"Stores Matter A Lot" - Is Nordstrom’s New Flagship its Road Out of the Discount Black Hole?

“The much-anticipated flagship and women's department store officially opened its doors Thursday, luring massive crowds of sharply dressed shoppers who came from near and far to behold the store in its seven-floor glory.”

Business Insider, on Nordstrom’s NYC Flagship, October 25, 2019

“Despite the severe rain storm on Monday and the disagreeable humidity of the atmosphere since the opening, the magnificent establishment has been attended by all the fashion and elite of the town.”

The Brooklyn Standard Union, on Macy’s Grand Opening, September 20, 1888

“Women, while shopping, buy what pleases the eye on the counter, forgetting what they have got at home.” Barrow’s Worcester Journal, September 24, 1859

”The Report of My Death was an Exaggeration.”

For much of the past decade the majority of the press attention towards retail has been that of the “Retail Armageddon,” that much ballyhooed demise of traditional brick and mortar establishments to the ease and value of online shopping.

True, the internet has shifted the value proposition and put more power into the hands of the consumer: for any even marginally commodity item the world has truly become a buyers market. But pundits have been calling for the demise of brick and mortar for almost twenty years at this juncture, a pronouncement that has far from come to fruition.

Certainly some retail sectors are more susceptible than others to the benefits off online shopping. However, the majority of brick and mortar retail sales categories have largely maintained, and in some cases even grown, their share of overall retail spending since 1992, long before the web became the powerhouse presence it is today.

The press and investors continue to call for the end of traditional retail: the Wall Street Journal recently reporting that investors are short 441% of the available shares in the SPDR S&P Retail fund. However, the reality remains that consumers are, in some 84% of their retail purchasing decisions, choosing to go to the store. Whether buying a car or the parts to fix it, furnishings for their homes or materials for their gardens, or for their personal care, they are shopping traditional outlets. Not to mention the explosion in discount stores and warehouse clubs.

And while this will be a subject for another time, the Wall Street Journal yesterday reported on the necessity beauty and personal care items continue to find in being on store shelves. Unilever is cited determining, after the acquisition of Dollar Shave Club, an online razor blade subscription service, “the average expense of winning a new customer was about the same online as in stores.”

“More Than 9,300 Stores are Closing in 2019 as the Retail Apocalypse Drags on.”

Given the number of store closures escalating at an alarming rate —with expected 2019 closings up almost fifty percent over 2018— American consumers are voting very clearly with their pocket books which retail establishments do, and do not, remain relevant for them. While there have been some high profile casualties in other sectors, such as Toys R Us and Payless Shoes, department stores have born the brunt of this assault, declining from 9.8 percent of retail sales in 1992 to and estimated 2.5 percent in 2019. This loss in market share amounts to some $535 Billion in spending that Americans are allocating elsewhere. And as non store retail is expected to top $775 Billion in 2019, up almost tenfold from 1992, it would seem the culprit is clear (note that traditional retailers online sales are included in the overall non store retail figure so these figures do not clearly reflect department stores share of online sales).

But lurking out there between the cracks is a basic and uncontested reality: people enjoy fun and diverting experiences, and many —especially a large percentage of women— love to shop. They like to be entertained.

The simple reality is that the typical mall in this country today, with its humdrum department store anchors, is far from entertaining, and in many cases actually tilting to the other end of the human experience spectrum: boring, tedious and annoying. And with the ramping exodus of stores, all too frequently depressing can be added to the list.

Technology, social media and shifting demographics have certainly compressed the time continuum from new and exciting to anachronistic and stale. Ten years ago, forty percent of the population was baby-boomers or older, the vast majority of whom entered adult life with nominal, if any computer interaction. Another twenty percent were children under the age of ten.

Ten years from now, the remaining baby-boomers and WWII generation will comprise less than twenty percent of the population: eighty percent of Americans almost certainly will have grown up with their lives intertwined with smart phones.

