November 06, 2008

Wow. Nordstrom. Wow.

My heart goes out to the poor souls and former co-workers responsible for trying to dig out of a big hole at Nordstrom.

A little color about a -15.6% comp store sales decline (as outlined on the Nordstrom investor relations page), helping you understand what that really means.
  • Nordstrom Rack, the lower-price retail channel at Nordstrom, actually experienced a 0.7% increase.
  • Full-Line Stores, the ones we all think of when we consider Nordstrom, experienced a whopping 20.4% comp store sales decrease.
  • Over the past few years, Nordstrom Direct, the online arm of the Nordstrom brand, had their sales included in Full-Line Store comps. This is an important distinction, because it is entirely possible that online sales grew vs. last year, meaning that Full-Line Store sales decreased more than 20.4% ... maybe in the -22% or -23% range.
  • In October, total net sales were $97,000,000 behind last year, and I'm confident we'll learn next week that gross margins were cut vs. last year to move inventory. This will probably result in $30,000,000 to $35,000,000 of profit just dropping off the table ... in October. Imagine if this continues into November and December?
Remember, there's almost no "flex" in a retail business model, you don't just make up the volume or profit. One can see the retail "discount bloodbath" on the horizon, as prices deflate for the holiday season in a desperate lunge for any remaining dollars that customers are willing to spend.

The lack of "flex" in the business model results in a bunch of people running around like their hair is on fire.

This kind of implosion requires a confluence of events to pile on top of each other. You can blame the economy, of course, but if you're going to do that, you have to wonder why The Buckle, Children's Place, and Hot Topic are posting increases --- and you can't make up excuses like "well, their customers are immune to macro-economic conditions", because nobody is immune to this economic crisis. Those brands must be out-merchandising, out-marketing, and/or out-pricing the competition.

In my last year at Nordstrom (ending March 2007), you could literally see the implosion coming by simply analyzing the customer file. Customer acquisition was poor. Retention rates were suffering, especially among marginal customers. In other words, the bottom of the customer file was dropping out --- a sure sign of the coming apocalypse. Even though comps were still marginally positive, the data foretold of a coming storm. I used to maintain a running tally of comp store sales increases on my office greaseboard. Comps always lagged behind changes in the customer file --- the customer file foretold what was going to happen. One could easily see that a four year run of positive comps were about to end.

The middle-aged, highly-affluent customer, considered the "target customer" at Nordstrom, must be in complete free-fall.

Retailing is a habit, especially high-end retailing like the kind practiced by the folks at Neiman Marcus, Nordstrom, and Saks. You retain customers at a very high rate, and you pray that they will buy every other month. When the customer elects to break the habit, it is hard to reverse the momentum. Really hard.

Nordstrom will once again experience good performance. It is likely, however, that the customer has fundamentally (and maybe permanently) changed her habits. These kind of pendulum swings require all of us to change as well, something I'm confident we'll do.

Retailers and catalogers have been through this cycle before.

But I'm so much more interested in seeing how online marketers will cope with a downturn in business, given that online marketers have no experience driving sales to the online channel when the customer is doing everything possible to protect what few dollars are left in her wallet. Long-term, the brands that out-merchandise the competition win. It will be fascinating to see how online merchants elect to attack innovation.

As you can see in the image above, Nordstrom's online marketing team basically removed product from the homepage, selling only the fact you can get a great deal this weekend.

Hang in there, dear readers. We will innovate our way out of this mess.

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