Nordstrom's e-commerce boom is both asset and issue

Yesterday we noted that the apocalyptic performance of Macy’s left considerable room for doubt about the viabilty of the retailer. Wall Street certainly wasn’t happy with its latest quarterly numbers. But then it also punished Nordstrom despite that store chain beating top and bottom line expectations in its latest quarter.

What’s particularly interesting though is that even as the Nordstrom stock tanked, leading analysts were remarkably upbeat, despite acknowledging that the chain has its problems to solve, not least in its full-line stores. But there’s also double-digit year-on-year growth for its e-commerce busienss, now accounting for nearly a quarter (24%) of total revenues. Alongside its discount arm, Nordstrom Rack, now making up 30% of revenues, that’s enough for the likes of Credit Suisse to declare that Nordstrom is “best of breed”.

Certainly management at the firm acknowledges that the business is in an evolving state, with CEO Blake Nordstrom noting:

Over the past decade, we've transitioned from being a predominantly mall-based store business to one that is more diversified, with multiple ways for customers to shop with us. During this time, we've invested in capabilities to better serve our customers and gain market share. This fueled our e-commerce growth, increased our customer base, and enabled us to expand into new markets.

Through these efforts, we've added nearly $6 billion to our top-line. In keeping our customers at the forefront of everything we do, our business looks very different today. Nearly one-quarter of our sales are from online purchases compared to roughly 5% from ten years ago.

That growth rate makes adding more and more digital offerings to the corporate arsenal a priority. Nordstrom says:

Nordstromrack.com and HauteLook are on track to be our fastest-growing business to reach $1 billion. We offer a variety of services that support our customers' needs around convenience, such as buy online, pick up in store, curbside pick up, and same-day delivery. We continue to invest in critical talent and capabilities around technology, mobile, data analytics, and supply chain.

There’s also a large emphasis on improving the e-commerce capabilities and the customer experience, adds co-President Erik Nordstrom:

We had addressed the underlying architecture to our website and modernized that, and different parts of our website have come online as being modernized at different times. We're about 80% modernized right now across our websites. We're not all the way there, but as we're able to modernize portions of our site, we're able to greatly, greatly enhance the speed with which we're able to roll out functionality and features to our customers.

In the last quarter, both our homepage and content pages became fully modernized and we were able to do a lot of A/B testing on all sorts of features there. We had a number of enhancements in search and browse. We are right now in the process of launching a new My Account feature, which is a significant enhancement for – that's very visible to customers. That really allows customers to get a much cleaner, quicker view of their order history.

The other part that I'd really call out that we're in the early innings of, but we did make measurable progress, is in our site performance. That’s not as sexy as a subject I'd talk about as customer features, but just the speed with which our site performs has improved measurably over the last quarter, and we are seeing measurable improvements in both conversion and sales from that.

Changed perspective

All of this digital growth has changed the way the management team look at their operating model. While Macy’s CFO struggles to articulate what the breakdown between online and offline business is, the Nordstrom team aren’t attempting to make that distinction, says Blake Nordstrom :

Because our customers' shopping experience may be influenced by multiple touch points, it's important that we view our business from the perspective of the markets in which we serve them. We're finding that measuring our outcomes through discrete channel metrics, such as store comps, are becoming less relevant. As we continue to head in this direction, we're increasingly looking at our business as full-price and off-price, inclusive of stores and online, to better capture the synergies of having a physical and digital presence.

That’s an important shift in the way of thinking, adds Erik Nordstrom, particularly when it comes to the future for offline retail outlets:

Increasingly what's most appropriate for us is to look at the business just as one channel, which means for store reinvestment, looking at the online impact that a store has and really viewing our stores as local assets that we can leverage. So as we get better data on the influences that go into customer behavior, that includes both digital experiences and physical store experiences, that better informs decisions like how much capital to put into stores as opposed to just looking at the four-wall contribution of that one store.

My take

It’s nowhere near as dramatically visible as it is at Macy’s, but Nordstrom’s physical stores are a problem waiting to happen in many respects. The rise in e-commerce revenues - $700 million In fiscal 2016 compared to $360 million two years earlier - and the booming success in its Nordstrom Rack off-price discount business inevitably has an impact on margins coming out of the full-line stores. That’s a circle that needs to be squared in the near future as it’s a challenge that is only going to become more difficult to resolve. But compared to the plight of Macy’s, the fact that Nordstrom can boast two sweet spots is a comfort in the increasingly turbulent omni-channel retail sector.