The Department Store’s Role in Post-Pandemic Retail
It’s no secret that the COVID pandemic caused abrupt shifts in consumer behavior. And the effects of this is reflected in the future of the department store. Once seen as a cutting-edge centerpiece of urban life in America in the nineteenth century, the department store is notable for bringing goods from around the world to a local area. Both customer service and the concept of luxury were innovations that the department store brought about. The flagship stores featured stunning architectural details, such as the domed atrium in Galeries Lafayette in Paris and the pipe organ featured in John Wannamaker’s in Philadelphia. The department store offered many amenities to shoppers, from spa and salon services to private shopping to afternoon tea.
But times have changed. The convenience of shopping online has diverted some of the department store’s traffic. The consolidation strategy by competing department store groups back in the late 90’s obliterated any difference between stores from one city to the next. Digital players began to eat away at the department store’s market share. And now, the COVID pandemic has all but wiped out the act of casual browsing, leaving department stores as empty shells with minimal amounts of shoppers.
Today, the department store feels like immense odes to pre-internet ease, a method of purchasing that now often feels disorganized, out-of-touch, and most importantly, unneeded. They represent the past, not the future. However, Nordstrom, the Seattle-based department store chain, is keeping their eyes on the prize by reinventing the role of how a department store will function in the post-pandemic world.
Nordstrom has long bristled at the idea of classifying their stores like department stores. Names are merely names, yet Nordstrom is wrestling with most of the same difficulties various other multi-brand, multi-category merchants are dealing with today. How do you stay afloat in a significantly crowded market where you’re not only competing with numerous other multi-brand merchants, as well as the brands themselves that you carry?
And like their competitors, the pandemic-induced lockdowns impacted their bottom line. Profits are down around 20 percent for 2020. However, Nordstrom expects sales to recover in 2021 through adjustments to their business model announced at their investor presentation in early February. Highlights of this idea of differentiating themselves from their competitors and rethinking the role of the department store for the future include:
Less Reliance On The Traditional Wholesale Model
Nordstrom is radically rethinking their inventory approach by reducing the number of products procured through traditional wholesale channels from 85% down to 50%. Nordstrom plans to utilize drop-shipping directly from brands themselves. Having lost market share during the pandemic to digital players, Nordstrom zeroed in on the concept of connecting their customers directly to the brands they carry. Customers have become accustomed to a wide range of choices. But having that amount of choice comes with considerable risk for the retailer.
The strategy is two-fold. First, Nordstrom wants to increase its choice of products available to their customer by boosting the website’s styles from 300,000 to 1.5 million. Unrestricted by the physical shop area, it intends to considerably expand its home goods department in the following 3 to five years.
Nordstrom will also provide options for smaller brands to sell their products on their platform. That implies while the traditional wholesale version will undoubtedly continue to exist. However, some brand names will likely be sold with a drop-ship model, Nordstrom will market others with e-concession, and some will cut a deal to share earnings. The objective is to lower wholesale to 50 percent of sales, down from 85 percent.
This provides brands versatility, specifically those increasingly dependent on straight sales, to drive most of their profits. It also gives Nordstrom a chance to test out brand names that it might not be in a position to purchase in advance. It also offers Nordstrom the freedom to try out many daring designs in a limited run produced by brand names it already collaborates with. Brands benefit from direct exposure from selling on a large site like Nordstrom.com while reducing fees as they would in a wholesale arrangement.
One of Nordstrom’s challenges is that they have established a precise tone of voice over the years. They have been successful at keeping their merchandise relevant as times change. However, one of the lessons learned from online marketplaces is maintaining that tone of voice and uniqueness with a considerably expanded product offering.
From Startup to Growth
Delivering Exceptional Customer Service Is Vital For Brand Differentiation.
High-touch customer service has been the cornerstone of what set the department store experience apart, just as it has been since the turn of the previous century. Nordstrom has long prided itself on its high service level standards, as demonstrated in perks like a generous returns policy. Yet, as consumers count on multi-brand stores less as their primary choice of a one-stop destination, it has implemented various other services to maintain customers’ flow to the store.
Nordstrom is also testing out a small-format local store concept in select urban markets. These locations offer BOPIS and customers’ ability to return purchases from any Nordstrom across the country, including Nordstrom Rack. This concept has proven popular for shoppers who are more comfortable in a smaller scale retail environment due to the pandemic. Nordstrom listened to its customers and delivered a shopping experience that resonated with those customers.
But Keeping Up With The Competition Is Crucial.
Nordstrom’s obstacle to differentiate itself through customer service is similar offerings of the competition, from straightforward returns to no-cost delivery options. The competition has heavily invested in its own customer service initiatives. Nordstrom will need to consider additional customer service solutions to differentiate itself from the rest of the legacy players.
Utilize Technology For The Product Discovery Process.
Nordstrom announced plans for a data-driven strategy to connect customer accounts across systems to excite and delight their customers by displaying product suggestions that are closely aligned to a customer’s preferred taste and style and within their desired budget. Nordstrom got a leg up over the competition by investing in technology as far back as two decades ago. In 2018, it started developing a new analytical system that gathers all of its data in one area, utilizing 70 different machine-learning formulas to help make more accurate referrals to customers. As the amount of data available grows, the recommendations will significantly improve.
The number of products that Nordstrom can sell at full price will likely increase if they can utilize this technology to allow their customers to locate the ideal product at an attractive cost. But this challenge is far from unique, as many competitors have similar aspirations. Online product discovery is tricky, and making exploration pleasant online remains exceptionally tough, despite the abundance of customer data available.
Adapt To The Bifurcation Already Underway In Retail
Bifurcation has been happening in retail for several years now. Luxury players are thriving, and discount retailers are booming. But the mid-market has been squeezed for several years now, with market share eroding to off-price retailers. Nordstrom has long taken the strategy of catering to a diverse range of price tiers. The off-price retailer Nordstrom Rack is an effective tool for bringing in new customers into the Nordstrom family. On the flip side, Nordstrom is also the place where most Americans make their first luxury purchase. Nordstrom plans to expand the Nordstrom Rack footprint in the coming years without damaging the mainline Nordstrom stores’ brand identity. Nordstrom’s challenge is to ensure that their mainline isn’t undervalued by the off-price experience, ensuring this is not a race to the bottom.