Did COVID kill entire categories of the retail industry? Omni-channel shifts at play at Nordstrom and Urban Outfitters tell the tale

Profile picture for user slauchlan By Stuart Lauchlan August 27, 2020
Summary:
A tale of two retailers - Nordstrom and Urban Outfitters - highlights the COVID-induced challenges facing the sector today.

Nordstrom
(Company logos)

In the retail turmoil that’s been accelerated by COVID-19, the fashion and apparel sector has been particularly conflicted. Still the most telling comment on the current situation has come from Simon Wolfson, CEO of mid-range fashion retailer NEXT, who noted months ago:

People do not buy a new outfit to stay at home.

What that has led to is a consumer shift towards comfort clothing - the Zoom fashion collection, you might say - and a fall off in purchases of business apparel or high-end items. That’s had a significant knock-on effect on a large number of retailers and if those brands haven’t got their digital act in place as well, the impact has been all the harder. 

This week saw Nordstrom turn in a quarterly loss of $255 million, down from a profit of $141 million this time last year, with revenues tumbling 53% to $1.86 billion. With storefronts largely closed for a large part of the past few months, it’s almost traditional at this point to add the comfort blanket clause of ‘but our digital sales soared by X%’. Sadly not so with Nordstrom where digital sales actually fell by 5% year-on-year. 

This was largely attributed to a decision to shift the start of the firm’s annual Anniversary Sale into August, but nonetheless the optics are not good.

It’s terrible timing for Nordstrom that its digital decline was aired the week after Target turned in 195% e-commerce growth and Walmart 97%. Those were the two comparisons that I saw most frequently made in the mainstream media earlier this week. They are, of course, not particularly fair comparisons. When Nordstrom starts selling laundry powder and toilet rolls, then we might be able to do an apples and apples measurement. 

A fairer comparison would be with the likes of Neiman Marcus, Lord & Taylor and Brooks Brothers, in which case the comfort blanket comment for Nordstrom becomes - at least we've not filed for bankruptcy!  

Some comfort? 

There are some crumbs of comfort to be reached for, as CEO Eric Nordstrom points to a 50% growth in new e-commerce customers for the year to date. He’s also keen to focus on the fact that Anniversary Sale prospect customers have created 20 million wish lists online of previewed sale items. That sounds impressive, but it does now put the immediate focus on delivering transactions on the back of those lists. Nordstrom is clearly aware of what’s riding on this: 

Our approach to planning and executing Anniversary reflects how we're leveraging our customer insights and enhanced agility to drive both top line and profitability during this important period. We took actions to meet evolving customer preferences by expanding our assortment to reflect growing preference for categories focused on casualization, comfort, wellness and home.

For the first time, customers could preview items through a digital catalog and build a wish list to enable them to check out faster when it was time to shop. Our customers created nearly 20 million wish lists, which was not only a great way for them to engage early, but also allowed us to adjust in real-time to high demand items. 

Assuming this is successful, this approach will influence how Nordstrom approaches Black Friday and the all-important Holidays season:  

For Holiday, we plan to continue to build on last year's success, with an emphasis on expanding our assortment of gift-able products with greater breadth at lower prices and across categories. We're focused on making it festive and easy for customers to shop by emphasizing our convenience services and experiences in stores and online. Using an approach similar to what has been successful in Anniversary, we will continue to leverage data to inform our assortment and categories that are resonating with our customers.

The end of category? 

The ongoing nature of COVID means - it is to be hoped! - that the traditional Black Friday scrums of punch-throwing people pouring into stores will be off the agenda for most retailers. In Nordstrom’s case, the CEO says he’s conscious of a new model of buying and selling emerging: 

There's no doubt the funnel is different than pre-COVID. There's clearly a lot of customers shopping online, we didn't do much online shopping pre-COVID. There's also a big difference in categories and a big difference in price. Some of it is a shift in categories that we think will last a little longer.…But the encouraging thing for us is the engagement. If we can get new customers in, engage with them, really regardless of what the transaction is, we feel really good that we can continue that engagement, be it online or in stores or increasingly services like Buy Online, Pick-Up In Store or our quickly growing curbside services.

