Photo: Nordstrom
Nordstrom Rack bets on premium merchandise in the face of rising prices
Nordstrom Rack sales were up six percent in the second quarter. That’s the good news. The bad news is that sales at Nordstrom’s off-price chain started to go south towards the end of the quarter.
Erik Nordstrom, CEO of Nordstrom, said last week on the company’s earnings call, that the retailer had not been adversely affected by macroeconomic pressures during the first quarter and most of the second. He attributed that to the “higher income profile” of the retailer’s customer base.
“This continued through most of the second quarter until late June, when demand began to soften, mostly in Nordstrom Rack. Compared to the first two months of the quarter, July sales decelerated nine percentage points in the Rack banner,” said Mr. Nordstrom. “Across both banners, the softening trend was more significant in customer segments with the lowest income profiles.”
Nordstrom is seeking to make Rack more attractive to consumers by upgrading its merchandise selection. The retailer in recent years brought in lower priced merchandise to gain entry point consumers but found that Rack’s customers were looking for deals on the same goods sold in Nordstrom’s department stores. Ninety percent of the brands sold in Nordstrom’s full price locations are found in Rack stores.
“Premium brands are a differentiator for the Rack, and we are focusing on having the best brands at the best prices at each of our locations,” said Mr. Nordstrom. “This quarter, sales of our top 100 brands at the Rack increased 17 percent, which underscores the opportunity from increasing our supply of premium brands.”
Nordstrom Rack is actively looking to bring in premium brands and clear out sub-premium merchandise. The retailer expects that this will put pressure on its margins for the second half of the year, although management still expects to post an increase in year-over-year profits when all is said and done.
Mr. Nordstrom said that Rack plays an integral role in the company’s fortunes.
“Our [Closer to You] strategy provides customers convenience, connection and access to the best product selection through a strong store fleet, two unique banners and omnichannel capabilities linked at the market level,” he said.
Nordstrom has been scaling Closer to You, he added, “by expanding next-day order pickup capabilities to more than 60 additional Rack stores in our top 20 markets. And our top 20 markets outperformed our other markets by seven percentage points.”
Discussion Questions
DISCUSSION QUESTIONS: Do you lump Nordstrom Rack with other off-pricers (TJX, Ross, Burlington, et al) or do you see it falling into another category? Do you expect Nordstrom’s department stores to continue to outperform Rack for the rest of 2022 or will that change?
Poll
Loading …BrainTrust
Virtually all retailers are seeing a deceleration of sales and profit – Nordstrom is not immune. And while I would position Rack in a different category than the other off-price retailers, they still swim in the same pool. Focusing on department store and premium brands seems like the right move given current conditions, but I expect that it will be challenging for the remainder of 2022 for many retailers.
I believe that Nordstrom Rack should behave as the outlet versions of many other upscale and luxury brands such as Armani, Brooks Brothers, Michael Kors, Polo/Ralph Lauren, Saks Off Fifth, etc.
The problem with focusing on premium brands in this channel is they don’t want to be flooded in outlets, so there is a limit to what inventory you can obtain.
So can you focus on brands Nordstrom buys but can’t sell? Well yes, then you have a business which is kind of the yang to the yin of Nordstrom. Whatever you can’t sell through ends up in Rack.
How is this different than TJX again? The only difference is all the goods produced directly for off-price (think of all the private-label sock manufacturers!), which sounds like what Nordstrom is now deprioritizing.
Premium brands in a discounted environment — that’s a win-win. Despite economic conditions, consumers always gravitate to deals, and especially when “trading down” in other areas has become the norm, consumers still want a bit of luxury in their lives. The Rack fills that need for shoppers with more disposable income, which is different from the other discounters that tend to target middle America.
No, I absolutely do not lump Nordstrom Rack in with the other off-pricers. Any more than I would compare a used Porsche to a used Chevy. The whole point for Nordstrom Rack is to offer premium product. It may be harder to get and premium brands may not love the idea, but that’s the assignment at Nordstrom’s level. Importantly, that’s the expectation of the Nordstrom customer.
