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Should Rack Be Nordstrom’s Growth Engine?
Nordstrom plans to accelerate store openings at its Rack off-price concept following a strong recovery in sales in the holiday quarter.
Plans call for 23 Rack openings in 2024 after adding 19 in 2023. There were 256 Racks in operation at the close of the year, making up a third of Nordstrom’s overall sales.
Opening new Rack stores “continue to be an excellent investment as they deliver well in excess of their cost of capital with a relatively short payback period,” CEO Erik Nordstrom said on a call with analysts.
Rack’s locations also enable the retailer to reach customers across price points.
“Rack stores continue to be a growth engine for our company as they are our largest source of new customer acquisition, accounting for over 40%,” Nordstrom said. “Growing our store count also supports long-term customer retention. In fact, roughly a quarter of retained Rack customers migrate to the Nordstrom banner within four years.”
Expanding locations improves Rack’s performance and supports overall omnichannel offerings. Said the CEO, “We consistently hear how customers enjoy the convenience of shopping between our banners, taking advantage of the services we offer, including cross-banner in-store returns, buy online, pick up in-store, and alterations.”
Finally, the ramped-up Rack openings will seek to build on the “momentum” being seen at Rack. Sales at Rack improved 14.6% in the fourth quarter, rebounding from a decline of 8.1% in the year-ago period. Comps were up high single digits.
The retailer had blamed Rack’s decline in the 2022 holiday quarter on weakness from lower-income customers amid inflationary pressures, although the leading off-pricers, TJX Companies and Ross Stores, managed positive gains over the period. Rack’s turnaround includes a renewed emphasis on “premium” offerings after a past approach of bringing in lower-priced items to reach a wider audience didn’t resonate with core customers
Nordstrom said, “We focused our efforts to improve our offering at the Rack as we know that delivering great brands at great prices is what our customers want.”
Nonetheless, muted guidance was provided by company officials for 2024. Revenues are expected in the range of a decrease of 1% to an increase of 2% in 2024 versus 52 weeks in 2023.
Growth at Rack is expected to be offset by “flattish” sales at the Nordstrom banner.
The Nordstrom chain is still aiming for “digital-led growth supported by our stores.” In April, Nordstrom will add a third-party marketplace to the Nordstrom.com website, providing increased offerings to online shoppers without having to absorb the expense of holding additional inventory. Eric Nordstrom also said the Nordstrom chain’s growth is expected to be helped by “amplifying the brands that matter most to our customers, along with ensuring we have the depth in these brands consistently across our stores and online.”
Discussion Questions
Does it make sense for Nordstrom to prioritize growth for the Rack chain?
Does the Rack chain continue to complement the Nordstrom flagship banner as it expands, or is operating two distinct chains a distraction?
Poll
Loading …BrainTrust
Albert Thompson
Director, Brand Strategy (President), Walton Isaacson
Susan O'Neal
General Manager, Promo Intel & Insights, Numerator
Maybe. On the one hand, if Nordstrom hopes to grow Rack it will first need to rethink its approach more in line with other, more successful, off-price/discount retailers. Rack and Nordstrom have a symbiotic brand relationship. The more Rack grows and/or the more Nordstrom’s business declines, or stays stagnant, the more stress that symbiosis faces. At some point it stops serving a complimentary function and may in fact erode one or both brands. The original value proposition, i.e., Nordstrom items at lower cost, begins to break down the more the Rack sells different inventories and/or the prestige of the Nordstrom brand fades. So, I don’t think it’s a matter of distraction, but more carefully managing the value proposition from both ends of the retail spectrum.
The reason Nordstrom is focusing more on Rack is because its department store operation is in decline and the company is finding it hard to get back to growth. As much as this might be understandable in the current economic environment, it is not operating from a position of strength.
Rack does have more of an opportunity as it is in a fast growing part of the market as consumers migrate toward value. However, recent performance has been abysmal. Compared to before the pandemic, TJX has grown full year sales by 30.2%. Ross has grown full year sales by 27.0%. By comparison, Nordstrom Rack’s sales have shrunk by 7.8%. The business has lost a stack of market share.
The latest numbers suggest that corrections have been made, but there is a long way to go in improving assortments and merchandising to get the business to becoming one of the powerhouses of off-price retailing.
