Nordstrom – 6% Decline in Shares Post-Q3 2021 Results
as Pre-Coronavirus Sales Volumes Still Out of Reach – 16
September 2021
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Specialist:
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Greg Lohman (GL)
Former VP, Merchandise Planning & Inventory, Full Price at Nordstrom Inc
Agenda:
1. Retail department store industry evolution, highlighting Nordstrom’s (NYSE: JWN) in-store vs digital
strategy vs e-commerce players such as Amazon (NASDAQ: AMZN)
2. Nordstrom’s Anniversary Sale – strategic rationale, potential limitations and performance update
3. Merchandising assortment – category expansion opportunities and threat of shifting D2C and
wholesale dynamics
4. Omnichannel strategic outlook, including Nordstrom’s global expansion
Contents
Q: How has the retail department store industry evolved over the last few years and how has that impacted
buying decisions?
Q: You said that Gen Z tends to mix between fast fashion and luxury, adding that Nordstrom wouldn’t
consider Macy’s a competitor but would monitor its results. Could you elaborate on the three-tier dynamic
you outlined? How has the market share dynamic changed between low tier, mid-tier and Saks Fifth tier?
Has there been a fluctuation where the share of dollars has gone to more of the high end or mid-tier?
Q: Could you expand on the success of Nordstrom’s strategy to offer Rack stores, given other retailers are
trying to replicate that programme? To what extent does this insulate Nordstrom from online e-commerce
giants such as Amazon that are putting players such as Macy’s out of business?
Q: When did Nordstrom start to invest in its digital strategy, considering how long it takes to transfer
physical know-how to a digital platform and build up the talent pipeline, assortment and supply chain
capabilities to compete vs Amazon? Has Nordstrom invested into that strategy as much as it could have?
3
4
5
6
Q: When you were at Nordstrom and consumers started shopping online, did you receive data that told you
a customer was shopping across channels so you could use that information to build a more personalised
experience? When did the data start to prove that the customer is less tied to the in-person experience, but
might still try something in-store before buying it online? How did that play out, given the lack of integration
7
you noted?
Q: How do you think Nordstrom considers its physical footprint vs its online presence? What do you think is
the right mix? What are the potential long-term profitability implications from opening more Rack stores,
given it means margins take a hit?
7
Q: How do you assess the excitement around Nordstrom’s Anniversary Sale? What is the strategic rationale
for that event? You alluded to pushing forward the end of the season inventory, but how does this
Anniversary Sale differ from other sales across different retailers and department stores?
Q: You mentioned consumer returns and the short life cycle of Nordstrom’s Anniversary Sale. How has the
company reacted to that aspect of the business, given it’s harder to control? How could Nordstrom mitigate
the risk from new things such as in-store pickup and click and collect?
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Q: How do the factors you mentioned play into Nordstrom’s men’s, women’s or kids’ category offerings? To
what extent is the store itself very much led into women’s categories? Are there missed opportunities in other
categories that Nordstrom has an opportunity to expand in or does the data suggest it’s not worth doing so?10
Q: How has Nordstrom weathered the storm of D2C brands or brands such as Nike and Canada Goose,
which you said are aiming to establish a D2C route and reduce the wholesale presence? How has Nordstrom
been impacted by the reduction of wholesale by brands across the industry? Alternatively, is that something
that the company isn’t worried about?
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Q: How well does Nordstrom manage its inventory? How do some of the brand relationships you outlined tie
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into the company’s ability to manage inventory in a consistent or normalised demand environment?
Q: How do you assess Nordstrom’s global opportunities and the company’s ability to secure designer
relationships in markets such as China, where so many brands struggle domestically and try to win business
in other Asian countries? Do you think Nordstrom’s can be successful on a global scale? What risks to its
business model could it improve?
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Nordstrom – 6% Decline in Shares Post-Q3 2021
Results as Pre-Coronavirus Sales Volumes Still Out of
Reach
Transcription begins at 00:00:04 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview entitled Nordstrom – 6% Decline in Shares Post-Q3 2021
Results as Pre-Coronavirus Sales Volumes Still Out of Reach. I’m Nyree Hinton and I’ll be facilitating today’s
Interview with Mr Greg Lohman, former VP, Merchandising Planning and Inventory, Full Price at Nordstrom.
Greg, before we get started with today’s Interview, please state I agree or I disagree to the following statement:
You understand the definition of material non-public information and agree not to disclose any such
information, or any other information which is confidential, during this Interview.
GL: I agree.
NH: Thank you, Greg. Could you start with a brief introduction to your background?
GL: I had a 33-year retail background, mostly in corporate merchandising roles. I worked for six retailers over
that time frame, some of which are long out of business, but the ones that are probably relevant that you’ve
heard of are Macy’s, Recreational Equipment Incorporated, REI, Amazon and then Nordstrom. I was at
Nordstrom for 18 years, before I retired last May, and for the last six of that, I was Vice President of
Merchandise Planning and Inventory Management. The core responsibility of that role is to work with cross-
functional teams, supply chain, finance, marketing, executive team, to decide how and where to spend
merchandising receipt dollars. Also, we forecasted sales receipts, inventory, gross margin, GMROI, the whole
ball of wax, and then coordinated with our supply chain friends to make sure that they were ready for delivery
of those receipts, then re-forecasted in-season, set up the next year, rinse and repeat that whole cycle. A
combination of roles of a finance background in a buying organisation as well as inventory allocation and
placement.
[00:02:08]
Q: How has the retail department store industry evolved over the last few years and how has that impacted
buying decisions?
