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Will Nordstrom Survive the Amazon/Walmart Duopoly Onslaught?

March 2018 Corporate, Marketing

Retailers after retailers are facing layoffs and store closures. Malls report occupancy challenges, and in the face of the budding Amazon/Walmart duopoly, Nordstrom—and more specifically the Nordstrom Family—seems to be imparting a different tactic.  Will it succeed?  I asked my Pricing Strategy students this question.  And, to make it personal, I asked if they would invest their cash or career there.

Katelyn Gimpert “I do not believe that investors will continue to invest in the company”

As Amazon and Wal-Mart continue to dominate e-commerce, Nordstrom has been faced with a unique challenge of growing its own e-commerce presence, and continuing to promote its differentiators against this duopoly.

Over the last few years, Nordstrom has been investing heavily in both technology and warehousing in an effort to recapture profits. Like most retailers, Nordstrom suffered a loss in profits subsequent to in-store foot traffic decrease due to consumers’ preference to shop online—and not properly preparing for this shift.

In 2017, while most competitors’ shares decreased by almost half (Macy’s decreased a staggering 40%), Nordstrom only decreased by 15%. Nordstrom’s profits have not entirely rebounded, but the CEOs have taken a long-term approach in stimulating revenue drivers for the company.

Nordstrom has sought to stimulate and identify new revenue sources through acquisition, expanding its existing rewards program, improving e-commerce through its mobile app and Nordstrom.com, launching new store concepts, and further emphasizing in-store delighters as differentiators. In order to compete with the retail subscription category, Nordstrom purchased Trunk Club, an online personal styling service in 2014 for $350M.

By 2016, Trunk Club was estimated to be only worth $150M, due to an overestimate of future growth and profitability. However, a few years prior Nordstrom purchased HauteLook, an online flash sale site which continued to improve e-commerce for Nordstrom Rack. By 2015, both HauteLook and Nordstrom Rack helped to increase sales by 51%. However, in-store sales continued to decrease.

In order to increase overall sales and customer engagement, Nordstrom expanded their existing rewards program to allow all consumers, regardless of payment method, access to rewards. This helped to expand within the millennial segment and attracted 3.7M new memberships, growing their customer enrollment to 7.8M members. In 2017, the rewards program played a significant role in sales, accounting for 51% of total sales—resulting in a 15% increase in sales from 2016.

In 2016, Nordstrom focused on enhancing the overall digital experience for its consumers by improving the functionality of its mobile app, adding location features, better integration of its loyalty rewards program, and targeting customers with discount offers. All of this combined with ensuring Nordstrom.com met customers’ online shopping preference, timely delivery, enhanced inventory management, consistent marketing, and improving pricing strategies helped to increase online sales by 20%.

In an effort to simplify in-store and online inventory, and align with customers shopping behavior, Nordstrom launched Nordstrom Local in October 2017, a smaller location with no clothing available for purchase. Nordstrom Local focuses on the heart of the brand and personal styling, while significantly reducing inventory overhead.

As Nordstrom continues identifying methods to streamline inventory and technology, the company also emphasizes in-store differentiators that set itself apart from Amazon and Walmart. Over the last few years, Nordstrom has been remodeling stores in an effort to move away from a dated department model, instead offering an open concept featuring exclusive brands.

The company maintains its practice of severing ties with brands that fail to meet margin goals, and risk square footed for slow to move inventory. This was demonstrated when the company cut Ivanka Trump’s line due to waning sales.

The determined brick-and-mortar continues to offer 90% of its inventory at full price, limiting discounts. Lastly, the store upholds its superior customer service while introducing additional incentives such as blow outs, manicures, and cocktail services. Nordstrom has created an in-store experience impossible for Amazon and Walmart to copy, catering to a more affluent and luxury brand-oriented customer base—which has been a challenge for the duopoly retailers to attract.

