Keeping the Magic
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I've always been a little skeptical of Nordstrom Rack. At first I was under the impression that Rack was just the place where all the unsold Nordstrom (NYSE: JWN) merchandise went to be snatched up at a hefty discount. But every time I've gone to shop there I've seriously wondered if the items for sale have ever actually graced the lovely displays at the real Nordstrom. Alas, the truth is only some items were ever actually good enough to get past the Nordstrom velvet rope; the rest were destined for the Rack to begin with.
A Nordstrom Rack or Last Call from Neiman Marcus does more harm than good for their parent brand. Though it does open up the demographic of the otherwise upscale store, the outlet store cheapens the experience so carefully cultivated by these companies. Nordstrom and Neiman Marcus aren't just stores, they are experiences. Wal-Mart is a store; it's utilitarian, and ugly, but it's cheap. Stores like Nordstrom have luxuries like piano players, fresh flowers, restroom "lounges," the carefully applied scents of the fragrance counter, and a staff of well-dressed, well-spoken sales associates. Everything about the experience helps to drive up the price of the clothing on the racks and it allows these stores to enjoy some pretty fat margins.
Going to a Last Call or Rack is like seeing Snow White on her smoke break at Disneyland. You see that the magic of the created world in the store is just a formula concocted by a marketing team somewhere, and that inevitably taints the full experience. In 2011, Nordstrom rack accounted for about 20% of net sales, and same store sales grew at 3.7%, compared to full line stores at 8.2%. The original purpose of the first Nordstrom Rack, opened in Seattle in 1975, was to house clearance items. This makes sense given that the store would want to separate the less-wanted items from the full-line experience, but when the clearance store starts taking on an identity of its own I think it needs to be reined in.
So how does a store maintain their brand image and still capitalize on the larger demographic afforded by the clearance store? Nordstrom discovered a backdoor by acquiring Hautelook in 2011 and getting in the flash sale business. The site, purchased for $270 million, hosts limited time sales of highly discounted designer items. They have over 4 million members and in 2011 accounted for $185 million in Nordstrom sales (this figure includes Nordstrom Jeffrey and treasure&bond stores). The genius of this purchase was that this keeps Nordstrom in the discount game, but moves the shopping experience online where it can be more carefully controlled at a much lower cost.
This is the type of partnership Neiman should be exploring, rather than their recently announced holiday team-up with Target (NYSE: TGT). Though Neiman already has Last Call, the company has explored flash sales on their own site, and in 2012, invested $28 million in Shanghai based Glamour Sales to give them a strong presence in the fast growing Asia flash sale business; they have not yet fully committed to the model. A purchase of someone like Gilt Groupe would give them cachet among the all important young female demographic that wants designer but simply can't afford it. Gilt is currently at 5 million+ members and a $1 billion+ valuation. Though IPO rumors have swirled for some time, Co-Founder Alexis Maybank has said as late as April 2012 that they will be more seriously exploring the option in 2013. Partnering with Gilt would put them ahead of Saks (NYSE: SKS) as well, a company that is testing the flash sale on their main shopping site with Fashionfix. The Target tie-in was pretty unexpected, what else will Neiman do to get attention?
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