GL: At a high level, in the US, the national department stores are broken into three groups, the low, medium
and high price point service tiers. Low would be your JCPenney, Kohl’s, Macy’s, Sears, Kmart, mid would be
Nordstrom and Bloomingdale’s, and then high would be Neiman Marcus, Saks and Bergdorf. All those groups
have, for the last 15 years, pretty much been losing market share to online retailers, mostly due to too heavy
reliance on stores and malls as their primary sales point. Oversaturation of stores and malls has diluted the
department store base. There’s also been a lack of customised assortment. When you create too many stores, it
becomes very complicated in a buying organisation to actually hand-pick assortments for different regional
stores. It’s difficult to monitor and keep up, so stores become cookie-cutter and boring. Then the physical
space of retail establishments has really cut in because the customer has gotten used to the online assortment,
which is virtually unlimited. When you go shopping at your local store, you might have three choices, where
online, you might have 300. The faster shipping from online retailers, which 10 years ago wasn’t a big deal, has
really moved into two- to four-day shipping for most entities, which gets over that whole immediate
gratification of walking into a store. People are willing to wait a couple of days. They’re not willing to wait 7-10
Private and confidential 3
days.
Then brick-and-mortar retailers getting into the online space, the way most of them started was they started as
separate entities, so they ran them as, while they were still under the same parent company, they were literally
two different buying organisations, planning organisations. They had separate P&Ls. There was no cross-
pollination between them or leveraging of customers. That really isn’t an integration model that works.
Retailers eventually have discovered that, and most of those standalone online businesses have been removed.
I believe the original reason for them being created was they didn’t have the knowledge, so they hired people
from online companies to come in and literally start up the organisation but then stayed that very online-
focused.
Trends that have been happening pre-COVID, the biggest thing is price discounting, online and in-store
retailers. When you have that exposure online, because the items often use the same photographs and same
descriptions from the manufacturers, the one thing you can differentiate yourself on, if it’s not in shipping, is
on price. A lot of marketing bounceback coupons have been used, particularly in the luxury market where
you’re not allowed to always take markdowns. What that causes, and this is pre-COVID, is it causes a race for
gross margin to the bottom, because everybody is trying to outbid the lower price of somebody else. The other
trend is the rise of direct-to-customer selling from the brands themselves. Most apparel manufacturers are
very good at making clothes but not particularly good at serving customers, doing the service and sales. They
outsourced it and now that has become common enough knowledge that most of them are running their own
direct-to-customer operations while they’re selling through retailers at the same time, so they’re eating away at
the market share of department stores.
The other big thing is really the investment. The tech and the money required for the online integration has
become very expensive for retailers. Direct shipping from stores, because you’re trying to use inventory that’s
trapped in stores vs just online in a fulfilment centre, costs more than it does to ship from a fulfilment centre.
To decide where to pick that product from, you’re using a lot of coding and AI rules, and that’s costing retailers
a lot more money, so the online component has not turned out to be cheaper than stores. You don’t have the
leases that you have on 100 locations, but you have large fulfilment centres and a huge tech investment and
then the shipping cost of sending those products and the returns that are associated with those.
The last pattern is everyone is trying to satisfy the millennial desire, and the millennial pattern is different
than previous generations, in that they tend to buy high and low for spending. What I mean by that is it is not
unusual for someone in their 20s to go out and buy a Chanel or Gucci handbag or a pair of shoes, yet buy the
rest of their outfit at a Nordstrom Rack or a TJ Maxx. They buy these foundational pieces that are really
important to them that cost thousands and thousands of dollars, that in past generations, people wouldn’t do.
Then they basically buy fast fashion, less expensive or discounted clearance product to round out their outfit.
That’s become a staple of the millennial shopper.
The way the competitive landscape has changed, I would say first of all, poor management at department
stores, getting back to that lack of assortment, getting online earlier, the integration has led to a lot of them
either disappearing or becoming utterly unimportant. If you look at Lord & Taylor, Bon-Ton, even Sears,
they’re virtually gone. There may be a shell of a company out there but they’re not doing any real business.
They’re selling items that other online retailers are selling, and if you’re a smart department store these days,
you’re looking at your business not as somebody who is competing with a Macy’s, for example, if you’re in the
department store business. It’s something that Nordstrom never considered a main competitor. They would
look at their result but Macy’s was not their competitor. They would look much more at how Amazon is doing,
Net-a-Porter, online fashion retailers more than they would necessarily true department stores. Those are the
big changes and the evolution of the landscape that come to mind.
[00:08:43]
Q: You said that Gen Z tends to mix between fast fashion and luxury, adding that Nordstrom wouldn’t
consider Macy’s a competitor but would monitor its results. Could you elaborate on the three-tier dynamic you
outlined? How has the market share dynamic changed between low tier, mid-tier and Saks Fifth tier? Has
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there been a fluctuation where the share of dollars has gone to more of the high end or mid-tier?
GL: It’s really a parallel to the income bifurcation that we talk a lot about in the United States, where you have
really wealthy people getting wealthier and wealthier and then poor people getting poorer and poorer. I don’t
know if that’s a great analogy but my point is you’re seeing designer brands, you’re seeing upscale high-service
companies being able to do a lot of business and drawing that wealthy money, and some of that millennial
money who’s willing to buy those staple pieces, and then you’ve seen everyone… Nordstrom has had a Rack
business for decades. They’ve been in this clearance business, it’s now about a third of the total business, two-
thirds being full price, one-third being Rack, and everyone else is trying to jump into that. You’ve got Saks Off
5th, you’ve got Macy’s trying to open clearance stores. TJ Maxx, Burlington, they’ve all done fairly well.
Burlington is hit and miss but TJ Maxx has done well over the last 5-10 years, so they’re growing in share. It’s
this customer who recognises that, “All of these goods are going to get marked down at the end of the season
anyway. Why don’t I go hunt for it now and see if I can find something that really lets me buy five pieces as
opposed to one at full price?” That has been the shift.
