My good friend Mike Gould, former Bloomingdale’s CEO, often reminds me of a statement I made several years ago that he keeps using as an apt description of all businesses that thrive on innovation: “Risk-averse fashion is an oxymoron.” Just replace the word fashion with retailing and then stack up another oxymoron, “risk-averse investments,” and you have the double-whammy, horrific predicament that all publicly owned legacy retailers are in today.
Today’s massive retail shakeout is a result of the meteoric rise of e-commerce and the Amazon “effect” on everything. It’s exacerbated by all things technological as well as the demographic and cultural shift to consume experiences over stuff. Its death knell is way over-capacity in a sluggish slow-growth economy built on insane price promoting.
How do you avoid being part of the shakeout? And even more to the point in today’s unforgiving marketplace, how do you transform legacy retailers’ strategic and structural models, essential to gain successful entry into the new digital world? It’s going to require jaw-dropping investments in time, capital and manpower. Most importantly, it demands leadership’s superior vision of the future and the intestinal fortitude to innovate, innovate and innovate.
Bottom line? All of this requires enormous, long-term risk-taking.
So while Wall Street pays lip service to their willingness to take long-term risks on their investments, in reality, their actions are short term, very short term. For publicly owned businesses, Wall Street demands quarter-over-quarter increases in the top and bottom lines (the exception being Amazon, of course) or the company’s market value is penalized. The enormous earnings pressure in today’s indescribably hostile environment is a long-term vision and innovation killer.
Nordstrom Assesses Its Option
Nordstrom has been outperforming most of its peers and retailers across all sectors. The Nordstrom family, which owns about 30 percent of the business, obviously feels the relentless pressure of the dynamic, complex marketplace. Market conditions, along with the expectation to deliver ongoing short-term growth, have influenced the Nordstoms to examine the potential opportunity to acquire the remaining 70 percent of the company.
I believe it’s an opportunity because this is a rational financial move for the family. The opportunity is unlike many other desperate leveraged buyout deals in which investors lever debt to acquire the business, hopefully turning it around in five to seven years to profit from its sale or by taking it public. In my opinion, the Nordstrom family is viewing this as a long-term strategic move for them to escape the short-term pressure for profitable growth, so that they can invest the capital necessary to continue to innovate, take risks and eventually achieve another level of superiority among competitors. Most importantly, they will be able to satisfy the desires of their new 21st century consumers.
The Wall Street Journal recently quoted Allen Questrom, former CEO of Neiman-Marcus Group, Macy’s, and JC Penney, that the Nordstrom family would be making a long-term bet on the future of retailing. “Sometimes you can’t make your numbers in the short term, but you want your brand to be around in 50 years.”
Nordstrom has had a track record for leading the industry in several areas. They have always been the poster child for their relentless focus on customer service (it’s a core part of the brand’s DNA). They got ahead of the industry with their launch into e-commerce and its integration with the stores; e-commerce now accounts for about 20 percent of total sales. The Rack outlet store chain, now numbering about 215 stores vs. 120 full-line stores (and accounting for about a third of its total $14.5 in sales last year) was launched long before competitor’s Saks and Neiman’s outlet store initiatives. They were first in free shipping among competitors.
Nordstrom’s progressive e-commerce strategy included acquiring Haute Look and Trunk Club. As with Walmart’s acquisition of Jet.com, Nordstrom can gain synergies through such startup acquisitions. I’ve advocated for some time that legacy retailers should build a strategy of bringing new entrepreneurial and innovative startups onto their platforms, if for no other reason than to learn from them. Speaking of platforms, they understand that by inviting other retail brands onto their platform, it will add a synergy by bringing new traffic into their stores. Brands such as Top Shop, J. Crew, Madewell, Brooks Brothers, and more also benefit from Nordstrom’s traffic and potential new customers.
As reported in WWD, Kathy Gersch, executive vice president for strategy execution and change management at Kotter International consulting, and a former Nordstrom VP, said, “…for the last couple of years, Nordstrom has been rolling out a new store design at key locations to advance the shopping experience. The format includes Space, a shop showcasing emerging designer labels, and pumping up designer presentations, though what remains most prominent is the breadth of merchandise and price points — from Prada, Céline and Lanvin to Jessica Simpson, Sam Edelman and Topshop. It’s an appeal that’s wider than the offering at Saks or Neiman’s and distinct from Macy’s, Holt Renfrew and Hudson’s Bay. It’s also a strategic advantage.”
Just Do It
As of last week, experts say this could be a $10 billion deal, with a market value of $7.5 billion and about $2 billion of net debt. It would not be difficult for the family to find a financing partner for a buyout, with its large stake in the business and real estate holdings. As reported in the WSJ, Chuck Grom, analyst at Gordon Haskett Research said, at $46 a share, they would need to raise about $5.5 billion.
If the family does do a buyout and succeeds in taking Nordstrom private, it will be the biggest retail deal in the industry since Federated Department Stores and May Co. merged in 2005 for $11.7 billion to become Macy’s Inc.
Michael Gould had a prescient quote in WWD. “You can’t run an apparel retail business as a public company without getting periodically destroyed. You can’t guess right in every quarter. You miss by a penny what the Street estimates and you are going to get killed. You take extra markdowns in December because you are too high on inventory, you get whacked for the quarter though you are clean [with inventory] for the year…If Nordstrom can do this, I take my hat off to them. Long term, they will run a better business.”
Given the Nordstrom track record in the industry, I’m sure the Nordstrom brothers have a clear strategic vision for their brand. While profitably growing the brand is essential for long-term sustainability, the tumultuous, sometimes tortuous environment with Wall Street beating the short-term drum, the Nordstroms should control the future they can clearly see. And, to do so, they must own it.
So I say, just get the deal done.