Dive Brief:
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Nordstrom has hired consulting firm AlixPartners to explore a spinoff of its off-price Rack business, Bloomberg reports, citing unnamed sources. Nordstrom and AlixPartners each declined to comment to Retail Dive.
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CEO Erik Nordstrom last month told analysts the company had hired “external consultants with function-specific expertise across three key areas: improving Nordstrom Rack performance, increasing profitability, and optimizing our supply chain and inventory flow.”
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AlixPartners helped Saks Fifth Avenue spin off its e-commerce business earlier this year and was hired by Macy’s last month to look into growth opportunities.
Dive Insight:
Breaking off its off-price business into a separate entity would be a remarkable reversal of Nordstrom’s efforts in recent years to weave its full-line, Rack, Local and e-commerce operations together — a seamless customer experience across channels and brands demonstrated most vividly in New York City.
Last month, Erik Nordstrom reiterated the approach’s contribution to the company’s overall performance. “The value of our interconnected model is evident as customers dramatically increase their spend when engaging across multiple channels, banners and services,” he said. “For example, the average customer that shops across both banners, in-store and online, spends over 12 times more than a customer utilizing a single channel.”
William Blair analysts pointed to such rhetoric in their criticism of the news contained in the Bloomberg report. “We would view a spin of Rack as counter to management commentary about the benefits of its broad ecosystem approach,” wrote analysts Dylan Carden and Phillip Blee. “Rack has long served as a key customer acquisition tool. As recently as December 2020 management noted the off-price channel was the largest driver of new customers, with one-third of those new customers trading up to full-price customers within a year. In the context of its Local strategy, Rack stores served as pickup points for roughly one-third of nordstrom.com orders in the third quarter.”
But perhaps desperate times call for desperate measures. Last month, in announcing the hire of outside expertise to figure out how to correct Rack’s trajectory, Erik Nordstrom painted a dire picture. “We are not satisfied at all with our Rack business, as clearly, our recovery is lagging what we think it should be,” he said.
The bigger problem for Nordstrom is how to move the full-line business forward at a time when a third of their sales are online, department stores in general are declining and the pandemic continues to scramble consumer behavior, according to Mark Cohen, director of retail studies at Columbia University’s Graduate School of Business, who said he’s not surprised by the rumor.
“I think that maybe Nordstrom is finally coming to the realization that the Rack is not the goose that laid the golden egg,” Cohen said by phone. “It’s kept their business viable for years, and it’s the business that’s been growing. They’ve been opening Racks pre-COVID at a pretty good clip. I’ve been critical publicly about the Rack purloining Nordstrom’s brand equity — something which they vehemently have denied. But I think maybe they’ve now come to realize that, as they reposition the store in a post-COVID world, the Rack really is not a beneficial companion.”
Essentially, the Nordstroms have to decide which side of the business to nurture, according to Cohen.
“If they’re going to bet on the future, my guess is they’re going to bet on the flagship, not on the Rack,” he said. “And the Rack may be out of gas. One of the problems they’re having, and everyone else in the world is having, is nobody knows what the future is going to hold for the next two or three years. We’re at a crisis that is not like anything we’ve ever experienced before, in the manner in which it’s changing consumer behavior. I think this is scaring the hell out of people, and it should.”
That doesn’t mean that hiring a consultancy like AlixPartners will yield the necessary results, however, Cohen said, adding that the online-offline separation at Saks and potentially at Macy’s is a financial play rather than an operational one.
“There’s just no retail expertise at AlixPartners,” he said.
