How Nordstrom Bests Its Retail Rivals

At 10 a.m. on the morning of Apr. 8, the doors opened to the 116th Nordstrom department store, at Christiana Mall in Newark, Del. A crowd‚ consisting mostly of smartly dressed women in their 30s and 40s, ran inside. There was screaming. They jogged through a gauntlet of more than 300 employees, and clapping along with all the store managers, salespeople, and security guards were four tall men. These were the Nordstroms of Nordstrom, brothers Blake W., Peter (Pete) E., and Erik B., and second cousin James (Jamie) F. Jr.

This was the 43rd new department store to open since the fourth generation of Nordstroms retook control of the company in 2000, a run that has had investors screaming, too, or at least looking over their portfolios with approval. Last year revenue at the company grew 12 percent, to a record $9.7 billion, and while the Great Recession slowed rivals Neiman Marcus and Saks, Nordstrom gained market share. Nordstrom, it seems, is that rarity in American business: an enterprise run by a founding family that hasn’t wrecked it.

There is no chief executive officer, though the board has an outside chairman: Enrique “Rick” Hernandez Jr. Where other family-run companies, such as the Dillard’s department-store chain, employ two classes of stock that give the founders extra voting power, the extended Nordstrom family owns the same kind of paper as any other shareholder. They own $2.5 billion worth, or about one-quarter of the outstanding shares.

Nordstrom is expanding, though in a methodical and not too daring way. With room in the U.S. for about 14 more stores—there are a limited number of ritzy Zip Codes—it is taking the enterprise abroad, starting not with Asia or the Middle East but just across the border from its Seattle headquarters, in Canada. Unlike Saks and Bloomingdale’s, which have opened stores in Mexico and the United Arab Emirates, the Nordstroms have chosen not to franchise their foreign outposts. “We’re not trying to make a buck and move on to the next thing,” says Pete, 49. “This is our life. We do not want to be the generation who screws it up.”

For the most part, say industry observers, the Nordstroms have succeeded by making customer service the good they’re really selling. Though many retailers embrace “customer centricity,” a fancy term for putting the customer first, few equal Nordstrom, which routinely ranks in the top three on Luxury Institute surveys that measure customer satisfaction.

“Nordstrom’s claim to fame has been customer service,” says Richard Dickson, president of Jones Group, which owns Jones New York, Anne Klein, and other apparel brands. “They led the charge and to some extent invented” the concept, he says.

Nordstrom was founded in 1901, when John W. Nordstrom, a Swedish immigrant, invested his Alaska gold mine stake in a downtown Seattle shoe store with his partner, Carl F. Wallin. Nordstrom moved into women’s wear in the 1960s and soon after added men’s and children’s clothes. The third generation took over in 1968, and expansion picked up. By 1990, the year Nordstrom opened its first store in the New York City area, in Paramus, N.J., the company had 46 locations in seven states.

Where rivals define store space by brand, Nordstrom breaks it up into so-called lifestyle sections. The “Individualist” corner offers midpriced contemporary goods from Theory to Trina Turk, while the “Narrative” section features less costly but classic styles from labels such as Lauren by Ralph Lauren and AK Anne Klein.

Nordstrom’s approach makes it easier for shoppers to put together outfits, says Jennifer Black, a retail analyst who once worked at Nordstrom stores in Portland, Ore. Brands covet an invitation to win shelf space. Shoe entrepreneur Steve Madden recalls the first time he was asked to a Nordstrom buyer’s meeting. “It was like an invite to the White House,” he says.

Rivals have been borrowing from the Nordstrom playbook for years. In the 1980s, Bloomingdale’s flew store manager Jim Schneider to Seattle to conduct intelligence on Nordstrom, where he had never shopped. He asked to see a pair of shoes, and the salesman brought out six pairs—the one he wanted plus five similar ones. He told the guy he only needed the one, and the salesman said, well, he wanted to give him more options, just in case. “I was completely wowed,” Schneider says. “They were pretty clever, very wise customer service methods. Now if you go into Bloomingdale’s or Saks, they’ve mimicked the model.” Schneider went on to work for Nordstrom, running its Façonnable brand in the early Aughts, and is now an executive at Caravan Entertainment in Los Angeles.

Nordstrom salespeople tend to stick around, moving into increasingly responsible jobs at an employer that prefers to promote from within. Many “Nordies” start out part-time, earning extra money in the summer and during college. Nordstrom pays a 6.75 percent commission, on a draw system, which means sales people get the greater of either their base pay or their commission total.

When Pete Nordstrom graduated in 1985 from the University of Washington, the family alma mater, he began his career at Nordstrom. “I like my dad,” says Pete. “I wasn’t trying to get away from that. It was appealing that we could add something.” Over the next few years, Pete and his brothers traveled through different departments, roles, and locations.