Great analogy.
Focusing on premium brands certainly works for the TJ Maxx locations with a “Runway” section. I consider Nordstrom Rack to be in the same category as TJ Maxx anyway, and it’s definitely an apples to apples experience in a Rack and the TJ Maxx runway.
A real differentiator would be store organization and service. Discount store shoppers know that whether at Ross or Saks Off Fifth, you are committing to treasure hunting and self-service. The ease of online shopping and delivery has likely made this a less popular choice for many.
Until I read today’s discussion, I did lump Rack in with the other off-price retailers. I believe Nordstrom may be on to something. And they are making a statement: We are not for the customer willing to trade quality for the price. We will provide quality at the lowest price possible.
If this is their strategy, they better ensure that the merchandise reflects it.
Rack is up over last year, but sales are down compared to 2019 and the business has lost a lot of share as off-price rivals have grown rapidly over the same period. Most of this is because the assortments at Rack were sub-par for most of the pandemic – with too much clutter and poorly selected merchandise. As such, I support the decision to differentiate Rack with more premium selections, which are more aligned with what the customer wants. That said, the emphasis still needs to be on bargains, great value, and hidden gems at surprisingly low prices as that’s the essence of any off-price business.
Rack is all about the aspirational Nordstrom shopper or the bargain hunter Nordstrom shopper. It’s not the same as the treasure hunters at TJ Maxx.
Rack excels at so many things vs. others, a bounce-back is inevitable. First, they offer recognizable luxury brands at a significant discount—mostly the same brands they sell at Nordstrom stores. Second, they get new merchandise more often through their unique, omnichannel supply chain. And third, they offer services such as tailoring that totally differentiate them from TJX and others. As if that wasn’t enough, they have better tracking tools that include a smart use of RFID that gives them visibility throughout all their stores, whatever the brand.
Trying to chase the lower-end off-pricers during a period of inflation is a tactical decision, not a strategic one. Nordstrom Rack has its long-term brand equity to consider, not just how to manage its way through 2022. Positioning itself as a value-oriented “step above” is the right move, especially since Rack can move through inventory overages from the mainline Nordstrom stores.
l’m with Jeff Sward on this. I don’t equate Rack to other retail off-pricers, and Nordstrom senior leadership shouldn’t either. If they do, then they’ll erode much of their equity they’ve successfully built in the eyes of the premium discount shopper.
From this consumer’s perspective, Nordstrom Rack isn’t any different from other off-price retailers. The merchandising may be a little cleaner, but the goods are still what I would expect to find in an outlet store.
Nordstrom Rack will build success with the premium brand strategy. The market will define how the off-price channel performs. The length of time that inflation takes a bite out of income will determine how fast the customer base will grow and become more loyal.
As holiday inches closer, customers will be looking for deals at Rack first, but I do not expect those customers to purchase in greater volume than those buying at Nordstrom.
Shouldn’t “premium merchandise” have been what the Rack division focused on all along? As is often the case with troubled retailers (has it fallen so far that we should give it that title?), every “improvement,” however logical it may be on its own, gets compared to prior changes, and furthers the perception that no one knows what they are doing.
The Nordstrom Rack concept was always meant to be primarily an extension of good quality (even premium) merchandise sold in the full-line stores. So an adjustment makes sense. The mix of product is unlike other discounters, which gives them differentiation.
This is a good move, to clarify, re-establish market position. Corporate has even reorganized its leadership structure so they oversee both Nordstrom full line products and Rack merchandising, which will help build on sales strategy execution.
Nordstrom Rack is more comparable with factory outlets, rather than the retailers like TJX. It offers a comparatively better shopping experience and this sets it apart from other off-price retailers. Additionally, all off-pricers lay-out premium brands’ typically inferior quality products, which explains why they’re priced so affordably. However, at the Rack, the collection is presented in an organized manner, and therefore, for customers, it makes a preferable choice to shop from.