U.S. Population by Age Category, as a percent of Total

Source: Census Bureau

Visionary Pioneering Merchants Understood the “Stimulant of the Noise, the Shops”

But even the early merchants of the nineteenth century were well attuned to the ephemeral nature of evolving tastes. In 1858, a journalist noted of New York city’s primary thoroughfare that had in a scant fifty years evolved from farmland to burgeoning streetscape “which resemble rather the avenues of Paris, Brussels and Hamburg”

“The wonders of the Thousand and One Nights are less startling that the growth of the principal thoroughfare of the city of New York, originally called by the Dutch settlers Heere straat.”

The journalist (clearly a male but we will leave the gender bias for another day) proceeded to delight in in the character of Broadway and the “sprinkling of lady-like women shopping, whose hopeless vacancy of mind calls for the stimulant of the noise, the shops, the dust, the variety of faces and the hissing, seething street. There is something there to lure them away from the monotony of their aimless life, and gradually they are fascinated by Broadway. The cannot live without it. They become part and parcel of Broadway. They dress for it, as it to flirt with its pavement.” (1)

Nineteenth Century Department Store Interior

Macy’s Animated Holiday Window Decorations, c. 1884

The department stores of the nineteenth century were places of majesty and wonder, where people could go and lavish in goods far beyond there typical lives and imagination. When Macy’s reopened on September 22, 1872, after a three month renovation, the papers were exuberant.

“They were certainly very awkward and labyrinthine; they are now models of elegance and lightness. The windows are especially handsome, and well planned for the exhibition of goods. Particular pains has been taken to render the store unusually ornate.”

Macy’s of 1872 understood that its customers expected the physical environment to exalt and tantalize their senses. “Festoons of beautiful lace, of rich velvets, of glowing satins, and ribbons of all imaginable shades of colors were hung between the pillars.” Flowers and bronzes “were distributed about at the most picturesque points.”

But theater could only take them so far: the store had to be stocked with goods that people wanted to buy. “The new stock of goods is in every respect most beautiful and attractive, and we doubt not will find plenty of purchasers among the crowds of ladies who now visit the store.”(2)

I’m at the tail end of the baby boom, but vividly remember the grand New York department stores from family trips to the city in the 1970s. They were elegant and glamorous, and even perhaps a touch romantic. Awe inspiring in scale and decor, our Foley’s and Palais Royal of Houston, Texas simply could not hold a candle.

The Discount Black Hole of No Return

Was it the internet that changed their relevance, or did merchants simply panic and jump headlong into a price competition that their capital structure was not built for and could not support?

When Macy’s next remodeled in 1888, they capitalized on the shifting taste and fashion expectations of New York women. “The interior of the great emporium was attractively decorated” with all manner of decorations “displayed in the most artistic and effective manner.” The point de resistance for the ladies was, of course, the millinery parlor. The display of imported bonnets is unusually find this year.”(3)

By the 1990s, department stores were starting to feel a great deal more like the “awkward and labyrinthine” Macy’s prior to its 1872 rebirth. That reality has really no avenue for turning a corner as margins are battered further year after year in an effort to stay float amidst online price competition.

Amazon created the world that has sucked the traditional department store, and and increasing number of discount and otherwise undifferentiated apparel chains, down the discount black hole of no return. Holding the anchor of the bottom left quadrant of the figure above (shaded red), they are acting the role of Hades, gradually enticing their brick and mortar competitors to discount themselves into the waters of the River Styx. This quadrant is characterized by utilitarian, uninspiring stores with little differentiation in product lines. Walmart is likely big enough to hold its own; Target and Costco are thus far keeping themselves fresh enough to move into the green.

The upper quadrants are where retailers try to remain aspirational, and thus avoid the discounting death by a thousand, or perhaps for some of these brands hundreds of thousands, of cuts. Barney’s lost that bet spectacularly, largely expanding outside of markets that could pay for their brands of aspiration, and leveraging excessively to do so. Perhaps their Madison Avenue landlord simply put them out of their misery in abruptly doubling their rent.