The expansion, even at Nordstrom, if you look at the store expansion, after Canada and New York were open,
there were no more full-price markets to go to in the United States. The 20 major markets were saturated by
Nordstrom. You can’t open a full-price store in the middle of a small town in the Midwest, but you can open a
Rack store, which is why you saw the growth of Rack stores, I think they’re up to close to 350 right now,
because they’re easier to open, you can put them in suburbs, you can put them in rural towns. That’s the
footprint that I think most retailers are trying to get to if they recognise that change in advance. Obviously, the
true high-end Neiman kind of people, they’re not going to play, although I think they have an off-price location
or two, but it’s not very broad-spread.
[00:11:44]
Q: Could you expand on the success of Nordstrom’s strategy to offer Rack stores, given other retailers are
trying to replicate that programme? To what extent does this insulate Nordstrom from online e-commerce
giants such as Amazon that are putting players such as Macy’s out of business?
GL: Nordstrom considers itself an end-to-end retailer, and there aren’t many who actually do that, meaning
there are enough Rack stores and NRHL, which is their off-price website, that they can take all excess product
from the full-price stores and flow it through, plus go out to suppliers who full price may be buying from and
say, I’ll give you the mythical situation, which is let’s say this supplier has 5,000 units of something and
Nordstrom only needs 3,000 for their full-price business. They can say, “If you’re having a hard time selling
these last 2,000 units, what we will do is we’ll take the 3,000 now, we’ll pay you this price. We’ll buy the last
2,000 at a discounted price. At the point that we transfer our leftovers from full price to Rack at the end of the
season, that selling season for that particular item, we’ll buy those and you’ll send those straight to Rack
stores.” What you’re doing is you’re offering this complete life cycle, birth to death, for a supplier. Close-outs,
pre-pandemic, were the hot thing to get a hold of, and often suppliers would call and say, “You have to take
everything or nothing,” and they may have a mixed bag of 10,000 different units of 100 different styles. It
could be weird sizes and colours and everything else but if you wanted it and it was somebody really attractive,
buyer-wise, you would buy that, bring that in, divvy that up as best you can to your stores.
Nordstrom is unique in that they have the broadest ability to do the full price all the way through to off-price.
TJ Maxx and a lot of other off-price players obviously have a large number of stores and they’re better at
simply clearing off-price, but very few of the other retailers, like what Macy’s has tried and Saks, do they have
enough outlets that they could actually clear real quantities, so that is to Nordstrom’s advantage. It’s been
successful for Nordstrom. The Rack business is a lower gross margin business than full price, so it’s not like
more Rack stores are the same thing as, if you added, I don’t know, 30 Rack stores together, it doesn’t equal
one full-price store, as far as gross margin. It takes a lot of Rack stores to make up the dollar volume, and then
you’re blending down your gross margin the more you open Rack stores. You just don’t get the initial markup
coming in the door that you get on full-priced goods.
As far as insulating Nordstrom or protecting themselves from somebody like an Amazon, Amazon is a
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platform, and between their own items they sell and their third parties that are selling on that platform,
Nordstrom would like to become that fashion platform, the same version of what Amazon does but with only a
fashion focus, and become the first place that all suppliers want to go to to put their products on there. The
difference between the Nordstrom website and the Amazon platform is that Amazon built their platform
themselves, from scratch, to do what it’s doing today. It may not be very jazzy and boring-looking, and
everyone knows it’s not very creative, but the Nordstrom site was built for Nordstrom-purchased goods only,
not for third parties to sell on their site. That transformation to build a platform that can do that same
capability is very, very complicated, and it’s the equivalent of doing open heart surgery while you’re driving
down the road. You can’t let the patient die because your regular business has to keep going. That is the end
goal but how you get there and how fast you can get there from a technology, from a design, from a migration
perspective is quite long.
[00:16:20]
Q: When did Nordstrom start to invest in its digital strategy, considering how long it takes to transfer physical
know-how to a digital platform and build up the talent pipeline, assortment and supply chain capabilities to
compete vs Amazon? Has Nordstrom invested into that strategy as much as it could have?
GL: It’s hard. I know some folks at other retailers, so I’m going to blend my own Nordstrom experience with
what I’ve heard from them. I won’t necessarily name companies but I would say it was at the financial crash,
2009, that I think everybody recognised that it was more important than everyone had thought. I can literally
remember leadership meetings, we’re talking about vice president-level leadership meetings, off-sites for two
days, where the feeling was that stores offer such a unique experience that you could never duplicate that
online. Also, the conversation was that there were brands that sell to Nordstrom that would never sell to
Amazon because they don’t present the product in the right kind of photos, and they don’t put the attention,
and the customer doesn’t think of Amazon as a place to go buy fashion. This is 2009-10. Not long after, you
start seeing some of these brands actually pop up on Amazon, because the truth of the brands is they’re public
companies too and they want the volume. If store-based retailers aren’t giving it to them, they’re going to go
do it themselves. I would say that’s when everyone’s recognition really popped.
The reaction to that, what you have in most brick-and-mortar trying to transition to multichannel or
omnichannel retailers is a leadership team, not just executive leadership team but regional managers,
everything else, whose entire lives have been spent serving customers in stores. They have a very, very hard
time believing that their platform that they grew up on is less relevant. While they may embrace or
acknowledge the transition and the need to change, whether they’re willing to give up resources, cut their
labour dollars in order to let the company reinvest and hire software programmers and all that, there’s a lot of
internal politics that happens on this. I would say some retailers dragged their feet, and if they did anything,
they went and hired some people externally to go run a standalone online presence that had the same name
but really wasn’t integrated. Nordstrom did a better job than that, and I would say within two years of the end
of the financial crash, we were hiring Amazon people to come work at Nordstrom, and we no longer had
separate buying teams and everything else. They were an integrated buying team. The technology was written
in order to allow shipping from stores or fulfilment centres, based on where the customer is and what’s needed
to get it to them fastest. It was talked about, a digital company.