Over the last few years, Nordstrom has taken a hit to profits due to taking on significant long-term debt. Yet, this past year investments are starting to pay off with net income improving the last three quarters. It appears that Nordstrom’s CEOs are headed in the right direction to combat the decrease in in-store foot traffic, and consumer shift to online shopping. However, the CEOs have communicated a desire to re-privatize the company in order to have total control of it, especially in regards to decisions that impact its long-term future. Yet it’s cited that this buy out hasn’t occurred due to a lack of funding.

This may provide a unique opportunity for Amazon to acquire Nordstrom in order to establish credibility within the luxury retail category, as it has struggled with past brands. Such a business move would align with Amazon’s past acquisitions, as Nordstrom is smaller compared to its competitive set and serves a more affluent market. Similar to their Whole Foods acquirement, Amazon could allow Nordstrom to continue to operate as its own entity, which will help to expand its reach for customers, brick-and-mortars, and credibility within the retail luxury category.

Amazon would be able to provide Nordstrom with the infrastructure and supply chain resources needed to expediate improvements for inventory management, timely delivery and its e-commerce site.

If Amazon were to purchase Nordstrom, investors would be putting stock into Nordstrom’s growth potential backed by Amazon’s infrastructure. If Amazon were not to purchase Nordstrom, I do not believe that investors will continue to invest in the company. It seems unlikely that Nordstrom’s existing efforts are sustainable for the long-run if profits do not start to increase at a greater rate to absorb debt.

At this time, it would be difficult for me to invest my career in Nordstrom since in many ways the company is playing catching up, and consumers expectations for ultra-fast delivery and on-demand inventory are rapidly increasing. In order to combat these challenges, Nordstrom will need to leverage an existing infrastructure that is already addressing these consumer changes—like Amazon’s model.

Qi Ge “Nordstrom’s strategy is a winning strategy”

As traditional luxury department stores are busy trying to reinvent themselves for the digital age, they’re probably not doing it as well as Nordstrom. The high-end chain is using a variety of strategies to inject a little excitement and entice new customers not only to enter their brick-and-mortar locations, but stay and shop. Nordstrom is trying to change the game.

Nordstrom’s strategy, in the long run, is a winning strategy. They are differentiated through a strategy which is completely different from what Amazon and Walmart are doing right now—even though Amazon and Walmart are moving away from a purely operational excellence position, toward a customer intimacy tier.

Nordstrom portrays sophistication and achieves high performance by showing more features, all linked with aesthetics and style to yield a better position against competitors. Hence, rather than shut down chains and stores, Nordstrom is investing in upgrading them. The focus is on getting more exclusive product to win back some pricing power, and seeking to quicken the product cycle to meet younger luxury shoppers expectations—rather than catering to their older, mainstay customers.

Nordstrom has an edge in e-commerce and sensed the opportunity in online sales earlier than its peers.  Its investments have paid off. The company posted growth on Nordstrom.com and on Nordstromrack.com, both of which accelerated from the year. Nordstrom’s e-commerce strategy does a much better job of leveraging its store base.

The company has only 116 full-line stores, compared to its peers, which have anywhere from 700 to 1,100, but it has a higher market cap than all of them in part because it uses its brand name and real estate much more efficiently in conjunction with its e-commerce platform. As a result of investing in e-commerce rather than erecting new stores, Nordstrom is in a much stronger position than its peers. That’s one of the reasons Nordstrom has no need to shut down any of its existing stores, in contrast to its competitors.

One thing worth mentioning is the fact certain department stores have an overlap of the same products sold. A shopper could visit department stores such as Sears, JC Penney, Kohl’s, and Macy’s etc. and easily notice that they were all selling much of the same merchandise. This problem has gotten steadily worse. Nowadays, middle positioned department stores have a more than 40% merchandise redundancy—that’s not just product categories, but specific items.

Department stores have historically been less differentiated from one another. To combat this, they have ramped up their house brands, the idea being to offer shoppers something “exclusive” but affordable. Still, such clothes offerings don’t exactly ignite consumers’ fashion fantasies, but helps drive margin, while not really driving traffic. With regard to this situation, Nordstrom weeds out weaker-selling brands regularly, replacing laggards with new labels and selling labels that aren’t widely distributed.



About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

Tim J. Smith, PhD
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