With Some 65,000 Quarterbacks

I wrote an article in 2004 in which I compared Nordstrom with the Green Bay Packers at their peak between 1958 and 1968 under coach Vince Lombardi. Guess what? Lombardi’s spirit lives on within the Nordstrom team, roughly 65,000 strong, and all of them “quarterbacks.” To revisit the past, the opening paragraph I wrote eight years ago was as follows:

The late, great Vince Lombardi, renowned coach of the Green Bay Packers from 1958 to 1968, never got confused over the concepts of “strategy” or “tactics.” And he never confused his team about them either. He viewed football as a “game of inches” and the superior execution of the “basics” of the game, such as blocking and tackling. I know the Nordstrom family hails from the city of Seattle, and I know basketball was their game. And basketball certainly is not a game of inches. However, to hear Blake Nordstrom, President of Nordstrom, talk about their recent “wins,” it’s like listening to the ghost of Vince Lombardi, albeit at a somewhat lower decibel level. While many experts at the time cited technological initiatives for Nordstrom’s huge earnings and sales gains that year, Blake Nordstrom was quoted as saying:  “I think any gains that we’ve had have less to do with technology and more to do with Retail 101.

I thought ‘hmmm,’ sounds like “blocking and tackling” to me.

Now, eight years later, sales are estimated by FactSet to increase by 14% to about $12 billion for 2012 (a roughly $5 billion increase over 2004 revenues of $7.1 billion). Making these numbers even more impressive are the year-in, year-out, profitability metrics: same store sales and sales per square foot, (see accompanying chart).

Also, during the past eight years, Nordstrom continued to invest heavily in technology and perfect its “omnichannel” capabilities. In fact, they are widely acknowledged as being a technology leader among their peers. But, again, Blake Nordstrom, in his humble demeanor, would say the same thing: essentially, it’s not about technology, it’s about “Retail 101.”

Retail 101, according to Blake and the rest of the Nordstroms who run the company, is nothing more than delighting customers beyond expectations. Technology and all other parts of the operation and the value chain are merely supportive “tools” for accomplishing and enhancing that “#1” goal.

One of the major reasons Nordstrom was so successful in achieving what could be considered “best in class” in developing its “omnichannel,” was that they did not build it from the “inside out” to the customer, based on some detached business objective. Rather, every step of the very complex, seamless integration of the online and brick-and-mortar businesses was made with total focus on what would deliver greater satisfaction to the customer. They built it from the “outside in.”

To paraphrase Blake Nordstrom, “It’s not about us being ranked on top or ‘best in class.’ It’s about doing what’s best for the customer. In fact, forget ‘best in class,’ the consumer is constantly raising the bar, and since they are setting the standard, we’re continually resetting ours upward.”

Furthermore, the greatest “tools” of all at Nordstrom are its roughly 65,000 (euphemistically speaking) “quarterbacks,” its sales associates, including the growing number of 1300 personal stylists, all of whom are personalizing service for each and every customer. This team is Nordstrom’s widely recognized competitive advantage, its “secret sauce.” And, similar to Vince Lombardi and his Packers,

Nordstrom has always, and still does, “grind it out,” play by play, inches to first downs to touchdowns, winning year after year after year, using the most fundamental play in retailing: satisfying the customer.

But totally unlike Lombardi, Nordstrom gives its “quarterbacks” complete autonomy and authority, “on the field,” to call whatever play they believe is necessary to score: satisfying customers’ “dreams.”

The Competitive Edge Then, and Now, and Always

The customer, the customer, the customer —say it one more time, please. No lip service, no fancy strategic PowerPoint presentations, no hyperbole on the subject. The entire Nordstrom team, simply and pragmatically, has one goal burned into their DNA for each and every “play:” to achieve a customer’s delight, beyond expectation.

The Nordstrom goal is to “provide outstanding service every day, one customer at a time.\”

If the consulting buzzword, “consumer-centric” had a birth date, Nordstrom was its mother.

“First down” and delighting yet another customer continues to be driven from the very soul of the company encapsulated by the lead statement in Nordstrom’s 2011 Annual Report: “As a customer-driven business, we aspire to continually improve the level of service we offer.” Later, Blake Nordstrom was quoted, “The foundation of our company is personalized service.”