I will also say that during that same time that we were investing in online, we were also investing in an awful
lot of store-based companies, meaning the purchase of the New York and the build of the New York flagship,
the launch of six stores in Canada, the purchase of Trunk Club. Trunk Club would be an online example of a
subscription business that was supposed to augment. Those things all became distractions and heavy capital
expenses for the company that stopped the rapid expansion, not of the website improvement but primarily the
(inaudible 20.52). The customer who shops online thinks of the assortment that they see, the interaction and
ease of use of the website, and finally, the shipping and returns process, they think of all that as online. I would
say that Nordstrom did a very good job building a good customer experience, offering the assortment, getting
the integration of the company behind the scenes. What didn’t happen is, because the capital was invested in
Canada, Puerto Rico, New York, in a lot of other things, and the purchase of Trunk Club, you end up with not
as much of a robust investment in supply chain, which means that you end up with two fulfilment centres and
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one omni centre that, truly, there probably should be three times as many of those in the United States in
order to guarantee a customer delivery within four days at any point of the year.
[00:21:44]
Q: When you were at Nordstrom and consumers started shopping online, did you receive data that told you a
customer was shopping across channels so you could use that information to build a more personalised
experience? When did the data start to prove that the customer is less tied to the in-person experience, but
might still try something in-store before buying it online? How did that play out, given the lack of integration
you noted?
GL: We did have good customer tracking numbers. Actually, Nordstrom looked at their customer flow a
couple of different ways. There was a four-box methodology, and the four-box being stores and online,
running vertically on that box, and then horizontally, you’ve got Nordstrom full price and Nordstrom Rack.
One of the things that the Rack business does is it brings in younger customers who don’t have as much
money, and they start shopping with Nordstrom. They become treasure hunters. They find the items that were
transferred from full-price stores that had been heavily discounted. Fortunately, it’s in their size. They buy it,
they have a good experience. As they move up in their economic standing over their work career, then they
migrate into the full-price bucket. We were watching people not just move, “Okay, this customer is only a store
customer, this customer is only an online customer, this customer shops both.” We knew the customers that
shop both spend about three times as much as somebody who only shops in one channel. We were also
watching that transformation of who’s coming into the Rack that’s new, who’s coming into full price that’s
new, but then who’s migrating between those? It tends to be a move from Rack to full price vs just you stay in
your brand level. Those metrics and analytics, I would say, were shared probably eight years ago, in that rough
time frame. It took that long to figure out and track everybody, and, again, aggregate patterns, you’re not
talking about individual people. You’re just talking about big-picture patterns, what you’re seeing, and they
were published monthly to leadership teams.
[00:24:23]
Q: How do you think Nordstrom considers its physical footprint vs its online presence? What do you think is
the right mix? What are the potential long-term profitability implications from opening more Rack stores,
given it means margins take a hit?
GL: I’m going to try to break that down into pieces. What I heard you say was your question was about their
stance on physical locations vs online. Pre-COVID, so let’s just say 2019-ish, Nordstrom did about a third of
their business online, and during the height of COVID, that moved into the 50% range. I think Q1 was 46%
and Q2, it slipped a little bit, maybe it was 40%. Those percentages of how much businesses can make from
the different channels, partially are driven by the fact that there were 16-20 full-line stores closed in 2020.
Using force majeure rules, they were able to look at stores that maybe still had five years left on the lease and
literally be able to tell the mall owner, “We’re out,” and you, during a pandemic, can’t argue with that. There
were no stores in Nordstrom that weren’t profitable but there were plenty that were so small that they almost
weren’t worth running. If you have one store that does a minuscule amount of business in the middle of
nowhere, just the supply chain, to get people and hire folks and everything else, it becomes a corporate hassle,
so there was a desire to condense down full-price locations. There was a plan. Before COVID, we closed usually
three or four stores every year. We opened a couple of new ones in better markets, so we were always trying to
stay in that A- or B-tier model and not to end up in super-poor-performing malls and just expand for the sake
of expansion, in the full-price business.
I don’t know that they’ve found the exact balance. I think it’s hard to say for one retailer what the right mix is,
because I think it depends upon who your customer is. Nordstrom’s customer, full-price business, is a USD
100,000-a-year household, and so you’re not going to try to blanket the United States in every city with a full-
price Nordstrom store. Really, what you want to do, and I think what’s been fairly successful has been this
Private and confidential 7
push towards a market strategy where they’re focusing on 20 core markets and doing the inventory
deployment to those markets, not agonising the four-wall financials of an individual location but instead look
at the whole market and say, “Is LA growing? Is New York growing?” Whether they shop online, whether they
come in a store, whether it’s a Nordstrom local neighbourhood store, it doesn’t make any difference as long as
that market is paying for itself and it’s growing in market share.
[00:27:48]
Q: How do you assess the excitement around Nordstrom’s Anniversary Sale? What is the strategic rationale
for that event? You alluded to pushing forward the end of the season inventory, but how does this Anniversary
Sale differ from other sales across different retailers and department stores?
GL: I’ll step way back and I’ll give you, real quick, how did it start? I actually was with the company, every year
that I was there for 18 years, we had an anniversary sale. It started a long time before. I’m not really sure if it
was the ’70s or whenever. Basically, the Anniversary Sale was created to fill a dead spot of the month of July,
and that’s not unusual. Every retailer, you’ve got peak, you’ve got holiday, you might have around Easter and
other things that happen, the transitional times of the year when people want to go buy spring clothes or fall
clothes because the weather changes, but you end up with these dead spots. It was created to drive business in
the month of July. What most retailers do is discount old stuff, so everything has got a life cycle, it could be
four weeks, it could be 12 weeks. They end up with a bunch of, let’s say, shorts and T-shirts, and then in July
you would put that on sale. That would be the standard retailer answer.
