Colt is a longtime freelance writer who's always been interested in examining businesses to help inform others.
Nordstrom Inc. is one of America's most popular high-end retailers. It has constantly evolved since its incorporation in 1901 more than a century ago. It started as a small shoe store that was known as Wallin & Nordstrom. During the start of the 1930s, the three Nordstorm brothers established the company's legacy as a luxury retail powerhouse (still selling only footwear till the late 1950s) in North America. Today, its retail portfolio encompasses clothing, footwear, bags and even credit cards. In an ocean of retail woes, Nordstrom has managed to navigate stormy waters through decades.
In this article, we will discuss the competitive advantages and strategy of Nordstorm that have established it as one of the world's leading fashion and retail powerhouses.
Nordstrom takes pride in its legendary customer service, emulated by its competitors. A glitzy shopping experience at Nordstrom is often associated with its excellent and personalized service. The retail giant often tops the rankings in customer service surveys.
Jamie Nordstrom, the president of Nordstrom, often attributes the company's success to improving customer service. One of the best ways to do this is to empower employees by giving them sufficient freedom and trust. Contrary to other retailers, employees often can make their own in-store decisions and exercise their own judgement. They do not (always) have to consult management before making a customer service decision, therefore exhibiting maturity and professionalism to customers and saving their time.
Nordstrom also has an exemplary return policy and the Nordstrom tire story is one of the most mythical examples. A customer requested to return a set of snow tires (which Nordstrom does not sell) at the Anchorage store and the manager actually refunded him. True or not, countless stories like this illustrate Nordstrom's unique take on providing excellent customer service.
E-Commerce and Online Shopping (and the COVID-19 Pandemic)
Nordstrom's decades of competitive advantage in the luxury retail industry are often attributed to its high-end mall-based department stores. After all, it was how the company started. As a luxury retailer, its brick and mortar shopping experience in shopping malls is synonymous with the company's image. However, trends in the modern world have encouraged retailers to shift businesses online and Nordstrom is doing likewise. After the start of the coronavirus pandemic in 2020, Nordstrom has rapidly shifted and accelerated its focus on selling online, giving it a strong competitive advantage.
According to a report by American Customer Satisfaction Index in February 2020, consumers now prefer online shopping, and this trend seems to be unstoppable. David VanAmburg of the ACSI specified certain reasons why online is reigning and traditional retail is declining. Consumers are able to find stuff online readily and are not pestered by clingy, intrusive sales staff.
The COVID-19 pandemic has impacted many retailers globally, and even Nordstrom has not been spared. The pandemic has highlighted the importance of diversification away from traditional retail and accelerated the company's focus away from high-end, in-store shopping. Nordstrom Inc.’s digital commerce in 2019 accounted for more than 1/3 of its sales and flagship stores in glitzy malls just accounted for 38% of it. By the end of 2020, it is estimated that the sales from e-commerce and its mall-based stores will reach a 50-50 split. This diversification and shift in strategy will give Nordstrom a strong competitive advantage.
Similar to other retailers, Nordstrom was badly rattled by the coronavirus pandemic, suffering a 40% revenue loss in the first quarter of 2020 and a permanent closure of 16 department stores (about 14% of its 116 full-line stores in the USA). Suprisingly, its e-commerce sales actually improved as most people in lockdown resorted to shopping online. For the first quarter, online sales increased 5% and resulted in more than 50% of total revenue.
Despite the company's digital outreach, being positioned as a luxury department store chain means Nordstrom is still focused on its brick and mortar stores for its unique shopping experience and brand building. A multi pronged approach is often the best, highlighted by its "buy online, pickup in store" service, providing the best of both worlds.
Diversification of Portfolio
One of the best risk management and competitive strategy a company can take is to diversify. Over the years, Nordstrom has diversified its business and building its brand at the same time. In fact, compared to their competitors, this diversification has allowed Nordstrom to stand out among its faltering retail peers. For example, two of its competitors in North Texas, J.C. Penney and Neiman Marcus, have filed for bankruptcy. This duo of luxury retailers have proved that diversification is necessary.
These are the way Nordstrom has diversified its approach:
- Strong and growing digital commerce arm (as highlighted above). It was one of the earliest department stores to move into e-commerce.
- Nordstrom Rack, an off-price subsidiary which is now generating billions of dollars. It strikes a balance between its high-end luxury retailer image and a value-for-money store chain
- Venture into F&B: Nordstrom has bars and restaurants inside some of its stores. For example, its NYC flagship store has 7 of them! Delving into F&B not only provides opportunities for diversification but enhances the shopping experience for customers.
- Nordstrom Local, a retail store without inventory. Keeping zero inventory shaves huge costs attributed to inventory maintenance. The Local concept is innovative and provides customers with an extremely personalized experience. It allows customers to get tailored fittings, style advice, alterations and do pickups and returns etc. These inventory-free stores is indeed a differentiator, keeping department stores relevant. After all, tailor measurements online cannot be compared with actual fittings in store.
Porter's Generic Strategies
According to Michael Porter in 1980, three general strategies can be used to achieve a sustained competitive advantage. They are cost leadership, differentiation and focus. As discussed, Nordstrom chooses to pursue different types of competitive advantages and has applied them effectively.
Despite being poised as a luxury, high-end retailer, Nordstrom employs cost leadership strategy well through its Nordstrom Rack subsidiary and six sales events annually. Nordstrom Rack provides discounted pricing that appeal to cost conscious customers in its market segment (middle to high income earners).
Porter describes the strategy of differentiation as the delivery of quality products or services that are perceived to be unique and valued by consumers. Through it's Nordstrom Local stores, excellent customer service and constant innovation, we can definitely witness Nordstrom's competitive advantage in its differentiation strategy.
Who are Nordstrom's top competitors?
- J.C. Penney (filed for bankruptcy in 2020)
- Neiman Marcus (filed for bankruptcy in 2020)
- Macy's, an American department store that share many similarities and often compared to Nordstrom for their retail shopping experience
- Kohl's, the largest department store chain in USA at the time of writing. Nordstrom targets high-end consumers while Kohl is more focused on middle income earners. However, with Nordstrom diversification, the target market can overlap and competition cannot be avoided.
- Amazon. Nordstrom's strategic direction and incremental venture into the online world means the clash with the largest online retailer is inevitable.
This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.
© 2020 Geronimo Colt