For Nordstrom, Great Service Wasn't Enough

The retailer grew too fast. Now it has to rebuild its reputation

It looked like a slam dunk. In the late '80s, Seattle-based Nordstrom Inc. set the gold standard in department-store retailing. Its reputation for quality, fashion, and customer care was unparalleled, its customers among the most loyal in the industry. And while other chains were still reeling from the buyout craze of the decade, Nordstrom profits were growing by double digits. So the decision to expand beyond the West Coast seemed like a no-brainer.

It didn't quite work out as planned. After opening stores in 22 states, the company today is struggling to put its fractured brand back together. Over the past few years, Nordstrom has been battling weak sales growth, disappointing profits, and volatile stock performance. Retail experts say Nordstrom took its eye off fashion trends, sending its customers scurrying to competitors. And the 99-store chain also failed to modernize quaint systems like the handwritten notes on customer preferences that worked on a regional basis but wreaked havoc after the expansion. "We have not been able to keep up with the changing needs of the customers," concedes William E. Nordstrom, a co-president and one of six Nordstroms now in the company's executive ranks.

The damage wasn't hard to spot. Net income took a dive of 11%, to $147 million, in 1996. Shares, at a high of nearly $53 in 1996, plunged to a low of $34 in 1997 and have since risen only to about $40. While the income trend has improved, Nordstrom still has a lot of work ahead of it. Last year, total sales rose 3%, to just over $5 billion, but sales at stores open at least one year, the most accurate way to measure a retailer, fell 2.6%.

After two years of cost-cutting and modernization, management is now scrambling to woo back customers. But many of the strategies, from new ad campaigns to Internet experiments, are still works in progress, leaving the open question: Can Nordstrom reinvent its stores and marketing message? "They have a few precious moments to do this," says Peter Glen, a New York-based retail consultant.

How did one of America's premier retailers get in this fix? The problems can be traced directly to the start of the chain's expansion a decade ago. As Nordstrom grew, management failed to centralize common functions. The number of buyers chainwide ballooned to 900--compared with the lean team of 100 in charge of buying for R.H. Macy & Co. Vendors were driven to distraction by the multiple and conflicting orders. "The fragmentation of the buying organization works at cross-purposes sometimes," says Paul R. Charron, chairman of Liz Claiborne Inc.

"LOST TOUCH." Customers were equally put off. As Nordstrom grew, the retailer became less adept at keeping up with lifestyle changes. While working women started to dress more casually for the office, for example, Nordstrom continued to stock its old, buttoned-down styles. And shoppers noticed. Nita Ostlund, 54, was a loyal Nordstrom shopper for 20 years. But lately, the store has disappointed her. "I think they've lost touch with the customer," she says.

Despite signs of shopper revolt, Nordstrom execs first focused on cost-cutting in an effort to boost profits and regain the confidence of investors. In 1997, Nordstrom cut the number of buyers by 19%, organized itself into divisions, and made dramatic slashes in inventory. That helped boost net income 11%, to $207 million, for the fiscal year ended January, 1999. Analysts expect earnings to rise another 16% to 18% this year.

This strategy appears to have bought the company some slack with investors. "This is a good story. The trend is positive," says Mark Grolig, principal of institutional investor Palley-Needelman Asset Management Inc., which owns 2 million Nordstrom shares. "Management has targeted doubling earnings in the next couple of years, which is very aggressive. But with these changes, hopefully they can get there."

Nordstrom has also moved to tackle its computer phobia--possibly the last major retailer to do so. Until recently, there was little centralized gathering of customer trends. Salesclerks kept notes on shoppers' likes and dislikes in looseleaf binders. "This company was in the Dark Ages," says Jennifer Black, president of Black & Co., a brokerage based in Portland, Ore.

This year, Nordstrom built a new multimillion-dollar data center in Denver to help collect and analyze buying habits, lifestyle trends, and inventory management. Even the information kept in salespeople's binders is going online. The goal, say company execs, is to back up employees' intuition with solid data to build a more consistent and on-fashion merchandise mix. That should result in better same-store sales by late '99, says Michael A. Stein, the new chief financial officer Nordstrom recruited from Marriott International Inc. last year.

But other improvements are still in the experimental stage. The company is taking itself through a crash course in Internet retailing. It launched a modest E-commerce Web site in October that is not yet profitable. But it has also invested in online shopping services such

as Streamline, which arranges a multitude of personal services, from shopping to errand-running via E-mail, and Scotty's Home Market, a grocery-shopping service. Co-President Daniel Nordstrom says the partnerships will give the company insight into how upscale Yuppie shoppers--the kind Nordstrom wants to attract--are using the Internet to shop. "We don't see a lot of boundaries between different product categories on the Web," he says. Outsiders agree it's a good move. "It's a smart way to approach the Internet," says Harry A. Ikenson, Hambrecht & Quist's senior retail analyst. "They are learning without taking incredible financial risks."

RAVE REVIEWS. Other tactics poised for rollout include an ad campaign. It's under development now by Minneapolis ad agency Fallon McElligott. The retailer is also carving its marketing into more distinct demographic groups to lure both the traditional Nordstrom woman and the younger shopper. Youth efforts included promotions of the hot sneaker Skechers and prom dresses licensed from the hit Gen-Y show Buffy the Vampire Slayer and running ads for Doc Marten boots on alternative-rock stations. "They are trying to formulate a way to become not only the mom store but the young women's store," says Dean A. Ramos of Kansas City investment bank George K. Baum.

"They" is the operative word. Nordstrom has one of the more eccentric management structures in Corporate America. For four generations, it has operated under a tradition of "consensus management." Family members hold most of the top positions and public squabbling is unheard of. Currently, a group of six brothers and cousins, all in their 30s, hold the title of co-president, the biggest such group in the company's history.

To groom the new group, which attained their current title in 1995, Nordstrom has kept John J. Whitacre, 45, who also worked alongside the previous generation of Nordstrom men. Whitacre, now chairman and CEO, directs the six "with an iron hand," says retail analyst Walter Loeb of Loeb Associates Inc. And Nordstrom has opened its executive ranks to other outsiders. Stein, the new CFO, drew rave reviews from Wall Street analysts at a recent meeting. "He brings a new sophistication," says Loeb.

In part to make sure this huge office of the president functions smoothly, Nordstrom brought in Marakon Associates Inc., a Stamford (Conn.)-based management-consulting firm, for a broad review of the company strategies. Among the recommendations: create more defined areas of responsibility for the Nordstrom six so they don't undermine one another. "While the management structure is unconventional, it can be a potential strength as long as clear decision-making and accountability are present," says Paul Favaro, managing partner at Marakon.

Still, the big unknown for Nordstrom is whether it can win back its once-loyal customers. While the retailer has struggled to regain its footing, they're being lured by everything from reinvigorated specialty chains such as Ann Taylor to new Internet shopping sites. Nordstrom may finally be on the right track. Question is, has its customer already pulled too far ahead to catch?

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