Nordstrom principals walk the talk. Jamie Nordstrom, great grandson of founder John W. Nordstrom, now President of Nordstrom Direct, is not content with simply the best “omnichannel” in its class. Rather, he envisions investing more than $1 billion to accelerate the “personalization” of their e-commerce operations: mining individual customer information to be able to proactively (yet unobtrusively) reach out to each customer with personalized recommen-dations. Chairman Enrique Hernandez, Jr. was quoted in the Annual Report, “Customer service is more than just a catchphrase or corporate initiative at Nordstrom. It is our core at Nordstrom—the fundamental value proposition, the most important competitive advantage and the top priority of every single employee.”

Amen. Not brain surgery; not rocket science. But kind of like a “game of inches,” right?

So, how many first downs, touchdowns and championships have all this blocking and tackling achieved?

Instant Replay: “Fumble and a Turnover”

Without going into a lengthy timeline of the company, founded in 1901 (check out Wikipedia for the full history), there was a period during the early 1990s when Nordstrom experienced a down turn, much of it caused by a recession, exacerbated by an earthquake in the San Francisco Bay Area in 1989.

Then in 1997, the first and only non-Nordstrom was appointed CEO. At the time, Nordstrom was generating $4 to $5 billion in revenues, operating about 104 stores in 23 states (71 full-line, 23 Racks, three Façonnable boutiques and two free-standing shoe stores) including catalogues and the beginning of online sales. Over the next three to four years, Nordstrom found itself struggling for profitable growth, even while an aggressive new store strategy was being pursued.

In 2000 and 2001, a major management realignment, including the CEO’s exit, brought the family back in control. Bruce Nordstrom came out of retirement to assume the Chairman’s position, while his sons Blake, Erik and Peter became co-presidents of the business, merchandise, and stores respectively; positions that they continue to hold. Ironically, as 2001 marked one of Nordstrom’s worst years, it also happened to be the 100th Anniversary of its founding.

The Recovery: Inches to First Downs to Touchdowns

Following the management realignment in 2000, Nordstrom went through two years of recovery and repositioning, all while struggling through a recession. Finally, its efforts gained traction in 2003 resulting in solid revenue and income growth, (see accompanying financial chart). Much stronger momentum followed in 2004 and continued through 2012, even as it slightly “dipped” through the worst of the Great Recession, albeit faring better than its major competitors.

Nordstrom seized the 2003-2004 downturn as an opportunity to reposition its merchandising strategy, refocusing on its “sweet spot” of luxury goods at affordable prices. It also made a heavy investment in information technology with a company-wide perpetual inventory system that could track sales in real time throughout all of its stores, thereby enabling Nordstrom to have the right products for its customers, in the right place, at the right time, thus winning the “Super Bowl” of productivity.

Also, as a part of getting its merchandising “mojo” back, Nordstrom introduced some edgier fashion items in a department called “via C.” This played right into the heart of the younger segment of its core customer base. It further leveraged another competitive advantage of appealing to a broader and younger customer age range of 25 to 64, compared to Neiman Marcus, estimated to be between 43 to 64, and Saks Fifth Avenue at 35 to 55.

Nordstrom closed out 2003 as its most profitable year ever with $242.8 million in net income on record sales of $6.49 billion. Same-store-sales rose by 4.3%, its best performance in 10 years. Having recovered and regained a significant growth trajectory, Nordstrom planned on maintaining the momentum by continuing to expand its technology initiatives, including what was to become the “best in industry” integration of its stores and e-commerce operations. They also pulled back from new store openings (at the time, planning only 11 openings between 2004 and 2008). Instead, they focused on improving the shopping environment and experience in existing stores, ultimately leading to even greater productivity.

Fast Forward to 2012: Ecstatic Customers = Ecstatic Numbers

As mentioned, it’s estimated that Nordstrom\’s blocking, tackling and its “quarterbacks” adherence to “Retail 101” is expected to grow sales this year by 14%, to about $12 billion, according to FactSet. And operating income is projected to increase to 11% of sales, or about $1.5 billion. Of the total business, the 117 Nordstrom full-price stores contribute about 70% of sales, while its 119 Rack outlet stores account for roughly 20%, and its Internet business, the remaining 10%.

