Important Trends In Retail: Nordstrom Closing Stores In Portland

Give this little ditty about Nordstrom closing stores in the Portland market a read, my loyal subscribers (click here).

Instead of getting knee-deep in the #omnichannel weeds, let's get the plane up to a comfortable cruising altitude, and look at the Portland market from 30,000 feet in the sky.

• A thriving e-commerce business at Nordstrom (#digital #mobile #ecommerce).
• A growing Nordstrom Rack off-price business (#discounting).
• A shrinking full-line store presence (five down to three) (#ohboy).
• Current/Future renovations at the 3 full-line stores (#omnichannel).
• The stores that are being closed were opened in the 1960s and 1970s.

The story goes beyond Portland.

• Full-Line full-price stores have grown from 109 in 2008 to 117 today (1.3 per year).
• Off-price Nordstrom Rack stores (which are not integrated with Full-Line stores or the website, dear omnichannel advocates) have grown from 60 in 2008 to 140 today (13 per year).
• E-commerce has grown from $700 million in 2008 to at least $1.3 billion today.

What does that tell you about the future? What is growing?

• Online - sales growth doubled in the past five years.
• Low-Price - Nordstrom is increasing the Rack store count 10 times faster than the Full-Line store count, with store counts more than doubling in the past five years.

What is not growing?

• Full-Line Store Square Footage.

Mind you, Nordstrom is a successful business.

What do you think will happen to a retail business that is less successful than Nordstrom, a business that crumbles under the weight of debt when sales drop by 5%?

The next ten years in retail are likely to mirror the last ten years in catalog marketing.

What happened in catalog marketing?

• We were told that catalog had to be "multi-channel", that the catalog had to be integrated into the online experience, causing both channels to fuel each other.
• This concept didn't work. It appealed to the "core customer", who is now 55+ and rural. Everybody else just disappeared, they walked their business over to Amazon and to large retailers who grew their own, underutilized e-commerce channels.
• The reduction in customer productivity caused catalogers to pull 40% of their paper-focused square inches out of the mail. Forty percent!
• Catalogers doubled-down on "best customers", squeezing every bit of profit out of them possible.
• In cataloging, the costs are "variable", which is an advantage. When the paper is pulled from the mail, it's gone - no worries, no debt, no empty floor space.

What will happen in retail?

• We are being told that retail has to be "omni-channel", that the retail store must be digitized and fully integrated into the online/mobile experience, causing all channels to fuel each other.
• This won't work (my guess, I could be wrong). It probably will appeal to the "core customer", the 5% of the baby-boomer centric customer file who loves the in-store shopping experience and actually wants stores to become digital distribution centers.
• Everybody else (especially customers age 18-44) will focus on inventing the future. When is the last time you heard a 21 year old say "I just wish that Forever 21 would have better digital distribution centers in the malls I frequent?"
• Existing stores will experience productivity declines (ask Nordstrom about the two older stores in the Portland market). It doesn't matter that online and stores are working together - at all - your retail CFO is going to look at that whopping fixed cost associated with a store, and will question why it should remain open?
• The reduction in customer productivity will cause retailers to close older stores.
• The reduction in customer productivity will cause retailers to invest in "the best opportunities". These may be low-price branded concepts (i.e. Nordstrom opening a Rack store at West Town Mall in Madison, WI - a former higher-end mall that is adjusting to modern economics), these may be remodels of good locations, these may be build-outs in new concepts (new concepts are not mall-based, are they?).
• In other words, weak stores will disappear - while strong stores may even get stronger.
• Retail stores represent fixed expenses. Unlike catalogs, you cannot simply remove them from the ecosystem. When closed, they sit there, collecting dust.
• We're going to have a lot of closed stores, sitting there, collecting dust. In catalog, 40% of the square inches simply "went away". In retail, will 40% of the square footage "be abandoned"? What are the consequences of empty square footage on our communities? And maybe more interesting ... especially if you market to an 18-44 year old customer, what replaces a Sears when a Sears store shuts down?

This will result in a fundamental transformation of retail. The baby boomer version of retail will die over the next ten years, unable to be saved by omnichannel strategies. Retail won't go away, but it is conceivable that 40% of the square footage will be "emptied", rendered useless by the impact of e-commerce on Jennifer and mobile on Jasmine. It will be interesting to see what (if anything) replaces what is lost.

Think about what happened to Borders and now to Barnes and Noble - especially the latter, they did everything the omnichannel folks love to see executed, and none of it worked. None of it. When mobile impacts everything else the way Amazon (e-commerce) and Amazon Kindle (digital/mobile) impacted bookstores, use Borders / Barnes and Noble as your cautionary case study of the future of retail.

Thoughts?

I'll offer an essay a day on retail for the remainder of the week. Could write a booklet about it. Hmmmmmm.