“So Numerous and Novel are the New Features in the Lord & Taylor Store”

Nordstrom NYC Flagship opened October 24, 2019

"The role of the store is changing, but stores matter a lot," Shea told Business Insider at the grand opening. "They're a place to discover, to become inspired by fashion or new brands. They're also a place to access great help through fit or styling expertise. They're a place to see, touch, feel, and try on the product."

Lord and Taylor 5th Avenue Flagship opened February 24, 1914

Lord and Taylor was the first New York department store, dating from the 1850s. As with its rivals, as time marched forward they continued to move further uptown in line with customer expectations and preferences. Their final NYC location, on Fifth Avenue between 38th and 39th Streets, opened to great fanfare on February 24, 1914 as it was the epitome of modernity and to be a showcase of retail innovation.

”After all has been said the store’s most pronounced feature is its all around attractiveness.” The New York Sun February 25, 1914

It had twenty elevators, each equipped with a fan to help with patrons comfort in the warm weather. There were feats of technological modernity, such as self-stoking boilers and automatic conveyors to load trucks, and it was fireproof. The designers were anticipating ongoing change, and included convenient entrance for those arriving by auto, but had likewise positioned the store conveniently for those arriving by mass transit. “Splendid dressing rooms were out-of town folks may change to evening clothes; the store will send home business clothes without charge.” (4)

But they had likewise made dramatic changes in the store layout and arrangement of merchandise, anticipating the evolution of shopping behaviors: men, for example, had their own floor, the 3rd.

Just over a century later, the new Nordstrom Flagship store has opened on Broadway at 57st Street. And it opened to the 21st century version of the same gushing fanfare. New features, layout, design, experience. A DJ and a number of bars, including one in the shoe department. Sighting couples enjoying a relaxing Saturday afternoon trying on shoes in a department store while sipping a cocktail is as eye-opening and welcome a change.

Need a break from shopping, or simply an excuse to prolong it? Perhaps a blowout in the Drybar or a facial massage in the Face Gym is the ticket. “You could spend a whole day here, hopping from one appointment to the next.”

No-one perhaps had a greater grasp of this innate human desire to be entertained, and the shifting multi-sensory nature that the post baby-boom generations expect in their experiences than WeWork founder Adam Neumann. There is no lack of irony in the fact that amidst Lord and Taylor’s crumbling fortunes, that its century old 5th Avenue flagship of former glory was store to WeWork.

Nordstrom very clearly hit the ball out of the park with this one from a retail perspective. But are they pulling a WeWork? Creating a venue that is a dynamic and enticing customer proposition but is incapable of covering its costs? Only time will tell. But it is clear that Nordstrom is aware that this path is the only possible future away from the bottom left quadrant is following the some 20,000 retail locations that have closed or are slated to, in the past three years. And they seem to be willing to toe the line hard this holiday season: my inbox is daily flooded with all myriad of discounts, friends and family and every conceivable variant, from Neimans, Saks, and Bloomingdales, and quite frankly any other retailer I haven’t taken the time to block. The notable quiet voice: Nordstrom.

With the family at the helm, and the most inspired retail vision seen for quite some time, Nordstrom seems like a bet worth taking. Observers of the retail community are in for quite a treat as their competitors equally vying for the few spots in the upper right quadrant— notably Neimans, Saks, and Bloomingdales— answer this paradigm shift. But for now, the Nordstrom flagship owns the “model of elegance and lightness.”

References:

(1) The Daily Exchange (Baltimore, MD) 4 Aug 1858, page 1

(2)The Brooklyn Union (Brooklyn, NY) 25 Sep 1872, p4

(3) Standard Union (Brooklyn, NY) 10 Sep 1888, pg2

(4) “So numerous and novel,” The Courier-News (Bridgewater, NJ) 25 Feb 1914, pg 10

(5) The Sun (NY, NY) 25 Feb 1914 pg 5