We’re in an era where the middle class continues to erode; thus the race is to the top (luxury good stores) or to the bottom (think Dollar Stores). The Rack will like emerge as the sustaining growth engine given the access it provides to “quality products” at discount pricing. It’s why T.J. Maxx is still in business. Consumers always want a deal and there will be more individuals in this country with “less” given the rise in the cost of living. The Rack is a “line extension” of Nordstrom the way Saks Off Fifth is to Saks Fifth Avenue.
The point of an outlet is – or was – to clear merchandise from the main store; so logically it should be a complement. Of course we know the reality of the past few decades: people became attracted to the brand and stores – taking advantage of the brand equity – began to offer merchandise that was really unrelated to the parent. Not properly managed – by, say, giving in to rapacious demands for sales growth – such can lead to destruction of the brand equity…for both the outlet and the parent. It’s hard to say, offhand, precisely the point where expansion moves from diminishing returns to actual decline, but based on comments seen here on RW, I think Nordstrom may be near that point. All this having been said, I don’t know if the parent’s problems can be laid at the foot of the Rack operation: I think a general decline in the popularity of what they specialize in – business and “dress” attire – is the main culprit…how do you fix that ?
For now, I’d day the two banners are still complementary. They both have strengths, but they certainly also have opportunities. Nordstrom’s has a loyal customer following, but must continue to refine its assortment strategy overall and by location in order to continue its typical high price points and minimal promotions. Rack on the other hand takes what they can get, and throws it on the floor in fairly haphazard manner with little customer support – but it still does well. They attract different shopping journeys, but there are many people that shop at both banners, depending on their needs. I think Nordstrom can sustain additional Rack growth, but can’t ignore the synergistic balance.
It’s clear that Rack stores are the growth driver at Nordstrom, and so continuing to build-out Rack stores makes good business sense. With only 93 full-line stores and 258 Rack stores, Nordstrom has essentially become a premium brand off-price chain that also happens to have full-line stores in their portfolio. And while Nordstrom management claims that their Rack customers are also full-line customers, I suspect that this will increasingly be less the case, as the Rack footprint gets bigger relative to the full-line footprint. It seems to me that Nordstrom is trying to hold on to their heritage as a full-line luxury retailer, but the fact is, it’s become a premium off-price player – just follow-up the money.
My perspective on this discussion is colored by my low opinion of the Nordstrom Rack stores here in Tucson. (We have no main line Nordstrom department store in our fair city.) I found the men’s offerings to be sparse and uninspiring on my last two visits. Service help nearly non-existent. Size selection incomplete. Overall, I could perceive little connection to the main line brand. Rack advertises very rarely in this market.
Based on this unscientific study, it seems to me that Nordstrom would do well to redefine Rack’s purpose. Is it an “outlet” store for goods that didn’t sell in its department stores? Is it an off-price retailer that sources its own lines of merchandise along with a smattering of Nordstrom own-label items?
I believe there is a position above off-pricers like TJ Maxx and Burlington Coat factory that Rack could dominate by emphasizing better quality in more popular sizes at affordable prices.
Nordstrom mainline stores opened its Rack business to complement and be a symbiotic option for customers to do a full shop. It wasn’t designed only to offer items from the main stores which didn’t sell, but rather be a place to find a mix of values, deals, and lower priced discoveries, many shipped in only for the Rack business.
When the economy was booming, the mainline stores were updated to a more upscale collection of designer brands and merchandise, which meant attention on the Rack stores drifted. Now with the economy still in flux, with high consumer debt levels, and inflation still adjusting, the Rack stores provide a strong consumer value, often with name brand product. The Rack will continue to help Nordstrom weather this period in retail until economic boom times in the US return.
Wait, so sales at Nordstrom Rack (discount store) were negatively affected by inflation (higher prices) in 2022 but the Rack saw sales growth (turnaround) from raising prices (“premium offerings”) but Nordstrom banner (the home of premium offerings) is expected to be “flattish.”
Yeah, this will end well or is that, “well, this too shall end.”
