The US retailer’s new business model will pivot to drop shipping, concessions and revenue-share deals.
American department store Nordstrom is responding to tough times with a radical rethink of its business model. At its Investor Day presentation on Thursday, the company announced plans to reduce traditional wholesale from 85 per cent to 50 per cent of overall sales.
That means many more sales will come from drop ship (shipping products direct from the brand to the customer), concessions and revenue share deals. Nordstrom is looking to offer more distribution options to brands as well as more assortment to its customers. Diversification also protects Nordstrom from risks associated with the wholesale model, including inventory overhead and cyclical markdowns. The move represents a pivotal shift, coming in the aftermath of a pandemic that exposed and accelerated the weaknesses associated with wholesale, including the pace of the promotional cycle and amount of unsold inventory.
“This is a monumental step signifying change in a department store model. I would not underestimate what a major step this is,” says Robert Burke, chairman and CEO of New York-based consulting firm Robert Burke Associates. “I’m sure other retailers will follow suit, because they have struggled with how to come up with a formula to address their immediate issues.”
Pete Nordstrom, president and chief brand officer, said the new model will increase product assortment available online to 20-fold more than in-store. That will resonate with customers both at Nordstrom and its off-price counterpart, Nordstrom Rack. At the same time, these new options have the potential to attract new brand partners, some of whom may be wary of the traditional wholesale model.
“We have to move away from a transactional way of [working with brands] and more to a partnership,” Pete Nordstrom said on Thursday. “When you build trust and you’re transparent, it’s not about offloading risks onto brand partners. It’s sharing risk to make business happen with greater speed, risk and agility.”
Department stores have been hit particularly hard by the Covid-19 pandemic and the resulting retail fallout. Nordstrom competitors Barneys and Neiman Marcus have gone bankrupt, while Macy’s, which owns Bloomingdale’s, is closing 20 per cent of its stores.
Nordstrom, which was early in adopting online-offline technology like kerbside pickup, returned to profitability in the third quarter ended 31 October 2020. Sales were still down 16 per cent compared to the same period the prior year. Nordstrom expects to return to pre-Covid levels this year, with 25 per cent revenue growth driven by e-commerce and sales at Nordstrom Rack.
Before the pandemic, some brands were shifting away from traditional bricks-and-mortar wholesale retail. For Nordstrom and other department stores, options like the concession model and drop shipping offer brands more control. Pete Nordstrom said that while the retailer does “lose some control, we have confidence in our brand partners”. Burke says trusting brands to handle customer information and fulfilment “may be the cost of this type of partnership”.
Drop ship, concession and revenue-share models provide more flexibility. Farfetch’s drop ship model enables it to sell goods from luxury boutiques worldwide, while Selfridges’ concession model has proved profitable.
This type of flexibility has made Nordstrom an appealing retail partner to digitally native brands. An example is Blueland, which sells eco-friendly cleaning kits on Nordstrom.com through a traditional wholesale model but also appreciates the potential of drop ship. “With wholesale, it shows a commitment to our product and our brand,” says Blueland co-founder and CEO Sarah Paiji Yoo. “The beauty of drop ship is that we would hold the inventory and have flexibility based on demand, but we see Nordstrom as a sort of influencer channel.” Yoo added that when it began selling on Nordstrom in 2019, drop ship wasn’t offered as an option.
A bigger selection online also makes Nordstrom a stronger competitor to luxury e-commerce sites, like Farfetch and Yoox Net-a-Porter. Part of the new digital-first strategy laid out by Nordstrom to investors on Thursday included a focus on more sophisticated online product discovery based on customer personalisation, an increasingly competitive ground for retailers.
New distribution models can prepare the way for further innovation. Pete Nordstrom noted the potential of resale — the company tested a resale model last year and plans to revisit it. “There’s an opportunity [in resale],” said Nordstrom. “Our digital technology efforts have afforded us new opportunities.”