Is Nordstrom in the Vortex of Deflating Value?

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It’s not surprising that without enough strategic foresight, Nordstrom would default to its “lowest hanging fruit,” and apparently its easiest path to growth — the Rack. And I could speculate the same about Kohl’s under its CEO, Tom Kingsbury, formerly the successful CEO of Burlington’s off-price chain of stores. Is Kingsbury defaulting to the model he previously led and best understands? Stay tuned for more about Kohl’s potential slippage.

Consumers keep pressing retailers and brands to accelerate their competitive “race to the bottom” offering lower and lower prices as the path of least resistance to growth … until they bottom out.  At that moment, retailers must either drastically transform or die, or get acquired out of bankruptcy, which simply triggers a prolonged death. 

The Race to the Bottom Surges On

There are, and will continue to be, more downsizing and/or failures because consumers keep pressing retailers and brands to accelerate their competitive “race to the bottom” offering lower and lower prices as the path of least resistance to growth … until they bottom out.  At that moment, retailers must either drastically transform or die, or get acquired out of bankruptcy, which simply triggers a prolonged death (that’s my somewhat cynical view).

Yes, there are exceptions. Specifically, retailers who have succeeded by strategically transforming their models, aligning with consumer behavioral shifts, integrating new technology applications, and establishing innovative differentiation — all of which command full marked-up pricing.

Nevertheless, the bigger picture beyond Nordstrom’s and Kohl’s current travails (that may or may not be able to be fixed), is the fact that value, as perceived by consumers, is being deflated and therefore drives pricing. Thus, the off-price and outlet sectors seem to represent the pricing “bottom.” Primark, Shein, and other fast fashion brands are beginning to establish an even lower floor. And then consumers’ perception and acceptance of devalued goods keep lowering the bar. So, who knows where the bottom is?

Nordstrom is expanding the number of Rack stores, now in 258 locations, adding 17 more in 2024. In terms of total store count, in 2020, 16 full-line Nordstrom locations were closed leaving Nordstrom with 93 full-line stores and 6 Nordstrom Local stores (all in the U.S.). Although Nordstrom might be uncomfortable defining its Rack brand as “off-price,” one could arguably observe that this is, in fact, the direction they seem to be heading.

Erik Nordstrom Weighs In

In an interview with Retail Dive, Erik Nordstrom said (Rack) openings have garnered “strong customer response and positive feedback. In general, Rack stores are a great investment because they deliver returns above their capital cost, with a short payback period, and are the largest source of new customer acquisition. We also know that our Rack customers value convenience, and we believe our stores are underpenetrated.”

Well, if Nordstrom is slipping into the vortex of deflating prices, then the Rack may very well be underpenetrated.

The “Graduate Degree”

Over the years, as Rack was rapidly expanding, my question had been, what happens when the Rack customer begins to perceive they are getting the Nordstrom up-market value for much lower prices? An answer to that question had been that there was a synergy between the two. As the Rack customers grew older and advanced in their careers, they would “graduate” (move up) to Nordstrom’s full-line stores.

How is that working out? In my opinion, as Rack continues to grow, it just moves further down into the hugely competitive off-price sector.

Is Rack Between a Rock and a Hard Place?

Rack is slipping into the off-price space, which has been thriving due to consumers seeking lower prices. Rack is underperforming according to Global Data. Its year-over-year Q3 sales drop is a moderation of its recent quarterly declines, but compared to 2019, this year’s sales fell 11.3 percent. Nordstrom no longer breaks out comp sales for either of its banners, but Evercore analysts estimate that Rack comps have been negative for the last four quarters, including a 1 percent drop in Q3.

“Because of this (decline) we attribute most of the Rack’s weakness down to missteps with merchandising, customer communications, and the general management of stores,” GlobalData Managing Director Neil Saunders said. “Some of these problems are being remedied, including the assortment – which now contains a somewhat better line-up of brands and compelling products. However, while this should be enough to push Rack back into growth, it will not be anywhere near sufficient to completely dig the brand out of the sales hole it has dug itself into.”

So, a valid question is: If they are shrinking the full-line Nordstrom business and expanding the Rack business, but doing so while underperforming against the off-price competition, how do they escape the conundrum of both brands losing value?

Is This the “All Hands on Deck” Moment?

Analysts at Evercore and William Blair expressed concern about the pace of Rack store openings, citing its negative comps as well as an evolving strategy there. In early 2021 Rack began chasing more value-driven shoppers by “dramatically” expanding its price-driven merchandise. But by November of that year it walked that strategy back as sales plummeted. The company has also recently shaken up Rack’s leadership a couple of times.

“We ultimately see the risk of additional store closures, at both the Nordstrom and Rack level, and question the logic of opening up more Racks given recent underperformance relative to the off-price space and lack of consistent performance,” William Blair analysts said.

“All hands on deck indeed.”

I have always been an energetic advocate of Nordstrom for setting the standard of superior service, above and beyond all competitors — and even the industry at large. It is a case study in the upside-down organization chart with the dictum that associates run the business. Thus, there are stories of unending and phenomenal acts of service that exceeded consumers’ expectations. The consumer demand of “Don’t fulfill my needs. Satisfy my dreams,” has always been delivered on a daily basis in the Nordstrom enterprise.

That said, is that level of service delivered at a Rack? When you’re in a warehouse type of environment, it seems the antithesis of gracious, hip, stylish associates in well-designed retail interiors.  The vibe is a treasure hunt mentality to find that one great deal in a sea of discounted merchandise. You could be anywhere. The Rack online, on the other hand, looks more in line with Nordstrom’s level of sophistication.

Nonetheless I’m rooting for their ability to right the ship.

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