Discount stores

Will Nordstrom’s discount stores harm its brand?

As shoppers actively seek bargains, the proximity of Nordstrom’s full-price stores to its Nordstrom Rack discount locations, the majority of which are located outside of traditional sales centers, may encourage consumers to shift their spending toward options. the cheapest, Chen mentioned.

“With Rack opening in malls with no outlet nearby by car, your customer will definitely cross-shop,” she said. “The lines are getting a little more blurry.”

Outlet stores are often seen as a good strategy for luxury retailers looking to eliminate excess inventory without diluting their brands.

In the aftermath of the recession, they have also become an effective way to capture spending from ambitious shoppers, consumers whose incomes are not as high as a true luxury shopper, but who will splurge on the right item. This is important because ambitious shoppers were responsible for much of the spending during the boom years in the retail industry leading up to the recession.

As such, both Saks and Nordstrom have expanded their low-cost presence, planning three and 16 new stores respectively this year. Bloomingdale’s recently announced that it will also enter the space, with the opening of its first four outlet stores later this year.

But the main difference, Chen said, is that several Nordstrom Rack stores are located within a mile of their full-price locations.

Coupled with the fact that the retailer’s full-priced inventory already offers lower prices than competitors like Saks or Macy’s Bloomingdale’s, this could hurt the company’s core business, Chen said.

“As a customer, I appreciate that it is [so close], but it really shouldn’t be, ”Chen said.

His Manhattan debut is even more damaging to Nordstrom’s strategy. After failing to secure space for a traditional store on glitzy Park Avenue, the retailer chose to go ahead with its plan to open a 32,000 square foot Rack location near Union Square in New York City. in May.

While the Union Square area is said to be home to a lower income population than typical Nordstrom shoppers, its heavy traffic – and the fact that it will be the only Nordstrom on the island – would likely attract the store to its neighborhoods. target buyers, Chen said.

“Are you debuting in Manhattan with an outlet store? I find that a little odd,” she said. “I’m just wondering what that does to the Nordstrom brand.”

But Nordstrom spokesman Colin Johnson said the company wanted to take advantage of the available location and said the retailer still hopes to open a full Manhattan location in the future. He pointed out that Rack’s current strategy hasn’t been new for 30 years, when it created the first low-cost location around the corner from its Seattle flagship store.

“We have found that the two stores really complement each other,” he said. “It was just a matter of us trying to find new ways to better serve our customers. “

Morgan Stanley analyst Michelle Clark said Nordstrom had done an exceptional job of maintaining its brand value during the recession by rapidly reducing its average unit price by around 10-15%, which helped bring the hesitant consumers in the store. In February, she raised the company’s shares from an underweight to an even weight, citing a more stable consumer and traction in the company’s initiatives.

Nordstrom appears to be gaining ground. In March, sales of its full line of comparable stores increased 17.6%, while Rack’s same-store sales rose 4.7%.

Disclosures: For the past 12 months, Morgan Stanley has provided investment banking services to Nordstrom.

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