TREADING WHERE OTHERS FAILED
Luxury retailer Nordstrom brings its off-price brand to Canada
After the Target Canada debacle, Nordstrom executives took particular care to not expand too quickly across this country.
Three years and six upscale department stores later, Blake Nordstrom is hoping the Seattle-based retailer’s Canadian investments will begin to pay off with the debut of its first deals-driven subsidiary, Nordstrom Rack.
“Compared to the U.S., (the Canadian Nordstrom stores) are all really good performers, because there are fewer malls per person in Canada than in the U.S.,” Nordstrom’s chief executive said last week at the outlet store’s launch in the Toronto suburb of Vaughan, which aims to attract bargainhunting consumers with up to 70 per cent off the prices of merchandise from its full-line stores.
“On average, the Canadian malls are almost double in terms of productivity compared with their counterparts in the U.S.,” he added. “So the stores here are, in many respects, a little bit more productive than you have in the U.S.”
That distinction could be important as investor nerves hit an all-time high about the state of the industry in the U.S., which has seen the closure of hundreds of J.C. Penney, Kohl’s and Macy’s department stores; debt-saddled Nordstrom rival Neiman Marcus has reported three annual losses in four years, and recently shuttered a quarter of its outlet stores.
Nordstrom announced it was opening stores in Canada in 2012, six months before Target opened its first stores in Canada. When Nordstrom opened its first Canadian location in the fall of 2014, four months later Target announced it was pulling out of this country. Canada, long regarded by American investors as an easier market to penetrate than the U.S. or Europe in fashion retail, had begun to look like less of a slam dunk.
“Right at that very time, Target was going through some of its challenges,” Nordstrom recalled. “Obviously, it was a quite different situation, they opened 130 stores pretty much at once.”
Industry analysts have speculated that Nordstrom might not have chosen to enter Canada had they been aware of future competitive prospects or the market conditions that have prompted multiple retailers to retrench and refocus rather than expand.
“When Nordstrom announced they were coming to Canada they did not know at the time that Saks was coming and they didn’t know that Simons was going to do a national rollout,” said Randy Harris, president of apparel market research firm Trendex North America. “That makes it much tougher for them to perform in the long term.”
Heeding caution, Nordstrom put a 2015 plan for a concurrent rollout of up to 15 Canadian Rack stores on pause.
But as Nordstrom Rack opens now with a more-seasoned Canadian management team, store systems and sense of its customer base, the retailer has faced pressure from investors along with the rest of the sector.
Shortly after Blake Nordstrom spoke with media in Toronto last week about the Canadian launch of Rack, the founding family gave up on its attempts to take the retailer private after a special committee of its board failed to come to terms with the family on a price.
“I don’t doubt that they are finding it more difficult than they thought in Canada,” Harris said, though he noted the Nordstrom store in Vancouver, helped by an influx of tourists, is reported to be one of the strongest performers among the company ’s 122 full-line stores in North America.
Blake Nordstrom says rolling out Nordstrom Rack now will help the company achieve its Canadian sales target of US$1 billion. Executives also know the market better, having pretty much debunked any earlier notions they had about Canadians being more frugal than Americans.
Nordstrom Rack, which gets about a third of its merchandise directly from markdowns at Nordstrom’s full-line stores, is also an unlikely gateway for attracting customers to its more upscale division. “It’s our No. 1 source of new customers,” Nordstrom said, with more than a third of Nordstrom Rack customers migrating over time to full-price stores.
The huge success in Canada of Framingham, Mass.,-based TJX, operator of off-price chains Winners and HomeSense, would suggest that it’s easy to make a killing in this market by opening outlet stores. The off-price retailer saw its sales at stores open for more than a year grow 5 per cent in its more recent fiscal year, following robust growth of 8 per cent in 2016. After years of steady growth, the retailer boosted its long-term store growth estimates for Canada to 600 stores from a previous target of 500.
And Trendex estimates that off-price apparel sales in Canada will grow to $3.39 billion this year from $3.09 billion in 2017. TJX accounts for about 80 per cent of the category ’s market share in Canada, consistently one of its top markets.
Not everyone, however, has fared as well in the segment.
Jennifer Marley, partner at retail market research firm Sklar Wilton and Associates, noted the failure of Holt Renfrew’s off-price HR2 division and HBC’s Designer Depot venture a decade ago.
HBC is hoping that Saks Off Fifth, which has 17 stores across Canada currently and should have 25 open by the end of this year, will fare better as it goes head-to-head with Nordstrom Rack.
While HBC’s full-line department stores in Canada have been outperforming its corporate siblings in America and Europe, its off-price division has struggled badly in the U.S.