Regarding online sales, it’s important to note that since Nordstrom added “Free Shipping, Free Returns, All the Time” (about a year ago, and again leading the industry with its focus on satisfying customers), they have experienced three quarters of 35% gains online. This is far beyond the 12% growth in the U.S. for online overall, according to Forrester Research. Plus Nordstrom continues to win. Three additional “games” Nordstrom continues to win among its peers, all largely due to its obsession with customer service: same-store-sales growth; sales-per-square-foot; and operating income.

As in 2011, Nordstrom is again expected to achieve same-store-sales growth of about 7% in 2012, and sales-per-square-foot of around $444, up from $431 in 2011. And according to newsletter SmartTrend, Nordstrom will finish out 2012 still ranked number-one with the highest operating margin among department stores at 11%. The top five rankings in 2011 were: Nordstrom at 9.9%; Kohl’s at 9.5%; Macy’s at 5.3%; Saks at 5% and Bon-Ton at 1.6%

By the way, this kind of stellar profitability is not only a result of an ecstatic customer, buying more, and more often; it is also driven by the fact that Nordstrom is not a “promotional” department store—because it doesn’t have to be. Enabled by a seamlessly integrated online and in-store business, inventory is unified across both channels. Thus, an online order from New York could be shipped from the floor of a California store.

Simply, orders are directed to stores with excess inventory, reducing the need for markdowns.

Furthermore, while some experts believe the growing Rack store business provides Nordstrom an outlet to discount excess inventory, Nordstrom views its Rack strategy as proactively responding to consumers’ desires for “off-price” fashion, which is indeed the fastest growing sector in retailing. Their acquisition of HauteLook, the online “flash sale” site, is another example of serving the customer first.

In fact, Blake Nordstrom has been quoted saying, \”What we\’ve learned is that our Racks do well when they\’re closest to our flagships. We think there\’s a great synergy.\” While that seems counterintuitive, because the pricing is lower—at about a third of the size of the full-price stores and with much lower SG&A costs—the Racks are highly profitable.

It’s also believed by some experts that the Rack is targeting the younger end of Nordstrom’s core consumer segment enabling Nordstrom luxury at an affordable price. The stores also appeal to younger tastes: urban locations; one-floor design; and a faster, more convenient shopping experience, enabled by mobile check-out devices.

In fact, a much more aggressive growth strategy is planned for the Rack stores to expand to 230 by 2016, almost double the number today at 119. There is not a current plan to add to their 117 full-price stores in the U.S., although Nordstrom does see great opportunity in Canada where they plan to open eight or nine full-price stores and 15 Racks over the next couple of years.

A Winning Playbook

As Vince Lombardi once stated, “The achievements of an organization are the results of the combined effort of each individual.” The reason for Nordstrom’s continual success in implementing its top-ranked service is that its focus on delighting customers is embedded in the culture. It was the Nordstrom “DNA” from its founding on day-one in 1901. Blake Nordstrom expresses the fact that they view the culture as their most important asset.

In the book, The Nordstrom Way, by Robert Spector and Patrick D. McCarthy (published in 1995), the authors” state that Nordstrom hires “nice people.” Bruce Nordstrom said at the time, “We can hire nice people and teach them to sell, but we can’t hire salespeople and teach them to be nice.” The author asked, “Then who trains the salespeople?” Nordstrom answered: “Their parents.”

The fundamental tenet that continues to strengthen the culture is embedded in the now-famous employee handbook­—a single card with 75 words. It supports total credence to the inverted organizational pyramid, giving the associate on the “floor” complete autonomy and authority when engaging and serving a customer.

In other words, the Nordstrom “quarterbacks” call whatever play they feel is needed to score. The concise handbook reads:

Welcome to Nordstrom
We’re glad to have you with our Company. Our number one goal is to provide outstanding customer service. Set both your personal and professional goals high. We have great confidence in your ability to achieve them.

Nordstrom Rules:
Rule #1: Use best judgment in all situations. There will be no additional rules. Please feel free to ask your department manager, store manager, or division general manager any question at any time.

Supporting such individual empower-ment and incentivizing associates’ goals to provide outstanding service, “one customer at a time,” Nordstrom’s compensation program is commission-based on performance. Without going into great detail, in addition to the commission formulas, there are other incentives including a generous 401(k) program, awards, bonuses, stock purchasing advantages, and other programs.