I am a big believer in brand value and delivery. Nordstom vs. Nordstrum Rack is a case study on how to destroy both. Similarly, I believe the solution is simple: Get the Nordstrom name off of everything RACK and operate the different banners of two different organizations. Each has a different reason for being. Each should be operated as a different business model. In the shoppers’ minds, never let the two collide.
Now that the Rack is growing by so much, I think that’s right. Or maybe change it to the Rack by Nordstrom. There are only so many aspirational shoppers.
On the other hand, does the world really need another off-price retailer?
And all of the off-price players (Ross, TJX, Burlington, Rack) are still opening more and more outlets. The market is hot right now, but if it cools, someone has to lose out!
The Rack complements Nordstrom like Hunter Biden complements his father. Sharing the same name eventually catches up with you.
Few brands are elastic and Nordstrom isn’t one of them.
Yes. But HOW they invest in that growth is critical. Different brand name (dis-associate the Nordstrom name from The Rack immediately), but a better store experience. Think about how Target emerged from its department store roots – keeping what was good about that shopping experience, but lowering prices and reducing selection. It’s an old case study, but highly relevant here.
Nordstrom focuses on Rack due to declining department store operations, seeking growth in the value market. Recent performance lags behind competitors like TJX and Ross, necessitating improvements in assortments and merchandising for sustained success. Rack chain complements Nordstrom’s flagship banner by contributing significantly to sales, fostering new customer acquisition, and supporting overall growth. Operating two distinct chains is not a distraction; it enhances customer engagement and provides convenience through cross-banner services, aligning with Nordstrom’s strategic goals.
NO…!!! Please…no! Nordstrom is one of the last bastions of regular price retail selling. It’s a retailer where the word ‘sale’ still means something. Adding more and more Rack stores will sooner than later dilute the (remaining) strength of the Nordstrom brand promise. They will have successfully accomplished what Macy’s accomplished. Turning their brand over to the One Day Sale and Backstage. And operating the two businesses should absolutely not be a distraction. It should be a partnership. The outlet stores are supposed to be the quiet, efficient channel for liquidating unsold inventory. They have become a beast in their own right, selling factory fresh product, all in the name of discounts and value. Where is the tipping point? Where is the point that the customer simply shrugs their shoulders and says “why bother” with the so-called regular price stores? It’s (mostly) available in the outlet stores! And if everybody is discount, is ANYBODY really discount? Or have we just successfully traded down the whole business…???
Yes, I have exaggerated. But not by much. In one local mall Gap rebranded a regular Gap Store into a “Factory” store. It is meticulously merchandised with fresh product. It is clearly not a ‘rack’ operation. It is better looking than the regular Gap store used to be. Fresh product throughout. All with “regular price” tickets and the current usual Gap level of promotions and “discounts”. It’s a joke and a sham to call in a Factory store. But I guess that umbrella is supposed to add to the value perception in the eyes of the customer. As Mark Ryski points out, Nordstrom has 93 full price stores and 258 Rack stores. And now Rack is going to be the growth vehicle…?!? The whole conversation about discount/outlet/factory stores has gone off the rails.
The tipping point has passed. Best evidenced by their admission of their ‘growth engine.’
Stick a fork in Nordstrom. There is no future for a brand that allows itself to be cannibalized down market.
The Rack helps the Nordstrom brand, because you go in there thinking “I am shopping the leftovers from Nordstrom”. While it is a discount store, you still know (or feel) that the merchandise came from a Nordstrom.
It is like a permanent end of season sale.
It’s sensible for Nordstrom to focus on expanding its Nordstrom Rack. Currently, Nordstrom tailors its product offerings per the store RTA, yet the prices remain too high for many consumers. Nordstrom Rack serves as a gateway into the Nordstrom brand, attracting consumers who may eventually transition to shopping at full-priced Nordstrom stores.
If 40% of your new customers are acquired through a single banner then that banner has to be a priority, whether your 3-5 year business plan said so or not.
This says a lot about Nordstrom flagship and premium department stores today. Most consumers want affordable luxury, not bank-breaking luxury. This is why the flagship banner is “flattish” and why the lower priced (ie. lower quality) items did not resonate with this consumer.
After some experimenting, Nordstrom has found a formula for growth in an inflationary market. With a focus on Rack, online and the omnichannel shopper, they very well may offset the softness in the flagship banner altogether.