Nordstrom gets digital dividend, as JC Penney bombs out - a tale of two retail omni-channel pushes

Profile picture for user slauchlan By Stuart Lauchlan August 16, 2018
Summary:
Nordstrom's seeing its omni-channel play working out in a way that JC Penney can only look on at and wonder where it all went wrong.

shopping bags
Two contrasting tales of digital transformation from big US retail brands as Nordstrom checks in with evidence of omni-channel progress, while JC Penney’s failure to deliver resulted in a share price collapse to its lowest point since the Great Depression.

At Nordstrom, where CEO Blake Nordstrom declares the firm’s aspiration “to be the best fashion retailer in a digital world”, there’s a healthy year-on-year growth rate of 23% for online sales, which now account for more than a third of the total. That last stat has recently been beaten during the retailer’s Anniversary Sale, which produces a volume of sales that comes close to the end-of-year Holidays season. Nordstrom says:

We continued to see a heightened shift of customers shopping online during Anniversary. Digital sales accounted for more than 40% of our event. On the first day of early access for our Nordstrom cardholders, we had our biggest day ever online, exceeding our previous record by 80% at 10x our average daily demand.

But that sort of activity puts a strain on the system as was evidenced this year, with Nordstrom noting:

We worked hard to manage our systems for peak demand. Despite our efforts, we experienced some website issues as we encountered unprecedented levels of demand on the first day of the event. While our team resolved this, we know we disappointed many of our customers and in response we offered cardholders 10 points per $1 on purchases made on the first day of Anniversary.

Like so many retailers today, Nordstrom sees the most beneficial operating model as being one that leverages its offline real estate as well as pushes into digital. That’s the most lucrative approach, argues Nordstrom:

When customers engage with us across stores and online, on average they spend 5x more and profitability per customer doubles.

What that means in real terms is more investment in upgrading the physical infrastructure with digital assets:

We’re starting in our largest market, Los Angeles, where we’re bringing all of our digital and physical assets together in a seamless ecosystem. We’re continuing to invest in supply chain, a critical enabler of the customer experience.

We have identified sites for our West Coast fulfillment center and local channel hub, which are scheduled to open in late 2019. These investments in our supply chain network will help us address our opportunities to better serve customers, improve our efficiencies and leverage inventory in our local market.

Last month, we announced that two additional Nordstrom local concepts will open in the LA market this fall. These neighborhood hubs are one component of our local market strategy to engage with customers through more convenient access to product and services, such as buy online, pickup in store, alterations, store reserve and personal styling.

The commitment to tech as an enabler has been emphasized with the recent appointment of a new Chief Technology Officer in the shape of Edmond Mesrobian, who joins after nearly 30 years in retail, including stints at Tesco and Expedia. Nordstrom says:

He will support all aspects of technology across the company and focus on advancing our capabilities to deliver the best experience to our customers however they choose to shop with us.

The increased requirement to enable that choice is resulting in some emerging trends around store traffic, adds James Nordstrom, President of Stores:

I think what’s changed - and it has for everybody - is that when a third of your business is done online in any given market, the nature of that traffic is different. A lot of customers are coming in having already decided what they want to buy because they’ve been shopping on our website, or they’re coming in to get alterations on something they bought on Nordstrom.com or any number of different versions of a digital-to-in-store experience.

So part of our big opportunity is looking at our stores and figuring out how do we need to evolve the staffing model, the layout, the services and experiences that we offer in our stores to continue to be relevant to that customer who spend some time shopping on our website. When they come into the store, is their experience matching what their expectations are. So that’s a big focus of ours in Los Angeles. But for all of our major markets, we know that that’s what the customer expects and that’s where our focus is.

Middle-aged moms

At the other end of the scale, JC Penney is struggling with its long-promised transformation to restore its status as Middle America’s store of choice. The problem is that there’s a hideous level of volatility that gives the impression of an ever-moving goalpost. For example, after fixing its sights on the Holy Grail of the Millennial customer, it’s now been decided that it’s middle-aged moms that JC Penney is after.

According to Chief Financial Officer Jeff Davis, the firm has drifted away from its core customer:

Over the last several years, JC Penney, and its desire to continue expanding its customer base, wanted to attract a number of many more trending customers. And [in] doing so, our assortment migrated that direction. Our core customer, we believe, is a female in the age range of 45 to 55-plus. We were no longer necessarily having the broad array of merchandize silhouettes that was most important for her.

We believe that that core customer is who JC Penney is. She influences across a broad array of individuals in our direct families and our extended families across multiple age ranges. So we need to make sure that we win her and we have the merchandize that is important to her, such that as she thinks about shopping, not only for herself, but for her family, that we then have the other products that are available and important for those individuals also.

JC Penney’s problems haven’t been helped by the abrupt departure of CEO Marvin Ellison, a man drafted in with a stated agenda of digital transformation to upgrade the one-time catalog retailer into an omni-channel business. Frankly that hasn’t been successful to date and his decision to move to become CEO at Lowes has to put a big question mark over the digital roadmap.

The party line is that the firm has been “quite pleased with some of the progress we've made there over the last several years in our omni-channel business”, but that’s far from the full-blooded enthusiasm expressed by Ellison during his tenure. The writing may have been on the wall back in March when the company axed the position of EVP of Omni-channel. Two months later, Ellison handed in his notice.

It’s notable on the post-results announcement conference call with analysts that digital got barely a mention in the Chairman’s prepared remarks, with it being left to Therace Risch, Chief Information and Digital Officer, to contribute:

Over the past year, I think people understand that we've done an extensive skewed fashion to our digital channel. And through this process we've learned a lot about what our customer really wants to buy digitally online and how to drive sustainable profitable growth in this channel...we very intentionally hold back on our online sales as we make adjustments to that extended assortment so we can better meet the needs of our customer. We're focusing on improving the overall digital experience. The changes that we're making right now are going to enable us to grow this channel very sustainably over the long-term.

Sadly the use of “long term” may be a case of optimism over pragmatism.

My take

Two US retail institutions, both with long-standing brands, substantial offline real estate and a need to transform to compete in the age of Amazon. Of the two, JC Penney, under Ellison at least, has been the one to make the most noise about digital transformation, but it's Nordstrom that’s quietly done the necessary spade work to make it happen. What happens next for the former is anyone’s guess. That will depend greatly on who takes up the poisoned chalice as the 4th CEO in 7 years. It may be academic. Wall Street has clearly given up on JC Penney in the same way as the moms of Middle America.