According to a study by the Great Place to Work Institute in 2009, the average salesperson’s annual salary at Nordstrom was $38,900 compared to the average department manager salary of $49,500, and many salespeople were making in excess of $100,000 per year. Another study conducted by the Bureau of Labor Statistics in 2007, covering 4.5 million retail salespeople, found that the average wage was $11.79 per hour, while Nordstrom salespeople were making $18.00 per hour.

In short, the empowered authority, the compensation incentives, and the possibility of their framed picture being displayed and revered on the walls of the Nordstrom stores, drives these “nice” and smiling employees to extraordinary heights to make their customers happy. By now, we have all read or heard of many of the legendary stories of Nordstrom service beyond the call of duty. In fact, these acts are so numerous that before each store opens in the morning, the store manager will gather their employees to relate the best stories of the previous day.Stories abound of customers being reimbursed for returned items bought in competitors’ stores, or for items actually worn or used for long periods of time. Associates rushing to find items for customers in urgent need, and traveling after hours to deliver them on time, is not uncommon. Clerks have been known to pay shoppers\’ parking tickets, lend cash to strapped customers, and to send tailors to customers\’ homes. And there are hundreds of other examples… too many to repeat for the purpose of this article.

Think about it. Each and every square foot that is occupied by a Nordstrom or Rack associate engaging a customer is yielding huge top and bottom line returns, all based on that associate’s priority goal to satisfy their customer’s “dreams.” Yes, superior customer service is a simple concept and imperative in today’s intensely competitive marketplace. It is unanimously declared a priority by every retailer. However, accomplishing it requires awesome execution, which Nordstrom, by the numbers, keeps achieving.

Ecstatic Customers = Ecstatic Numbers = Ecstatic Employees

Finally, it’s no surprise that ecstatic customers lead to ecstatic numbers, which ultimately lead to “ecstatic most valuable player” employees.

A career site, CareerBliss, ranks companies in its annual listing according to how they treat their employees and on employee “happiness.” Nordstrom leads the list of 10 retailers. The determination takes into account employee reviews (over 10,000) of their employer, based on work-life balance, compensation of senior management, benefits and job security.

And Nordstrom has been listed for 15 consecutive years on Fortune’s 100 best companies to work for (one of only 13 companies to remain on the list each year).

A Neurologically Connecting Experience

Yes, if the product and the price are not right; if the shopping environment is cluttered and confusing; if there are no amenities—food, entertainment or other experiences—customers will walk out the door to another competitor. Certainly the Nordstrom shopping environment and “experience” meets, and often exceeds, customer expectations, enhanced by its numerous restaurants; its crisp, clean, well lit and assorted merchandise; and wide aisles.

But all of it pales in comparison to the most important moment in all of retailing’s existence: the moment when the customer’s “dream” can be tipped into reality—the moment of purchase. If that moment becomes more than just a physical transaction, if it’s filled with not just a smile, but over-the-top engagement, empathy, interest and warmth, then that customer will stay longer, buy more and will come back, over and over again.

Indeed, not only is this human “touching and tipping” point Nordstrom’s competitive advantage, it is what I call in my co-authored book, The New Rules of Retail, a neurologically connecting experience. We espouse the fact that when a retailer like Apple, Starbucks, Lululemon and Nordstrom provide an overwhelmingly compelling experience, it goes beyond just connecting emotionally with customers, it connects with their minds, strongly enough to compel them to keep coming back to that experience: as we say in the book, to become “addicted.”

That, my friends, is what also turns Nordstrom’s dreams into the reality of winning the “Super Bowls” of same-store-sales growth, sales-per-square-foot, and over-the-top operating income.

So no “hail Mary’s” or fancy plays for the Nordstroms or their 65,000 “quarterbacks.” Maybe a third-down pass now and then in the form of new technology, but then it’s back to “Retail 101,” and the “quarterbacks” calling the plays that they need to score a customer’s delight.

Nordstrom’s strategy, and “The Nordstrom Way” as we might call it, is really “execution” as Vince Lombardi would call it. It was clearly summed up in the following quote from Blake Nordstrom in the Wall Street Journal back in 2004, and it still resonates today: “It doesn’t sound very glamorous to say that what’s next is to continue to improve on the little things in front of us, but that’s what we’re going to do.” And that, ladies and gentlemen, is what wins ball games.