What was created a million years before me was an anniversary event, where the buyers were told to go out
and find fall product that’s going to be coming in, and talk to the suppliers beforehand and get them to sell you
new stuff, so it could be the latest version, it could be a new colour for fall, whatever, but get them to sell you
fall stuff. Tell them that we’ll buy a big chunk, ask them to participate, because we’re going to give them an
early read on their fall product. We’re going to share with them how their fall product does, even before they
put it in their stores or sell it to other retailers. Usually, we got a little bit of a gross margin adjustment, a little
bit of a discount on the initial markup coming in, so that it was not a full hit for Nordstrom to offer it on sale.
It would be offered, on average, about a third off, and the customer would come in and they would stock up.
They would buy for their kids, they would buy boots and coats because they’re going to need it in the fall and
winter later, and this is July time frame. For themselves, they would buy their winter coat for the year,
whatever, and then put it in the closet. It became quite an event where whole families, for decades, would
come in and shop and have lunch, and it was a big store focus, a lot of hoopla in the stores. That’s what the
event was created for.
The pros and the cons of this event. The pros, it does fill the sales void. It gives you a marketing opportunity.
That marketing opportunity has been copied by a lot of people. Amazon does it right now. They have Prime
Days. It’s usually overlapping with the anniversary sale. It’s not a whole month, the Nordstrom Anniversary
Sale is very long, compared to the Amazon Prime Days, but they’re doing the same thing. They’re not just
taking old stuff that’s sitting in the back of their warehouse and putting it on sale, they’re getting brand-new
exciting things, and somebody’s taking the hit on that, whether it’s Amazon a little bit or the supplier or both
sharing it, to be able to advertise those things to drive business. It’s new product vs old, and it forces the
customer to act, because the event goes on for 30 days. At the point that the event is over, those prices go back
up and they will remain at full price at minimum 30 days, if not 60-90 before the end of the season. It gives
you the opportunity to buy, because if you wait until the very end to try and buy clearance, it’s too late, they
might be gone in your size. It also drove other business, so if you were to capture all the sales during the
anniversary, the event, the items that were advertised that were specifically purchased were only about 10%.
People were buying other items when they were in the store that were full price, so it was not just a margin
loser, it was actually, on those items, you might have lost a little bit of margin but they were buying over things
too.
The cons. The cons of the anniversary event is that it puts a compression in a month. It is very hard to execute
well in a whole lot of stores with limited staff and the online with supply chain challenges. Customers often get
products and they return online twice as often as they do in stores. They would order things for anniversary
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and it might take three weeks to get back. If they bought it day one of the event, you would get it back on the
last week of the event and it might not be up and in the shelves, ready to be picked, in time for the end of the
event, so you can see the logistical challenge of running this thing at warp speed in a very tight time frame. It
exhausts your people, it burns out your supply chain.
The other change that has happened with the anniversary in the last couple of years has been more of a tiering
of their top customers by spend, and if you are the highest-level customer, I don’t remember the names of the
levels but you could probably look that up on their website, but if you’re the top spender at Nordstrom, you get
to shop early for all those items. Meaning you get to see it before everybody else, and put it in your cart and
have it sent to you. Then the next level gets exposed, and then the next level gets exposed, and then you
eventually get down to the base card level, and then it’s everybody in the public. If you’re in the base card level,
you can often be very disappointed because you’ve heard about something and by the time you get to see it or
put it in your cart, they’re out. That tiering of customer causes sell-outs and causes some frustration with the
customer.
The other thing that’s changed is you have to change the products to more wear now. The reason why people
bought fall products early and put them away was because their availability was limited, but now, with the
fashion cycles speeding up, the factories overseas, people don’t need to buy fall in July and put it in the closet.
They can literally buy fall when it turns cold. The products had to shift from being heavier cashmere wool
items, more towards wear now, maybe in a fall colour or something that’s a little bit different to make it
different than the stuff you had on the floor before.
A good thing that has come out of the Anniversary Sale, and I would say why, in the Q2 earnings call, it was so
hyped that the event was a positive increase and better than previous years, was buyers in the past got to
decide which items, how many items and how deep they bought. Literally, I don’t remember the number of
buyers that are in the company right now, but, anyway, just imagine there are probably hundreds of them.
These buyers would buy for their category and they would spread their money that came from my team, for
example, in any way that they wanted to use it. They would often peanut butter the assortment. If last year had
15 offers, they might have 20 offers this year, but my dollars only came up a couple of per cent, so now I’m
buying thinner on all those 20 styles. What that causes is more stock outages. The change that happened, it
was started for the 2020 event but the pandemic ruined the outcome of seeing that, that I think came to
fruition in 2021 was the actual telling of buyers, “No, buyer. Here’s an analysis of your buy in the last two
years. You have,” I’ll make the number up, “12 items offered. You are only going to get eight, and they should
be in these rough categories. We’re not going to tell you the exact item, because that changes over time with
fashion and supplier availability, but you’re not going to get 15 choices. We’re going to decide how many units
you write, as opposed to you deciding that. You’re going to find the item.” That use of data and analytics, I
believe Erik Nordstrom quoted something like a 35% reduction in sell-outs from the previous year, which is an
impressive adjustment to the assortment.
It’s really a transition, and it’s a common theme through Nordstrom’s restructure in the last two years, has
been buyer independence and being able to do everything that they want to do, based on their own knowledge
and understanding of the customer, with a heavy push and control of analytics, scientific analysis, telling
them, “Actually, we’re going to put these guard rails in place. You’re still the person who goes and knows the
customer, knows the trends, finds the item, but we’re going to decide how many and we’re going to make sure
you don’t overbuy the quantity.”
[00:36:32]
Q: You mentioned consumer returns and the short life cycle of Nordstrom’s Anniversary Sale. How has the
company reacted to that aspect of the business, given it’s harder to control? How could Nordstrom mitigate
the risk from new things such as in-store pickup and click and collect?
GL: I think the steps that they did, we’re talking thousands and thousands of items were analysed, and each
one of those was torn apart and looked at, how much was bought, where was it sent to, how many offers were
available in that category? Let’s say you’re selling men’s socks, did you have six men’s socks or three offered?
