Nordstrom Inc. announced on March 2 that it would close the Canadian branch of its high-end department store business due to financial losses after nearly a decade in the country, the latest example of a famous retailer struggling to make facing the riptides of a shift to digital shopping, the worst inflation in four decades, higher interest rates and lingering worries that the global economy is heading into a recession.
As the story unfolds, here’s what you need to know:
What happened
Nordstrom’s routine quarterly earnings report has come with good news for its shareholders and bad news for its Canadian fans: the company has improved its 2023 earnings outlook, thanks in part to the cash it forecast save money by closing its six department stores and seven Nordstrom Rack discount stores in Canada. Some 2,500 employees will lose their jobs.
Canada accounts for less than three percent of Nordstrom’s sales, according to Bloomberg News.
“We regularly review all aspects of our business to ensure we are set up for success,” chief executive Erik Nordstrom said in a statement. “We entered Canada in 2014 with a plan to build and maintain a long-term business here. Despite our best efforts, we see no realistic path to profitability for Canadian business. »
In the quarter that included key holiday shopping weeks, the company’s overall sales fell more than 4% from the same period last year.
The retailer said that while closing its Canadian operations would result in a net loss of US$400 million in total sales in 2023, earnings before interest and taxes would increase by US$35 million.
He said he plans to close all 13 Canadian physical stores by the end of June. The company has already taken the e-commerce website offline. Customers will no longer be able to purchase products online and Nordstrom will continue in-store returns and exchanges until March 17, after which all sales will be considered final, according to the webpage at Nordstrom.ca.
Those who placed orders online before March 2 will still receive them, but tracking information will no longer be provided.
Nordstrom credit cards will also be discontinued.
Blame the internet
Nordstrom’s decision to pull out of Canada is the latest example of a traditional retailer struggling to find its footing in the digital age. Technology and the rise of e-commerce continue to disrupt the vast retail industry, while changing consumer behavior.
E-commerce now accounts for about 7% of total retail sales in Canada, compared to just 2% in 2016, when Statistics Canada began tracking online sales of retailers with physical locations.
The department store business model was “very strong” a few decades ago, but as people get used to shopping online, walking around multi-purpose stores has become “less and less compelling,” Simeon said. Siegel, analyst at BMO Capital Markets.
“Historically, a department store was based on convenience and conservation. The problem is, there’s nothing more convenient than (shopping) online in your own living room,” Siegel said.
This forces companies to focus on the curation aspect of the products they sell while trying to solve the problem of what a profitable department store looks like in the digital age, Siegel added.
“While companies, in general, are focused on determining their size, ancillary companies and ancillary regions are scrutinized,” he said. “If the core part of your business is more difficult, stemming the bleeding from the ancillary parts of the business becomes an easier decision to make.”
Economic factors
The COVID-19 pandemic has compounded the headwinds and disruptions facing retailers and the current economic environment has worsened the outlook, said David Soberman, professor of marketing at the University of Toronto.
“The retail environment for apparel retailers…is tough in Canada right now,” he said.
In the past two quarters, Nordstrom’s revenue was below pre-COVID levels. The company said lower consumer spending, due to inflation and high interest rates, was hitting revenue.
Inflation is slowing in Canada, but prices continue to rise faster than incomes. Canadians continue to shop, as evidenced by an increase in retail trade in December and an estimated increase in January, but the sectors that fueled this growth were auto and parts dealers and general merchandise stores.
“Consumer spending is always going on, and so, I think it’s the department stores’ job to make sure they have the best version of products for their unique (customers),” Siegel said. “Acknowledging that these (customers) are feeling consumer pressure doesn’t negate the fact that they still need to buy clothes.”
Nordstrom’s footprint was too small
With 13 stores, concentrated mostly in or near urban centers across Canada, Nordstrom likely lacked a big enough presence to be front and center when shoppers sat down at their computers to research products, Soberman said.
Consider a person in a small town who might want to buy a product from Amazon. If that person is unhappy, they might consider checking out Walmart or Canadian Tire simply because there are hundreds of such stores across the country. “The reason they got these secondary visits is because these brands are on the minds of Canadian consumers.”
Additionally, fewer physical locations tend to suggest that a company’s e-commerce capabilities are less robust than the world’s Amazons and inventory is more limited, he said.
In addition, Canada’s population is about 10 times smaller than that of the United States, a headwind for companies accustomed to taking advantage of the size of the market.
“Nordstrom needs to figure out where they are best positioned to try to capitalize and try to avoid all of the challenges that exist for department store retail today,” Siegel said.
Nordstrom owners are out of luck
For mall operators such as Cadillac Fairview Corp. Ltd., Ivanhoé Cambridge and Oxford Properties, Nordstrom’s departure will result in lost rent and vacant space. In the Toronto area alone, the Canadian division occupies six storefronts. Calgary and Ottawa are home to two locations, while Edmonton and Langley and Vancouver in British Columbia are each home to one outlet.
“Whether or not there is another retailer in the US, another retailer could come from Europe or maybe even Asia,” said Ray Wong of Altus Group. “We’ll have to see whether or not another retailer sees this opportunity to branch out into Canada.”
The opportunity, however, will come at a cost in a market where success cannot be assured.
“To be able to get it ready for the next tenant, it could cost anywhere from $80 to $100 per square foot for new siding, HVAC, and electrical wall separation,” Wong said. “It can cost a little more, especially if you need to reconfigure the mall itself to accommodate customer traffic – it can cost between $80 and $120 per square foot to prepare it for other types of uses. .”
If the renovation impacts the mall hallway, the cost can increase to as much as $300 per square foot.
“These are not small numbers, especially with Nordstrom’s size,” Wong said.
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