Merchandise Strategy At Nordstrom


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Merchandise Strategy At Nordstrom

  1. 1. Merchandise Strategy at Nordstrom The Art and Science of Managing Change within the Retail World Lisa Dolan, VP, Nordstrom Central States Division April 9, 2002
  2. 2. Merchandise Strategy at Nordstrom A Bit of Nordstrom History... <ul><li>Founded in 1901/1971 Public </li></ul><ul><li>Opening Day Sales $12.50 </li></ul><ul><ul><li>2001 Sales $4.7 Billion </li></ul></ul><ul><li>80 Full-Line Stores </li></ul><ul><li>4 Faconnable Boutiques </li></ul><ul><li>44 Rack Stores </li></ul><ul><li>2 free standing shoe stores </li></ul><ul><li>Over 40,000 Employees </li></ul><ul><li>Serve customers in multi-channels </li></ul><ul><ul><li>Bricks / mortar </li></ul></ul><ul><ul><li>Internet / .com </li></ul></ul><ul><ul><li>Rack – discount </li></ul></ul><ul><li>Family run business </li></ul><ul><li>Started as a Shoe Company, 1963 bought Best Apparel </li></ul><ul><li>Service is our #1 goal </li></ul>
  3. 3. The Primary Decisions we Face as Merchants Which customers do we want to serve , and in which product categories? i.e., who do we want to be? 1 What is the mix of vendors , including own label, that we want to serve each of our customer segments with? 2 How do we want to layout our stores to best communicate our mix to our target customer? 3 “ Where we Compete” Merchandise Strategy at Nordstrom “ How we Compete”
  4. 4. Merchandise Strategy at Nordstrom The Issue we were Facing Indexed $/ft 2 1997 1998 1999 0 10 20 30 40 50 60 70 80 90 100 1999 Competitor Average <ul><li>From 1997 to 1999 we had been facing increasing challenges sustaining our competitive advantage over key rivals </li></ul><ul><ul><li>a superior, service-driven offering had contributed to historical sales intensities nearly double that of direct competitors... </li></ul></ul><ul><ul><li>… however, recent declines in this advantage and a newer set of competitors (i.e., Specialty stores) had driven market share losses and comp store declines </li></ul></ul><ul><li>Despite continued new store growth and margin improvements, the negative comp store trends limited profit growth, resulting in a declining share price and market value </li></ul><ul><li>Much of the comp store decrease was driven by a declining position in Women’s Apparel, which represented the largest proportion of our space and sales (~40%) </li></ul>Nordstrom Women’s Apparel Sales Intensity
  5. 5. A Better Fact Base on What Was Behind the Issue <ul><li>Over 80% of our Women’s Apparel sales were concentrated in serving what had become slower growth customer segments </li></ul><ul><ul><li>Given a similarity to other retailer’s offerings, it was becoming increasingly difficult to differentiate in these highly competitive customer segments… </li></ul></ul><ul><ul><li>… however, despite declining sales many of these existing customer groups remained highly profitable </li></ul></ul><ul><li>Very little of our space was dedicated to serving what had become the high-turn, high growth market segments </li></ul><ul><ul><li>Specialty retailers had leveraged a strong offering in these segments to drive much of their early growth </li></ul></ul><ul><li>Our offer to any given existing customer group in the product market was highly fragmented (i.e., extremely high number of vendors), limiting the depth and authority in our offer and decreasing overall inventory turns </li></ul><ul><li>Our store environment and department configuration did not send clear signals to customers, limiting the effectiveness of serving any given customer group (and making more difficult the shopping experience) </li></ul>Merchandise Strategy at Nordstrom 1998 Nordstrom Sales Mix vs. Market Growth 18% Low - Moderate 19.4% Low 3.3% High Classic Mainstream Modern/ Forward 14% Declining 0.2% Moderate 13.3% Moderate 0.3% High Better Moderate Bridge 14% Declining 10.5% Low % Nordstrom WA Sales Market Growth Key:
  6. 6. Evaluating Options to Resolve the Issue Merchandise Strategy at Nordstrom Evaluation Criteria and Considerations <ul><li>Expected turns, sales intensities and gross margins of vendor resources and overall customer segments </li></ul><ul><li>Forecast growth rates of target customer segments </li></ul><ul><li>Incremental operating expenses and capital costs required to execute </li></ul><ul><li>Expected operating income, economic returns and value creation of each alternative </li></ul><ul><li>Ability to implement given internal (e.g., organizational) and external (e.g., vendor agreements) constraints </li></ul>Examples of the Options we Evaluated <ul><li>Maintain our current participation across customer groups (as defined by price and taste), but improve our offer to each group by growing own-label brands and editing the number of vendors </li></ul><ul><li>Increase representation with new customer “taste” groups, maintain current average price point and improve offer through own-label and vendor editing </li></ul><ul><li>Increase representation with new customer “taste” groups while also dropping our average price point; improve offer through own-label and vendor editing </li></ul>
