August 27, 2014

Nordstrom Omnichannel Expenditures And What It Means For Your Business

One of our loyal readers forwarded this gem about Nordstrom (click here to read it).

It's unlikely that Nordstrom signed its own death certificate because it is going to spend billions improving online infrastructure, especially as it relates to Nordstrom Rack. These article headlines are written to get folks to click on the article (worked on me), which makes money for the website hosting the article.

For those playing along at home, Nordstrom has spent the past decade growing primarily through two channels.
  1. Online.
  2. Nordstrom Rack.
In fact, Nordstrom Rack stores easily outnumber full-line Nordstrom stores - growth in Rack stores has been dramatic ... in 2011 there were 108 Rack stores ... in 2013 there were 143 Rack stores ... while full-line stores (the ones you are familiar with) stayed flat at 111 for each of the past three years.

Interpreted differently, Nordstrom is targeting two customers ... the affluent one it has always targeted (and not by offering additional square footage, which tells you something, but instead by improving the online experience) ... and a more modest customer (with a 40% growth in stores in two years, which tells you something), by improving the in-store experience for non-high-end customers (Rack). Where appropriate, Nordstrom buys businesses that cater to younger customers.

The online spin in the article sounds an awful lot like things I've been saying for the past year, but with a twist.

When I worked at Nordstrom, way back in 2006, my team ran an analysis for me. We knew, way back then, that there was a "3-2-1 Rule". Specifically, good customers visited the website three times a month, visited our stores two times a month, and purchased one time a month, with 85% of those purchases happening in stores.

Knowing that ratio is the secret to retail success. If the ratio gets unbalanced in either direction, interesting things start to happen.

Let's analyze two different types of retail businesses.

I recently analyzed a retail business where four years ago, a pure in-store buyer spent 85% of future dollars in-store and 15% online. Today, that same pure in-store buyer spends 75% of future dollars in-store and 25% online, but customer productivity has not changed. For this business, omnichannel investments are likely to keep customer productivity constant, but are not likely to improve the ratio of retail sales to online sales. In other words, the trend for this business is for pure retail customers to increasingly sit at home and shop online. This will lead to negative comp store sales, positive sales outcomes for the online channel and total business, and an eventual rationalization of the retail store portfolio - the bottom 25% of the store portfolio will not be profitable enough, the middle 25% of the store portfolio will likely need less square footage to be profitable. This will likely lead to a sales decline, once stores are closed and square footage is reduced. I want for you to think carefully about this ... the omnichannel/online investment is right for the customer, is right to support the online business, but shifts customers online (slowly), ultimately resulting in marginal stores being unprofitable and ultimately closed, thereby reducing sales. That wasn't the desired outcome as prescribed by the omnichannel thought leadership community. We can already see it happening, folks - just read the financial filings from your favorite retail brand - tepid comps and robust online growth.

A second retail business I analyzed is a lot like Apple, in that the in-store experience is "active", whereas the in-store experience in the example above is "passive". In this case, online sales as a percentage of total are low. All of the data shows that online research on Wednesday leads to an in-store purchase on Saturday (whereas in the example above, online research on Wednesday increasingly leads to an online purchase on Saturday). Here, omnichannel investments are going to help both channels.

The key, then, is to identify if your retail business is "active" or "passive".
  • Passive = Low paid employees, merchandise available online via numerous competitors, no thrill or excitement. Not much sound. Not much for the senses, in total. Lots of %-off sale signs. You go to the store to try clothes on, or to buy stuff that you don't want to wait 2-3 days to receive.
  • Active = Music, scent, better-paid employees, trying and/or playing with merchandise, food, video, senses are thrilled, large assortment, merchandise not readily available at Amazon, full price merchandise.
The passive retailer has to make an omnichannel investment to keep up, but will likely lead to poor in-store performance at marginal stores, which will result in store closures and ultimately, a drop in sales (though there will probably be more profit, and that's not a bad thing).

The active retailer has to make an omnichannel investment, but the investment causes additional customer research that yields increased foot traffic in stores and more e-commerce purchases.

The omnichannel community is telling everybody that they are active retailers. That's not the case. Most are passive retailers.

The investment community doesn't appreciate a healthy investment in the online infrastructure, because they understand the repercussions associated with dying malls and store closures.

Not all businesses are the same. Each possesses interesting dynamics, merchandise, and demographics. The combination of dynamics, merchandise, and demographics dictates your omnichannel future.

My homework assignment for you, then, is simple.
  1. Identify if you are an active retailer (think Apple or Cabelas or Nordstrom or that kind of store), or a passive retailer (think Ann Taylor or J. Crew or Gap, not high on the in-store experience/excitement factor).
  2. Measure how web visitors convert in-stores, and measure this by store distance, and measure this monthly, not on an individual visit basis. Does your website serve as a research tool for store purchases, or does your website cut off store purchases by pushing the customer into an online purchase today?
  3. Measure if your pure in-store buyers are slowly leaking into e-commerce. If so, is customer productivity increasing, flat, or decreasing? If flat or decreasing, think carefully about what it means for the future of the bottom half of your store portfolio.