It's Hard Out There for an Omnichannel Retailer, Says Nordstrom
— February 24, 2016
Nordstrom is tapping the brakes on its aggressive planned CapEx investment, trimming its 2016 budget to $900 million instead of roughly $1 billion, the department store explained in its earnings call for Q4 2015. Overall, the company is shaving $300 million from its five-year expenditure plan.
The move comes as Nordstrom tries to bring sales and revenue into alignment with its technology spending. As CFO Michael Koppel notes, "With our increased investments to gain market share along with the changing business model, expenses in recent years have grown faster than sales."
In five years, Nordstrom has grown its e-commerce business from 8 percent to 20 percent of total sales.
The company's HauteLook and Trunk Club acquisitions and expansion into Canada are finally paying off to the tune of more than $400 million in top-line growth last year. Despite the relative health of its full-price business, which grew 5 percent total in 2016, off-price, including HauteLook and the online and offline Rack channels, remains the star, with sales rising 14 percent for the year.
Nordstrom's headlong rush into omnichannel commerce has come at a high cost. While it was important to be a first mover in the "fulfill anywhere" game, now the focus is on optimizing every channel. Fulfilling from multiple locations creates not just additional shipping costs but increases labor expenses as well, says Koppel, when Nordstrom ships multiple items per order from different distribution points.
"We're also looking at how spread out we want our assortment to be, because the more lower-price items we have in it, the less unit profitability we gain," he explains.
Is good business, good business?
As some of its national brands have turned in less-than-stellar performances recently, Nordstrom is singing the praises of its private-label products, which comprise about 10 percent of its total business.
"We have some fairly big brands that have had some pretty sizable decreases over the last year," notes Peter Nordstrom, merchandising president. "We're looking to replace some of these brands that are a little more troubled by some of that promotional activity. Their sales aren't as good."
By contrast, Nordstrom's Tucker + Tate brand, just three years old, is "doing $50 million," the merchandising chief explains.
The retailer was able to land a brand such as Madewell, which is owned by J. Crew, because "because they like the way we do business, they like our customer," adds Nordstrom. Having those kinds of relatively exclusive products helps to insulate the company from the current highly discount-heavy retail environment because you simply cannot find those brands everywhere.
To ensure that it remains focused on fresh new product instead of attractive promotions to drive traffic, Nordstrom collaborates closely with its vendors. "I think we work to identify vendors that operate cleaner businesses," says Nordstrom. But working with top-quality suppliers must pay off on the bottom line.
"It's a difficult balancing act because you want to make sure that you're bringing things that customers want too," he continues. "Having things just uniquely or exclusive for exclusive's sake — that doesn't work either."
The move comes as Nordstrom tries to bring sales and revenue into alignment with its technology spending. As CFO Michael Koppel notes, "With our increased investments to gain market share along with the changing business model, expenses in recent years have grown faster than sales."
In five years, Nordstrom has grown its e-commerce business from 8 percent to 20 percent of total sales.
The company's HauteLook and Trunk Club acquisitions and expansion into Canada are finally paying off to the tune of more than $400 million in top-line growth last year. Despite the relative health of its full-price business, which grew 5 percent total in 2016, off-price, including HauteLook and the online and offline Rack channels, remains the star, with sales rising 14 percent for the year.
Nordstrom's headlong rush into omnichannel commerce has come at a high cost. While it was important to be a first mover in the "fulfill anywhere" game, now the focus is on optimizing every channel. Fulfilling from multiple locations creates not just additional shipping costs but increases labor expenses as well, says Koppel, when Nordstrom ships multiple items per order from different distribution points.
"We're also looking at how spread out we want our assortment to be, because the more lower-price items we have in it, the less unit profitability we gain," he explains.
Is good business, good business?
As some of its national brands have turned in less-than-stellar performances recently, Nordstrom is singing the praises of its private-label products, which comprise about 10 percent of its total business.
"We have some fairly big brands that have had some pretty sizable decreases over the last year," notes Peter Nordstrom, merchandising president. "We're looking to replace some of these brands that are a little more troubled by some of that promotional activity. Their sales aren't as good."
By contrast, Nordstrom's Tucker + Tate brand, just three years old, is "doing $50 million," the merchandising chief explains.
The retailer was able to land a brand such as Madewell, which is owned by J. Crew, because "because they like the way we do business, they like our customer," adds Nordstrom. Having those kinds of relatively exclusive products helps to insulate the company from the current highly discount-heavy retail environment because you simply cannot find those brands everywhere.
To ensure that it remains focused on fresh new product instead of attractive promotions to drive traffic, Nordstrom collaborates closely with its vendors. "I think we work to identify vendors that operate cleaner businesses," says Nordstrom. But working with top-quality suppliers must pay off on the bottom line.
"It's a difficult balancing act because you want to make sure that you're bringing things that customers want too," he continues. "Having things just uniquely or exclusive for exclusive's sake — that doesn't work either."
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