But that shift in categories is still hitting hard. Sweatshirts and jogging bottoms are what sell online, not ballgowns and designer shirts. At Urban Outfitters, its Anthropologie brand, known for its occasion and function wear, suffered, while its Free People leisure wear arm did not. As CEO Richard Hayne puts it: 

COVID just completely wiped out the need for classifications of product. I think there can't be any more clear-cut example of this than the struggle that Anthro had early on with a lot of their dressy and functional type outfits and the success that Free People had with Free People Movement, which is activewear and things that she likes to wear around the house. I think it shifted from a silhouette conversation to a more functional conversation. 

This is introduced a new unpredictability, he adds: 

Typically functions don't change. I mean every year people have weddings and people are invited. Everybody has graduations. These kinds of functions happen every year, so we almost take them for granted. Well, I guess we shouldn't - and we've learned that in 2020 that these functional drivers of fashion are not something we should take for granted, but something that can change and as we've seen change rapidly. So the silhouette is still intact. It's just the function has trumped it and has become the main driver of fashion right now. Casual, comfortable, dress down looks and exercise wear is what everybody wants. Everybody wants to have wear for their home living, since most of the people aren't leaving their home.

Urban Outfitters is at least able to point to decent digital growth. While overall sales were down 13% in its most recent quarter, e-commerce sales were up by “double digits” which meant the firm still turned in a profit, albeit 43% down on this time last year.  Still, right now any form of good news is really good news, so Haynes points out: 

Besides sales, other digital metrics were also impressive with sessions and orders showing mid double-digit gains. Conversion improved as well. Perhaps the most noteworthy metric was a number of new digital customers the brands attracted. Total new digital customers across all brands jumped by 76% on a year-over-year basis. This gives us confidence that digital channel will continue to produce robust growth during the back half of the year.

We expect continued strength in the digital business, and have taken extra measures to ensure we have the capability to scale with customer demand during the holiday period. These include adding staff in our existing fulfillment centers earlier, installing additional equipment in those centers to boost efficiency, using a newly distribution facility to ship faster on items and staffing stores to allow for more pack-and-ship processing.

In contrast to Nordstrom’s cautious and defensive tone, Urban Outfitters is positioning itself as proactive. Earlier this month it announced plans to build an 880,000-square-foot omni-channel distribution center in Kansas to support digital growth across all brands. It’s a four year project with long-term thinking and planning as its keynote. Hayne predicts: 

We believe Urban Outfitters brands will emerge from the COVID fog better positioned for the future, and therefore, are beginning to make new strategic investments. An example is our recent announcement to commence building another large fulfillment facility. This complex in Kansas will give us the operational capacity to continue growing our digital business in North America. We have also recently completed a similar facility in the UK, which will allow for expansion in Europe. Our goal is to continue expanding the family of brands and bring our unique products and experiences to more customers around the globe.

Meanwhile stores have now been re-opening around the globe. The company currently has 624 physical locations in the US and Europe and these will continue to be part of the omni-channel mix, says Haynes: 

Clearly, some customers still prefer shopping in stores. Therefore so long as the economic model works, we are committed to maintaining or even enlarging our store fleet as part of our omni-channel strategy.

But he adds: 

It remains unclear if store traffic will ever rebound to pre-COVID levels.

My take

That last comment is the challenge for all ‘legacy’ retailers today, of course. Those who made the digital investments early on and achieved some relatively healthy form of omni-channel mix are in theory the best placed to emerge from the pandemic with some form of viability. Or as Hayne puts it: 

Companies with pre-existing conditions and those more relying on physical stores felt the effects most acutely. [We] entered the period with a well-developed digital capability, powerful brands, seasoned merchants and production teams and a strong balance sheet. We reacted quickly and took the necessary steps to mitigate the effects of this scourge.

That’s the theory at any rate.

But then again, later today The Gap, which has spent years boasting about its digital investment and omni-channel clout, is due to report its latest numbers. The exception to that theoretical rule may be upon us sooner than we think...