Retail analysts and executives have long known that the U.S. is “overstored,” with far more retail space per capita than other countries. More specifically, one could say the U.S. is “overmalled,” with roughly 1,200 malls (depending on exactly how you count).
So-called “A” malls have generally remained quite healthy, with high occupancy rates and strong sales per square-foot. Despite representing only about a quarter of the U.S. mall universe, those properties hold around 80 percent of the total value of all U.S. malls. Of the remaining 75 percent of U.S. malls, some are solid performers, but the vast majority have experienced massive traffic declines over the past decade. Many won’t recover from the shock of Covid-19.
The downward spiral of B, C, and D malls has forced most department store chains to close large numbers of stores, particularly since 2015. (Of course, it’s not a one-way street. The declining competitiveness of those department stores has contributed to falling mall traffic.) By contrast, upscale chain Nordstrom avoided mass store closures for most of this period, helped by a slimmer, high-quality store base, with 95 percent of its full-line locations in A malls.
Over the past two years, though, Nordstrom has started to close full-line stores at a rapid pace. Given the changing composition of its business and its ability to serve full-price demand outside of traditional full-line stores, Nordstrom should strongly consider shrinking its store footprint even further.
Store Closures Ramp Up
As of late 2018, Nordstrom operated 122 full-line stores in the U.S., Canada, and Puerto Rico, up from 121 at the beginning of 2016. Despite that roughly stable store count, in-store full-line sales fell from $7.6 billion in fiscal 2015 to around $6 billion last year. Customers have increasingly embraced e-commerce.
Indeed, on a companywide basis, e-commerce penetration reached 33 percent last year: up from just 18 percent five years earlier. (The pandemic has driven e-commerce penetration to new heights in fiscal 2020, topping out at 61 percent in the second quarter.) E-commerce penetration is even higher in Nordstrom’s full-line business, whereas physical Nordstrom Rack stores still generate the bulk of off-price sales.
The downward spiral of B, C, and D malls has forced most department store chains to close large numbers of stores, particularly since 2015.
As a result, Nordstrom began to cull its full-line store fleet in a meaningful way last year. The company closed seven full-line stores during 2019, including low-volume locations in the overstored markets of South Florida, Seattle, San Francisco, and Detroit, as well as stores in three smaller markets: Anchorage, Providence, and Norfolk. The Norfolk store was a stark example of how business has fallen off at certain Nordstrom full-line stores over the past decade. Sales for that location peaked in 2007 at $32.9 million and fell to just $11.2 million by 2017.
The Covid-19 pandemic drove Nordstrom to become even more aggressive about closing stores. Like most of its peers, the retailer temporarily closed all of its stores in mid-March. In May, it said that 16 of its 116 remaining full-line stores would not reopen: these are mainly lower-volume secondary stores in large markets, along with a handful of struggling locations in smaller markets.
Thus, Nordstrom has culled its full-line store fleet by nearly 20 percent in less than two years. However, there’s plenty of room to continue in this directio
What’s the Purpose of Full-Line Stores in 2020?
It’s no secret that omnichannel prowess is critical to retail success today. Customers want to move seamlessly between online and offline channels. This means that the role of a full-line store has changed. It isn’t meant to be a standalone sales channel.
Instead, stores function as depots for order pickup (including curbside pickup), returns, shipping online orders to customers’ homes, and other services like alterations. They also foster product discovery, although even that is increasingly moving online, particularly during the pandemic, when many people are trying to limit the amount of time they spend in stores.
Nordstrom has realized that it can offer these services without the expense of operating an extensive network of full-line stores. A little more than three years ago, the company opened its first Nordstrom Local concept in Los Angeles. Nordstrom Local stores have no dedicated inventory. Rather, they function as service hubs. The exact menu of services differs from location to location, but core offerings include order pickup (including curbside, and as soon as same-day), returns, alterations, and personal styling.
Over the past few years, the company has added additional Nordstrom Local stores in the LA area, as well as two in Manhattan. The stores average a little less than 2,000 square feet: a fraction of the size of a typical full-line store. That means they can often be placed in locations that are more convenient for many customers.
The Nordstrom Local concept appears to be succeeding. Last year, the company stated, “Customers who visit a Nordstrom Local spend 2.5 times more and account for 30 percent of online order pick-up in Los Angeles.” Another key benefit of opening convenient small-format stores is that returns come back faster, increasing the likelihood that those items can be sold without big markdowns.
Yet Nordstrom can offer the core services of a Nordstrom Local in many more locations without a massive physical expansion. It already operates 248 Nordstrom Rack stores in the U.S. and Canada. While the company used to manage the Rack separately from the full-line business (aside from sending aging full-line inventory to Nordstrom Rack stores), it is increasingly looking for synergies between the two. As such, customers can now order merchandise from Nordstrom.com for pickup at their local Nordstrom Rack. Rack stores also offer alterations and can accept full-line returns.
More Stores Can Be Closed
The Covid-19 pandemic and resulting store closures will create excellent real estate opportunities for retailers that are still opening new stores. In Nordstrom’s case, that means the ability to expand the Rack chain and add new Nordstrom Locals. That in turn will give Nordstrom more freedom to contemplate additional full-line store closures.
For example, even after recent closures, Nordstrom has 14 full-line stores in the LA metro area: twice as many as it operates in the more-populous New York metro area. That seems excessive in a digital-first world where services like order pickup, returns, alterations, etc. are offered at Nordstrom Rack and Nordstrom Local stores.
Even in two-store markets such as Austin and Salt Lake City, Nordstrom may find that it only needs one full-line store. After all, it closed its store at Chandler Fashion Center earlier this year, leaving it with a single full-line store in the Phoenix metro area (which has nearly five million residents). The one remaining store, at centrally-located and regionally-dominant Scottsdale Fashion Square is all Nordstrom really needs in the region.
Nordstrom’s store fleet is younger than that of most department store chains, so some of its stores are still subject to operating covenants or initial lease terms and can’t be closed easily in the near term. Nevertheless, it should be possible to make significant progress towards right-sizing the full-line store base over the next five years.
Downsizing Can Be Profitable
Nordstrom owns most of its full-line stores either outright or (more commonly) through ground-lease arrangements. Since nearly all of its stores are in good, well-located malls, they can be quite valuable. That means closing stores could lead to substantial windfalls. For example, Nordstrom’s property in Broomfield, Colo. (one of the stores closed earlier this year) could have significant value in conjunction with an adjacent mixed-use development project.
Selling redundant stores would help Nordstrom repay the $600 million of high-cost debt it issued during the depths of the pandemic earlier this year while continuing to invest in its omnichannel and off-price growth initiatives.
Five years ago, selling stores to harvest their real estate value wouldn’t have made sense. At that time, most of Nordstrom’s full-line stores were generating strong in-store sales while serving as an integral part of the company’s omnichannel platform. Today, in-store sales are lower and Nordstrom can offer in-person services to full-line customers through its growing network of Nordstrom Local service hubs and its broad Nordstrom Rack store footprint. In short, it’s the right time to shift to a more focused portfolio of full-line stores and cash in on the rest.
Full disclosure: The author owns shares of Nordstrom.