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Did you buy 5,000 units each or did you buy them at different levels? That heavy focus on data and analytics
being pretty much given to the buying side and forced into some parameters is the one way that they can
combat this, because they’re not offering as many items. I don’t have the actual numbers to say that, “In 2019,
we had 2,000 items offered at anniversary and I know that in 2021 they only had 1,200,” but to have a 35%
reduction in your sell-out, they had to have cut assortment dramatically. What they were doing, and this is
good, is cutting the worst items in the assortment. It’s that sixth colour in a T-shirt that no one cares, there
might be two people that want it in mango, so you sell it in the colours that people want. You don’t buy it in
mango, you don’t offer that choice. You can continue to do that for a while.
I think the next piece of this is you have to get the supply chain pieces, meaning more fulfilment centres, omni
centres, with more staff to be able to process the returns that when these pallets of returns show up in boxes,
that you can literally, within a day, empty all those pallets and have those goods back on the shelf for the next
customer who might have wanted to get it but couldn’t get it earlier, but somebody who had early buying got it
and sent it back because they didn’t like it. It’s not limitless how fast you can make this happen but there’s still
slack in that supply chain, I think. From what I know about the business and remember, it was very inefficient,
and part of the loss of those goods was if it took you two weeks to get it back from a customer, it took you
another two weeks to process it, to check it, to make sure it was clean enough to resell to another customer,
now your event is over. By shortening both of those, by giving them the opportunity, and I know this was done
in this anniversary event as well, “You’ve got an item you don’t want, drive by a store and we’ll come out and
grab it right off the kerb from you.” Those are excellent ways of getting the customer to go, “Yes, I want instant
credit back on my card. I want this out of my life. I’m not going to wait for it to be mailed in for you to process
for two weeks. I’m just going to drop it off at the store.” Now, it’s back in the node, it’s checked by a store
employee and back, literally sellable, in the store or online that same day.
[00:39:44]
Q: How do the factors you mentioned play into Nordstrom’s men’s, women’s or kids’ category offerings? To
what extent is the store itself very much led into women’s categories? Are there missed opportunities in other
categories that Nordstrom has an opportunity to expand in or does the data suggest it’s not worth doing so?
GL: The reason why Nordstrom is so heavily focused on women, and it’s hard because there are some
categories that don’t clearly fall in men or women. Even beauty, you could argue men buy beauty products and
health and wellness as well, not to the level of women, so it’s difficult to say that a moisturiser is a men’s or a
women’s item, but, in general, the reason why, if you were to walk into a Nordstrom store, there are three
levels, two of those three levels are going to be women’s-focused. It’s going to be beauty, shoes and apparel.
That’s because that’s the size of the market to start with. Men don’t spend as much as women. They don’t.
They don’t shop as often, they don’t enjoy shopping as much. I don’t mean that to sound sexist, it’s just a fact.
In fact, I think the number is 60% of men’s apparel is bought by women, so it’s a spouse or a partner or
whatever buying something for somebody else to bring it home to them because the men aren’t doing it. Part
of the reason why it’s so heavily geared towards women is that is the US market in general. If you stand back
and look, there’s much more offering in women’s apparel and beauty and shoes than there is for men.
Nordstrom has had two main focuses as far as men’s. I think both of these have niche segments to them. One
of them would be you want to think about what I call the dressy gentleman, somebody who really wears
expensive clothes, a Canali sport coat, we’re talking pants that are USD 250 and things like that, who really
puts it all together, that dressy businessman or wealthy individual who just likes and appreciates fine
cashmere and clothes and things like that. That’s a very small niche of the men’s population who’s willing to
spend that kind of money. In fact, most of the men’s purchasing in Nordstrom was done during the clearance
sales, where tables and tables of dress shirts and sportswear were out and men were coming in and going,
“Hey, here’s my chance to get a whole bunch of new polo shirts, because I hate all my old ones, and I love it
because they’re 30-40% off.” They would buy a whole bunch at one time. The other segment for men that
Nordstrom has also gone after, which, again, is very narrow a slice, is this young designer, these very, very
expensive, not wealthy-looking suiting but the big logoed, puffy, colourful outrageous clothes. Again, not very
many people actually do that, don’t wear that stuff, so yes, you might buy a piece or two but you’re not going to
wear outfits and outfits, unless you’re some sort of celebrity. They’ve had a challenge but I think the analysis
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has shown that men just don’t spend as much, and so I think that’s why we tend to stick to that same rough
percentage of men vs women. Then beauty falls in the middle.
There’s a small kids’ business. The challenge for the kids’ business is if you’re a mid- to high-price department
store, you cannot sell clothes at a price point to attract enough people to draw a big kids’ business, which is
why people who have kids or a lot of kids or need a lot of clothes go to Old Navy and other cheaper, Burlington
Coat Factory, all that, because they can get a lot more clothes for their dollars. Nordstrom would not be the
place you would look, so they don’t have a tremendously large kids’ business. They do sell a lot of infant
accessories, strollers, things like that, because parents who are new are definitely willing to spend for that sort
of expensive stroller, USD 700 or USD 1,000 for a stroller. Then there’s a small home business.
The other piece I haven’t said is Nordstrom does not consider itself a department store. Truly, they consider
themselves a large-format speciality apparel and shoe retailer. When you think department store, even though
most analysts are going to put them together with Macy’s and Sears and other people, basically big box,
Nordstrom doesn’t sell appliances. They sell a little bit of kitchen goods but they don’t sell tons of Cuisinarts
and things like that. You’re not going to buy furniture, you’re not going to buy a mattress. Exception, they had
a mattress one time, 10 years ago, but they don’t do that any more. They are a large big box retailer who has a
real focus on apparel and shoes, with some home and kids’ on the side. I think that positions them to offer
really nice stuff. The challenge is that you can’t move all that up to designer because there aren’t enough
people that can afford that much designer, and if you get lower price points, like a Macy’s or a Kohl’s or Sears
even, it dilutes the image of a quality retailer that Nordstrom wants to be. They use Rack stores to fill that gap
because it’s okay if it’s lower quality at Rack because it’s also substantially cheaper but it’s not in the same
building.