In 1995, Bruce Nordstrom and his cousins retired. The board ultimately put John Whitacre, who had worked for the company for two decades, in charge. He was the first and only nonfamily member to run it. Nordstrom lost its way. Management, as Financial Officer Michael G. Koppel tells it, stopped listening to the salespeople and focused instead on multiple initiatives that went nowhere. In one, the company sank $50 million into its biggest-ever advertising campaign. Called “Reinvent Yourself,” it featured TV spots and magazine ads poking fun at stereotypes. Yes, Soccer Moms can be fashionable, one suggested. It had no discernible effect, and to this day, Koppel says, its mention makes company folk “nauseous.”

In 2000 the brothers pitched themselves to the board in informal conversations. The brothers were in their 30s, and some directors wondered if they were too inexperienced; many may have been aware that family members are not always the best stewards of a legacy. During a national search for a new CEO, several outside candidates were considered. Ultimately the board went with the brothers, on the condition that one had to be in charge. “We divided up the jobs,” Pete says. “They went, ‘Hey, Blake, you’re the oldest, so you’re president, O.K.?’ ”

The brothers focused on getting back in touch with the floors—Blake still gives salespeople his e-mail address and extension number—and improving antiquated inventory management systems. As part of the power-sharing agreement, they hold regular Monday morning meetings. These typically last up to an hour as they brainstorm and try to sell each other on ideas. Then Jamie and other executives join in. The discussions are generally ego-free, Erik says, though according to Jamie the Nordstroms don’t “agree on everything by any stretch.”

As the three brothers put their stamp on Nordstrom from Seattle, second cousin Jamie was in Glendale, Calif., running the store there. In Glendale, Jamie was fretting that modernization drives at the likes of Wal-Mart Stores and Gap were leaving Nordstrom at a competitive disadvantage. As it was, if a store didn’t have a specific shoe, the salesman would offer to call other locations to see if he or she could track down a pair. “That was charming in the ’80s,” says Erik. It was less charming once consumers could easily find it online.

The answer didn’t require a PhD: Give salespeople a single, electronic view of the chain’s entire inventory, and give them direct access to all of it. Imposing such a system, however, would require changing the way the company worked. For decades, merchandise buyers had operated as decentralized entrepreneurs, accountable for their own results. In the end, the brothers convinced the regional bosses that technology that gave customers what they wanted was worth giving up some autonomy.

The day after the last piece of the new system went live—when the website staff got access to store merchandise—Jamie visited a Chicago store. A manager pressed a button on the register, and a 21-foot stream of receipts spewed out, detailing the 531 transactions that took place in the first 24 hours. All the other stores were experiencing similar surges in sales that otherwise wouldn’t have taken place. “We hadn’t added inventory, but we had a lot more sizes,” Jamie says. “You are saying ‘yes’ to a customer more often.” According to Kenneth Stumphauzer, a retail analyst with Sterne Agee & Leach in New York, the inventory system is “really above and beyond.” Macy’s and Saks have yet to catch up.

During and after the financial crisis, American shoppers discovered they could do without that $5,745 metallic pink boucle Chanel suit or $1,895 Gucci Hysteria bag. Like other retailers, Nordstrom watched same-store sales plunge; in October and November 2008 they dipped 16 percent. While other retailers panicked and piled on the discounts, the Nordstroms held firm, as had the second generation during the Great Depression. “We don’t do the 50-percent-off-everything-in-the-store, our-manager-is-out-of-town, opening-at-midnight, one-day-only sale,” says Blake. Instead the Nordstroms decided to temporarily layer in cheaper merchandise and open fewer stores than usual.

The Nordstroms are not perfect. One cost of superior customer service was revealed in a class action the retailer settled in the early 1990s, when it was accused of failing to pay employees who had worked extra unrecorded hours for off-the-clock work. The chain’s 2000 acquisition of Façonnable, the French apparel maker that was also a Nordstrom supplier, was a cultural mismatch, resulting in its sale seven years later. “The practical side of [the brothers’] brain must have kicked in and realized they didn’t want to build a European business inside an American company,” says Schneider, the executive who ran the brand until 2002. “I respected their decision, and in hindsight I agree with it.”

Despite past performance, equities analysts are not universally positive. Stumphauzer recommends buying the shares. Daniela Nedialkova, at Atlantic Equities in London, suggests selling the stock, because she believes it is fully valued and that profit will be pressured by higher material, transportation, and operating costs.

Twenty-four hours before the new Delaware store was scheduled to open, Blake, Pete, Erik, and Jamie dropped by to share personal stories from the years they worked the floors. Blake addressed the shoe department. After a slapstick impression of tying the shoelaces of a recalcitrant child, he warmed to his theme, which is to err on the side of tolerance. Blake mentioned the time he unknowingly kicked out the wife of a famous rock star for repeatedly returning merchandise. Later, when the singer showed up to complain, Blake learned whom he had offended. She was buying tens of thousands of dollars’ worth of apparel at another Nordstrom and returning a fraction of it to his store. Blake apologized, of course, and accepted the returns. As his father used to tell him, that’s how the Nordstroms pay for dinner.

— With assistance by Matthew Townsend, and Lauren Coleman-Lochner

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