on demand, but we see Nordstrom as a sort of influencer channel.” Yoo added that when it began selling on Nordstrom in 2019, drop ship wasn’t offered as an option.

A bigger selection online also makes Nordstrom a stronger competitor to luxury e-commerce sites, like Farfetch and Yoox Net-a-Porter. Part of the new digital-first strategy laid out by Nordstrom to investors on Thursday included a focus on more sophisticated online product discovery based on customer personalisation, an increasingly competitive ground for retailers .

New distribution models can prepare the way for further innovation. Pete Nordstrom noted the potential of resale — the company tested a resale model last year and plans to revisit it. “There’s an opportunity [in resale],” said Nordstrom. “Our digital technology efforts have afforded us new opportunities.”

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Nordstrom Investor Day 2021: “Closer to You” Strategy Seeks To Expand Inventory by 5X and Lower Prices at Nordstrom Rack

What's Inside

The Coresight Research team attended Nordstrom’s virtual Investor Day on February 4, 2021. We present our top takeaways from the event, including the company’s views of the shifting retail landscape and Nordstrom’s three initiatives under its digital-first “Closer to You” market strategy.

Click here to read more Coresight Research coverage of Nordstrom.

What’s the Story?

The Shifting Retail Landscape: Customers Are Younger; Spending Is Polarized; Digital is Driving Decisions

“Closer to You” Strategy: Three Initiatives

• Winning in Its Most Important Markets
• Broadening the Reach of Nordstrom Rack
• Increasing Digital Velocity

Financial Outlook

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