[00:45:26]
Q: How has Nordstrom weathered the storm of D2C brands or brands such as Nike and Canada Goose, which
you said are aiming to establish a D2C route and reduce the wholesale presence? How has Nordstrom been
impacted by the reduction of wholesale by brands across the industry? Alternatively, is that something that the
company isn’t worried about?
GL: They’re worried about it. I know in Canada, for example, I remember when Canada Goose would no
longer sell Canada Goose jackets to Nordstrom stores because they were opening their own store in the same
mall where we already had a location. The designer market that Nordstrom deals with is very much controlled
distribution, meaning Chanel will not open five points of contact that you can buy Chanel in one downtown
city. They usually limit it to one. They are worried about that.
Not all brands are the same, so you’ve got the designer brand where they’re trying to maintain that exclusivity.
They’re going to be very controlled and they give Nordstrom permission to sell those goods. Then you have
Nike, who is humongous but Nike wants as many points of distribution as possible because they want to keep
growing their business too. Nike’s request to Nordstrom, this is probably two years old, so I don’t even know if
it’s still in effect, but they wanted Nordstrom to be able to offer the full Nike assortment on the Nordstrom site
but actually run it like a drop-ship business, where the customer would place the order with Nordstrom,
Nordstrom would send the order to Nike, and Nike would ship the goods to the customer. That drop-ship
model is not bad, and usually you use that for auxiliary sizes or colours that you don’t want to carry. You would
keep your core in your four walls to control, and then you would buy auxiliary colours or sizes through the
drop-ship programme if your supplier has that capability. To put the entire Nike assortment on and have
Nordstrom not really own inventory, you don’t make very much in that transaction. You make a lot more if it’s
your inventory sitting on your shelf and you ship it to the customer. The difficult part is it would have been
phenomenal for Nike. The technology to actually enable that, to make that flow-through happen so that a
customer order could then be sent to a third party cleanly and seamlessly, to ensure, is difficult and complex.
The other part you run the risk of is those other suppliers don’t always ship with the same standards, and you
can’t enforce it, so what happens if they get a box, they order the shoe on Nike, the Nike shoe shows up and
let’s say the box is destroyed or the shoe is dirty or whatever? The customer doesn’t know that Nordstrom
passed the order to Nike. They blame Nordstrom, so now they have a bad reputation with Nordstrom in their
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mind from that experience. That’s the challenge of flowing everything through.
They’re getting a lot of requests for unique business models, some of which are possible with the current
technology and some of which are extremely complicated. You have concession models where a store, a brand
will say, I keep using Gucci as an example for this because it’s a name that everybody knows, but somebody
like a Gucci would say, “We want you to give us 800 square feet in your downtown Seattle store, and that is
going to be our store. We’re going to hire the employees. It’s going to be our merchandise. We’re going to bring
it into your store. We’re going to sell it, and we will pay you rent on that space,” basically. There’s not a
revenue share model here. It’s literally renting space. There are some department stores in France and other
places that do an entire store that way, but it’s a different model to what Nordstrom is having. If Nordstrom
could use that, this space is usually first floor, prime real estate, so if Nordstrom could sell their own products
in that space and make more money, but Gucci draws a different customer and adds the halo to your store.
You’re always balancing this, “How complicated is this for us to do? How much money do we lose because
we’re not able to sell in that space, but then what do we get for it?” That’s the business model trade-off on each
one of these. They’re literally negotiating it on a store-by-store basis, they all have different rules, and the
customer is none the wiser. As far as they know, Nordstrom is running the Gucci shop in that example.
They’re trying to deal with these different business models. Topshop, before it was sold or went bankrupt,
Topshop went that way. Topshop gave Nordstrom exclusive distribution rights in the United States, other than
the Topshop website, and they gave, I think, Hudson’s Bay in Canada, and that was a deal that Nordstrom cut
with them. In that case, Nordstrom bought the merchandise from Topshop, and Topshop was happy to have
another player in the United States with a bigger known marketing platform advertising their goods, but you
have to find the right synergy, that company is the right size, they’re not asking too much and you can fit it into
your normal day-to-day operations. A brand that’s a fashion brand might only be in trend for two years, and
then nobody, I won’t say nobody cares about them but they’re not the hot thing any more and they’ve moved
onto somebody else. It’s not Canada Goose any more, it’s Moncler, for example. Those things move, so if you
built your entire operation to serve Canada Goose’s request and then they’re no longer super relevant, then
you’re stuck with this framework that you can’t use for anybody else.
[00:51:26]
Q: How well does Nordstrom manage its inventory? How do some of the brand relationships you outlined tie
into the company’s ability to manage inventory in a consistent or normalised demand environment?
GL: The control of how much is spent is fairly good within the company, meaning if my team were to give a
budget of USD 100m to a buying team to go spend for the year, and we don’t give the whole year at one time
but we give it in sections, but, anyway, let’s just say USD 100m for the year, it’s not unusual to have some give
and take, some horse-trading. Maybe they spend USD 95m and we move that USD 5m somewhere else
because they couldn’t find enough good product, or maybe they come back and say, “I’ve got the world’s best
product, I need USD 120m,” and we take the USD 20m from somebody else. If you stood back and looked at
the macro dollars spent, is receipt control happening within the company? Absolutely.
