Nordstrom discovers the high price of omni-channel

Stuart Lauchlan Profile picture for user slauchlan February 21, 2016
Summary:
Nordstrom has to carve itself an omni-channel future, but that costs money, a lot of money as it happens, at a time when sales are under pressure.

Nordstrom
Omni-channel costs

Our expenses have grown faster than sales to support our multichannel growth.

A timely reminder that the pursuit of omni-channel retail comes at a price from Blake Nordstrom, co-President at Nordstrom, who says:

While we're on track with our $20 billion sales ambition by 2020, our efforts to serve customers in multiple channels are having an impact to our business model.

On the face of it, the investment to date has delivered results. Nordstrom.com sales rose 11% last quarter, while online revenues from its discount web sites nordstromrack.com and hautelook.com were up 50%.

But offline sales in stores were down and the firm’s recent Q4 numbers missed Wall Street expectations. Nordstrom's net income fell to $180 million, in the fourth quarter ended 30 January, down from $255 million a year earlier. Revenue did rise 3.7% to $4.19 billion, but Wall Street wanted $4.22 billion. That, combined with a downbeat outlook, sent Nordstrom’s share price down sharply late last week.

With that in mind, it’s time for what the company is positioning as a sharper focus on various elements, including some significant reining in of costs. So, for the next 12 months will see the retail firm spend $300 million on digital and e-commerce, which sounds impressive, but is actually flat year-on-year. In contrast, that number represented a 35% increase on the 2014 spend.

Tough decisions

It’s clear that some tough investment decisions need to be made. The pursuit of an omni-channel business model can’t be cast aside, but needs to co-exist with offline needs. Nordstrom Chief Financial Officer Michael Koppel explains:

In evolving with our customers, we made significant investments to enable customers to shop in multiple ways. This has resulted in market share gains, but also structural changes to our operating costs. For example, e-commerce now represents over 20% of our sales, a notable increase from 8% five years ago. This business model has a high variable cost structure driven by fulfillment and marketing costs in addition to ongoing technology investments. With our increased investments to gain market share along with the changing business model, expenses in recent years have grown faster than sales.

So it’s now all about pursuing increased efficiency and reduced costs, which means, according to Koppel:

There's a number of things we can do. Currently today, we fulfill out of multiple locations. Are there opportunities for us to get more efficient at that? [The current model] creates not only additional labor cost but it creates additional shipping cost because you're shipping multiple items per an order. We're also looking at how spread out we want our assortment to be, because the more lower-price items we have in it, the less unit profitability we gain.

He cites three initiatives as examples of what is to come:

In technology, we are planning productivity improvements by focusing on fewer, more meaningful projects, such as a scalable merchandising solution that supports seamless integration across multiple channels. In addition, we are accelerating our efforts to re-platform our architecture to streamline development while reducing costs.

In fulfillment, we are assessing ways to improve efficiencies around delivering product to customers which is expected to generate lower shipping costs. We are also refining our online assortments with a focus on unit profitability.

In marketing, we are focusing on improving our effectiveness across all channels. Consistent with our fulfillment efforts, we are measuring enterprise profitability of our total marketing spend.

All of this is going to take time, he cautions:

These and other initiatives are multi-year in nature.

But they are crucial as they are built on a need to rethink how Nordstrom engages now and in the future with its customers. Keppel says:

A lot of these [initiatives] go back to how we need to continue to view the customer experience, not just by channel, but across the enterprise, and understanding how we can serve the customer on an enterprise level.

My take

At a time when Nordstrom has been accused of becoming overly-reliant on its discount outlets, it’s ironic that it’s having to admit that the cost of building an omni-channel future has a bigger price tag than it can handle. It’s a difficult one to balance out and Wall Street’s on a hair trigger when it comes to any sign of weakness in the retail sector.

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