Last week Cowen and Co. retail analyst Oliver Chen downgraded Nordstrom shares, and the stock promptly tumbled. Among the concerns he cited were declining comparable store sales at both Nordstrom’s full-line department stores and the Rack off-price division. There’s a real risk to misunderstanding what is really going on.
One of the things were going to need to get used to, not only with Nordstrom but with many other brick-and-mortar-dominant retailers, is a new way of thinking about performance — and much of this has to do with letting go of comparable stores sales as a key indicator while fundamentally thinking differently about the role of physical stores.
We know that e-commerce is growing much faster than physical retail. That’s not changing anytime soon, if ever. But there is a huge difference between online brands stealing share from industry incumbents and sales that are transferred within channels of “omni-channel” retailers. Nordstrom is a great case in point.
It’s hard to make a case that Nordstrom has been appreciably damaged by the disruptive impact of e-commerce. It’s easy to make the case that the company has done a heck of a job responding to these changes and capturing the digital-first customer, both by developing superior online shopping capabilities and executing a well-harmonized experience across digital and physical channels.
While most of its department store brethren are losing market share, experiencing significantly compressed margins and closing stores in droves, Nordstrom has consistently driven strong overall results despite being a rather mature brand. In recent years, this has mostly played out in strong e-commerce growth and tepid physical store performance.
A world of declining traffic
Last year I posed the question “what if traffic declines last forever?” While I was intentionally being provocative, for many retailers it is far more reasonable to assume that this will be the case going forward than not. There will always be hot retail concepts that will go through a growth cycle of opening plenty of locations and experiencing strong same-store sales growth. The off-price segment is a great example of that right now. But for the most part, the shift away from brick-and-mortar to online shopping will continue unabated. And that means most retail brands, particularly those that are relatively mature, are looking at an almost impossible task of driving consistent positive same-store sales as e-commerce gains share.
It’s one thing for physical store sales to go to an online competitor; it’s another to transfer sales to your own captive websites, as Nordstrom has been able to do (for the most part). The problem with the relentless focus on comparable store sales as a key metric is it treats the store as a discrete economic entity, which it clearly is not. This in turn drives the nonsense around closing stores as the silver bullet for fixing what ails traditional retailers. It’s certainly reasonable to assume that physical assets can be better configured to deal with changing shopper behavior and the shift to online selling. And clearly, when a retailer is losing massive share to competitors, a wholesale re-think is in order. But the idea that comparable store sales are the best indicator for a retailer’s brick-and-mortar deployment is simply no longer valid in most cases.
A new role for the store: the heart of a brand’s ecosystem
For most traditional retailers, we must stop thinking about stores as liabilities but rather as assets that, yes, in many cases need to be transformed — often radically. But we must acknowledge that from Target to Kohl’s to Sephora to Neiman Marcus and beyond, the store is typically the heart of a brand’s ecosystem. This means that for many, if not most, if the store goes away many customers’ relationships — and therefore future spending — will be compromised. It’s not brick-and-mortar or e-commerce. It’s both, together, that ultimately drive customer loyalty.
In many categories, physical locations perform key roles in the shopping journey that online simply cannot duplicate or come close to mimicking — at least with current technology. For retailers that put a premium on creating a harmonized experience across channels, e-commerce is a sales channel, but it is also a major complement to the stores, and vice versa. It is therefore not surprising to discover that many brands that have shuttered stores have seen their e-commerce get worse in the trade areas once served by a closed location.
The big move of once-online-only brands into brick-and-mortar locations reinforces the unique and important role of physical stores. Most of these brands are approaching the limits of online growth and see stores as a way to acquire customers more inexpensively, serve them in unique ways and forge more comprehensive relationships through the unique combination that digital and physical can provide. One Warby Parker customer, for example, might be completely comfortable buying a new pair of glasses online, but will turn to a brick-and-mortar location for an optician’s adjustment. Another Warby Parker customer might need to see and physically try on their first pair in a store, but will make future purchases online going forward.
The reinvention of retail demands new metrics
In light of the differing underlying economics and category dynamics faced by any given retailer, there is no one-size-fits-all metric to perfectly define success. But it should be clear that same-store sales is an increasingly irrelevant metric. As it gets harder and harder to truly credit a particular channel for a sale or its role in acquiring, growing and retaining a particular customer, the delineation of channels becomes more of a blur. Retailers (and the analysts who love them) need to evolve their measurement focus.
Since customers typically do most of their shopping (whether online or in store) in a relatively narrow geographic region, there is a strong case to be made for seeing a trade area as the more relevant economic entity compared with a store or e-commerce in isolation. Given what was discussed earlier, and knowing that e-commerce sales tend to go up in a trade area when a brand opens a new store, we cannot ignore the inherent interdependence of the channels in retailer metrics any longer.
Spoiler alert: Many brand are already looking at performance this way internally. It’s time for Wall Street to catch up. Here’s my and Euclid’s Brent Franson’s suggestion on some other things to consider.
Of course, none of this is to say that Nordstrom doesn’t have some work to do or that its shares were not overvalued. Yet the inexorable shift to digital and the resulting difficulty in driving what gets counted as comparable store sales does not get addressed in any useful way by defaulting to store closings, leasing out excess space or hyper-focusing on misleading metrics.
Nordstrom is only the latest retailer to be misunderstood. More are sure to follow.
A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.
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