The part that’s hard is that receipt and writing, your average order cycle is 6-9 months. That’s the average
order cycle. There are some items, like beauty, you can get within three months because they have it on-shelf
or they can restock and rebuild pretty quickly. There are some knit programmes and some goods made in
Central America that you can get very fast back into, but when you’re talking about designer products, men’s
suiting, occasion dresses, things like that, those are 10- to 12-month order cycles. The challenge of inventory
management is that you’re forecasting your needs at the point that we’re writing the order, 10 months in
advance. Once the order is written, it’s a contract. You’re committed to it. You can’t come back and go, “Hey,
changed my mind. I only want half of it.” They’re going to send it to you because they made it because they
took your money to build it, and they don’t have any place, sometimes they do but usually they don’t have any
other place that they can sell those kinds of quantities to. If between then and the arrival of the goods, some
other major things had happened, you can throw in hurricanes, you can throw in tariffs on China, you can
throw in supply chain, lack of tankers, you could put all these different things in, the pandemic, that could
happen, now what you thought 10 months ago isn’t what you need. You might need more or less.
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I would say as a company that is looking at what they can control, they’ve done a very good job being fairly
conservative, holding people to the macro spend. It’s not like they just wake up and go, “Wow, we spent 40%
more than what we’d planned on spending.” That being said, sometimes your sales, that’s what was the driver
for that receipt number, don’t always happen or things have happened before those goods arrive that have left
you with excess inventory from the previous season that you’re trying to liquidate. That’s why you have to be
flexible as a retailer, and Nordstrom has the advantage of Rack stores they can push things to. They tell the
Rack buyers who buy closer in not to spend as much because we’re going to move more from full price into
you. It gives them a little bit of an out, but there are certain things you can’t sell in Rack stores. You can’t sell
designer goods in Rack stores, not much of them, some of them you can but most brands will prohibit that. If
the order cycle was 30-60 days, I would say it would be easier to answer this question, but the challenge is
because you’re ordering 6-9 on average, some cases 10-12, and that has not been substantially sped up, has not
been sped up because tankers don’t move faster on the water and factories overseas don’t make clothes really
faster. Fast fashion retailers are able to do it but they’re making a select number of products. They’re not
buying on the scale of assortment that Nordstrom is doing.
That’s a really tough thing to say, is how well are they managing their inventory. I do know that the discipline
is there and the desire is there, it’s just sometimes there are things beyond your control that throw off the best
plans in the world. I have worked for retailers that have not been able to control their spend and this is not one
of them.
[00:56:02]
Q: How do you assess Nordstrom’s global opportunities and the company’s ability to secure designer
relationships in markets such as China, where so many brands struggle domestically and try to win business in
other Asian countries? Do you think Nordstrom’s can be successful on a global scale? What risks to its
business model could it improve?
GL: I don’t know that my answer, I have the benefit of having been involved in REI when we opened a store
and website in Japan, literally decades ago, and I have the benefit of being part of the Nordstrom expansion
into Puerto Rico, which technically is a US territory but it has its own set of rules and that was very much like a
foreign country, and Canada. I would say that Nordstrom suffers from what most American companies suffer
from, which is the basic misunderstanding that the United States capitalistic system is so different than the
whole rest of the world, and the expectation that you will be able to make the same, not necessarily sales but
the same kinds of margins and EBIT, net income flow-through that you make in the United States. Most
American companies don’t understand that it’s not repeatable in foreign countries, yet they bring their
mindset that it will happen and then they go there and they are often disappointed. Everybody knows the
debacle of Target going into Canada and pulling out, and they hurt themselves in many ways, but Nordstrom is
not as profitable in Canada, anywhere near as profitable as they are in the United States. They have, I think,
five stores up there now. I think they closed one.
It’s partially because of the economic rules of the country. The cost of labour is dramatically more expensive.
The tariffs in importation in foreign countries is a heavy burden on your markup, and the requirements of
labelling, ticketing, environmental. The beauty industry, when we opened stores in Canada, we had to get a
completely different assortment from the brands that everyone knows as worldwide beauty brands because
Canada doesn’t use 20 chemicals that are allowed in the United States, so you can’t buy the same products. It’s
not like you can just take a US product and take it to China or take it to Japan. There are so many tax rules,
liabilities, labour, benefit requirements that American companies are almost guaranteed not to make the
money, and after they do it on a large scale, they tend to pull out or pull back.
The only way I’ve ever seen anybody ever make any money is when they have a partner, and when I say make
some money, I don’t mean they make anywhere near what they make in the United States. My point is they
make a partnership, so many of the outdoor industry people, when I worked at REI, were in Japan, like The
North Face, but they had a partner. LLBean was in Japan but they had a partner that was Japanese who ran
their stores, who hired their people, and they paid them almost a licensing fee to use their name, and there
Private and confidential 13
were rules so they didn’t abuse it and didn’t damage their reputation. The North Face and LLBean didn’t make
anywhere near what they made in the United States, running those operations.
I would say Nordstrom has pulled out of Puerto Rico, it has shrunk its Canadian footprint. It was disappointed
with its performance there, and much of what it’s going against is not changeable at a single-company level. It
would have to require the Canadian government to restructure, and they’re not going to do it for somebody
like Nordstrom, so I don’t believe that this is a particularly expandable model. That’s my opinion. That’s no
declaration that I’ve heard anyone say they wouldn’t ever try to go to China or do anything else like that. I
think American companies know even less about China than they do Canada, and there hasn’t been a huge
track record of success in Canada, so why would you go all the way there? I’m pretty adamant that that’s
probably not going to be the forefront. A partnership with a UK company who wants Nordstrom to do a pop-
up in their store or something like that, sure, yes. That kind of marketing, small-scale thing, yes, but the
launch of full-line Nordstrom stores across Europe, I find that very hard to believe would happen.
[01:01:00]
NH: Greg, we’re just about out of time, so we will end the Interview there. Let me close by saying thank you
very much for your time and input. Clients, thank you for joining Third Bridge Forum's Interview today. If
anyone would like to speak with Greg in a private call or meeting, please let your relationship manager know.
Greg, thanks again.
GL: Okay, take care. Bye-bye.
Transcription ends at 01:01:17 of the recorded material
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