Nordstrom Analysis

Historical performance analysis

As of January 31, 2016, Nordstrom Inc.’s operating margin is 7.6%. This compares to other family clothing stores such as Macy’s (operating margin of 7.5%), JCPenney (margin of 1.4%), and Saks (margin of 3.5%). Urban Outfitters, which is a specialty clothing store, has an operating margin of 10.3%^[1]. Also, Nordstrom Inc. has a net profit margin of 4.2%. In comparison, Macy’s has a net profit margin of 4%, JCPenney has -4.1%, and Saks has 1.4%. Urban Outfitters has a net profit margin of 6.5% and Buckle has a net profit margin of 25.09%^[2]. This means that Nordstrom Inc. is able to price relatively high for their costs compared to JCPenney, Sears, and Saks. Nordstrom Inc., however, still lacks the pricing power that Urban Outfitters or Buckle have achieved. These specialty clothing stores have more pricing power based on the products they offer and the specific demographic they serve. Because of this key difference, it is hard to compare Nordstrom to smaller retailers with less variance in aesthetic.

Additionally, Nordstrom’s operating margin has been decreasing since 2011 and its net earnings have been slowly declining since 2012^[3]. While they may be making less on each sale, Nordstrom’s net sales have steadily increased since 2010. For example, in 2010 Nordstrom’s net sales were $9,310,000,000 and increased to $13,110,000,000 in 2014^[4]. It is understandable that Nordstrom is making less money on a single sale because it is entering discount platforms like Nordstrom Rack.

Nordstrom does not have a significant competitive advantage in the family clothing store industry because Macy’s has a very similar operating and net margin. Comparing Nordstrom to Macy’s leads to the conclusion that Nordstrom does not have substantially higher returns. Because they do have a slightly higher net profit margin, Nordstrom still has pricing power due to how they have differentiated themselves. Nordstrom is still in a competitive position against many other firms in the industry that have negative margins.

Internal Analysis

Critical resources and capabilities

Nordstrom possesses strong multichannel capabilities. These channels include Nordstrom’s offline stores, online websites, and off-price stores. There are currently 121 full-line stores and 197 off-price Nordstrom Rack locations^[5]. It also serves online customers through nordstrom.com, nordstromrack.com, and its private sale site, hautelook.com. There is little cannibalization between those segments, as there is only 10-20% overlap between customers of their off-price and high-end stores. Each channel attracts a different market segment so each is an independent resource. For example, Nordstrom’s outlet business is aimed at reaching Millennials, a group who represents a unique market segment that is not included in the other channels.

Nordstrom’s online channel has been a main focus of the company, which now has digital IQ of 148 and is ranked the most digital-savvy department stores by L2^[6], a benchmarking and education firm. Nordstrom aimed to be a first mover and become a big player in e-commerce field. In 2015, they showed the highest revenue share (19%) coming from e-commerce, putting them ahead of other department stores^[7].

Another resource is Nordstrom’s human capital. Nordstrom is choosy about “hiring nice, capable people”^[8] they believe will add value to their culture. Nordstrom employees are crucial to how Nordstrom operates and differentiates itself from other stores. Much of Nordstrom’s philosophy is focused around hiring the proper employees, and empowering them to be the best they can be^[9].

Core competencies

One of the main qualities that sets Nordstrom Inc. apart from many other retailers is its customer service policies. Alongside elite employees, policies are consumer-oriented. For example, Nordstrom’s return policy is striking in that it will accept any returned merchandise without question. This keeps their customer base loyal, especially their rewards members, who generated 40% of sales in 2014^[10]. Nordstrom is tasked with not only maintaining their current customers but with conducting continuous improvement in order to increase market share.

Nordstrom Inc. plans to continue to develop and improve its customer service platform with five steps. The first is to create a seamless experience for online and in-store customers. The second is to invest more capital into their physical stores to improve the environment and convenience for the customer. The third is to increase speed of shipping to customers. Nordstrom also aims to increase the visibility of online and in-store inventory. Lastly, Nordstrom Inc. desires to create a customized environment for shoppers who visit physical stores^[11].

All of these steps create a plan to tackle customer service on many fronts. This increased customer service gives value to consumers through convenience, and it allows Nordstrom to develop brand loyalty. Individually, these steps are easy to imitate, but the integrated plan Nordstrom Inc. has suggested is both rare and difficult to imitate. The capital investments required to improve customer service in every aspect while expanding into diverse markets is a daunting task. This plan may be enough to gain Nordstrom competitive advantage, but only higher returns will tell.

Firm’s Strategies

Nordstrom Inc.’s corporate-level strategy is related diversification through internal development and acquisitions. In 1960, Nordstrom was the largest independent shoe chain in the country and was looking to expand into women’s apparel. To expand into the clothing market, Nordstrom purchased Best Apparel in 1963. Since this first acquisition, Nordstrom has continued to grow by acquiring Jeffrey, a line of avant-garde boutiques, in 2005; Trunk Club, a personalized clothing service, in 2014;and the flash-sale site Haute Look in 2011^[12]. Nordstrom also developed its own website in 1998 and created Nordstrom Rack, a clearance outlet for its full-line stores, in 1973^[13]. Through related diversification Nordstrom has effectively gained market share and appealed to different market segments.

Nordstrom Rack, which encompasses 197 out of the total 326 stores^[14], is a direct result of this related diversification strategy. Since 2010, the company has opened more than 70 Nordstrom Racks and plans to build dozens more. Opening these various stores will continue to play a role in Nordstrom’s growth plan. These racks provide a large sum of profit to the company and increase exposure to customers who appreciate value. The outlet business gives the company exposure to “young customers who are seeking a deal” that will hopefully shop at the full-line stores in the future^[15]. Nordstrom intends to continue expanding its discount business without damaging the status of its full-price offerings. Nordstrom Rack has proven through their success that it has helped grow the brand name and help become more visible to a wider array of customers.