  7. 7. Merchandise Strategy at Nordstrom What We Agreed to Implement Outcomes <ul><li>Significant changes in merchandise mix within Women’s Apparel </li></ul><ul><ul><li>increased by ~200% the inventory $ and space dedicated to serving newer, high growth, high turn customer segments (“modern/forward”) </li></ul></ul><ul><ul><li>reduced the total number of vendors serving each customer segment by over 50%; concentrating inventory $ with the most productive resources </li></ul></ul><ul><li>A new own-label strategy </li></ul><ul><ul><li>two new own-label brands, and the re-positioning of two existing brands to strengthen the offering and increase profitability across all customer segments </li></ul></ul><ul><li>New department identities and environments focused on better grouping vendor resources serving similar customer groups </li></ul><ul><ul><li>creation of an entirely new department, “t.b.d.” focused on bringing a new set of customers into the store </li></ul></ul>Declining Moderate Declining Moderate Weak High Classic Customers Mainstream Customers Modern/Forward Customers Advantaged Low Par Low to Moderate Weak Moderate Declining Moderate Weak High Better Price Point Moderate Price Point Bridge Price Point Advantaged Low Our Current Offering Market Growth Potential Offering Strengthened in Existing Segments Increased Participation in Newer Segments
  8. 8. Significant Implementation Challenges Product Procurement and Assortment 1 Space Allocation and Floor Layout 2 Brand and In-Store Execution 3 <ul><li>Identify new resources to be added; develop and reposition NPG brands; edit existing resources </li></ul><ul><li>Determine product category mix across tailored, sportswear, dresses, coats and special occasion </li></ul><ul><li>Execute purchase planning by segment, by region and by store </li></ul><ul><li>Align advertising and promotion strategy (brand strategy) </li></ul><ul><li>Align in-store communication to customers; link to events strategy </li></ul><ul><li>Determine department management structure and sales person configuration </li></ul><ul><li>Internal communication and product knowledge </li></ul><ul><li>Finalize optimal floor layout and space allocation plan (number and size of departments, critical adjacencies, etc.) </li></ul><ul><li>Execute in new stores </li></ul><ul><li>Determine transition plan for existing stores </li></ul><ul><li>Execute in trial stores </li></ul>Focus Areas: Focus Areas: Focus Areas: Merchandise Strategy at Nordstrom
  9. 9. Developing the New Store Layouts - My Life Merchandise Strategy at Nordstrom Department Definitions Agreed as Part of the New Strategy <ul><li>One of the most challenging aspects of implementing the new strategy was re-allocating space in all existing stores to: </li></ul><ul><ul><li>match the newly defined departments </li></ul></ul><ul><ul><li>achieve the space requirements of each target customer group </li></ul></ul><ul><ul><li>create space for an entirely new department (“t.b.d.”) </li></ul></ul><ul><li>The goal was to come as close to the target space as possible and achieve improved “adjacencies” while recognizing: </li></ul><ul><ul><li>we needed to minimize as much movement as possible so as not to confuse existing customers </li></ul></ul><ul><ul><li>we could not invest to change the “hard-coded” nature of our pads (therefore in some cases it was like “fitting a square peg into a round hole”) </li></ul></ul><ul><ul><li>we had to do this for 60+ stores in approximately month </li></ul></ul>(Target % of Space) Classic Customers Mainstream Customers Modern Customers Forward Customers Bridge Better Moderate Savvy (7%) N/A Individualist (includes Classiques) (11%) Studio (includes St. John and Special Occasion space) (23% of space) Narrative (16%) Point of View (includes Preview) (26%) “ t.b.d” (includes Halogen) (17%)
  10. 10. 1 st Year Challenges Where We Are Today Merchandise Strategy at Nordstrom <ul><li>We are back to a Regional Buying Structure that can support needs of all local markets. </li></ul><ul><li>Significantly improved comp store trends over the past 12 months that have beat most rivals (including Specialty stores) and suggested we are re-gaining share in both markets </li></ul><ul><li>Despite continued evolution and strengthening of our mix, Women’s Apparel has been one of the strongest performing categories for us over this same time period </li></ul><ul><li>Strong growth trends in departments such as “t.b.d.” suggest we are being successful in serving a newer customer group </li></ul><ul><li>After a difficult transition inventories are better in line and profitability is up - this combined with the stronger sales trends has resulted in much improved stock market performance </li></ul><ul><li>We have aligned our organization towards a continual focus on opportunities to strengthen and evolve our merchandise mix, while always ensuring that we are second to none in terms of the service we provide for customers in our stores </li></ul><ul><li>Went from a Regional Buying Structure to a National Buying structure to more easily implement changes </li></ul><ul><li>Approach with merchandise mix was same across all stores however all our stores do not have the same customer base. </li></ul><ul><li>We changed everything from environment to advertising to merchandise assortment to store location to buying approach---was it too much at one time??? </li></ul><ul><li>We learned very quickly that what may have looked good on paper was not necessarily executed in the same manner at the store level </li></ul><ul><li>We spent the majority of our time and efforts focusing on 33% of our business and got too far away from the customer we already had. </li></ul>