Merchandise Strategy at Nordstrom

The Art and Science of Managing Change within the Retail World

Lisa Dolan, VP, Nordstrom Central States Division April 9, 2002

Merchandise Strategy at Nordstrom

A Bit of Nordstrom History...
Founded in 1901/1971 Public Opening Day Sales $12.50 2001 Sales $4.7 Billion 80 Full-Line Stores

4 Faconnable Boutiques
44 Rack Stores 2 free standing shoe stores Over 40,000 Employees

Serve customers in multi-channels Bricks / mortar Internet / .com Rack discount

Family run business Started as a Shoe Company, 1963 bought Best Apparel Service is our #1 goal

Merchandise Strategy at Nordstrom

The Primary Decisions we Face as Merchants

1
Which customers do we want to serve, and in which product categories? i.e., who do we want to be?

What is the mix of vendors, including own label, that we want to serve each of our customer segments with?

3
How do we want to layout our stores to best communicate our mix to our target customer?

Where we Compete

How we Compete

Merchandise Strategy at Nordstrom

The Issue we were Facing

Nordstrom Womens Apparel Sales Intensity

Indexed $/ft2 100 90 80 70 60 50 1999 Competitor Average

From 1997 to 1999 we had been facing increasing challenges sustaining our competitive advantage over key rivals a superior, service-driven offering had contributed to historical sales intensities nearly double that of direct competitors... however, recent declines in this advantage and a newer set of competitors (i.e., Specialty stores) had driven market share losses and comp store declines Despite continued new store growth and margin improvements, the negative comp store trends limited profit growth, resulting in a declining share price and market value Much of the comp store decrease was driven by a declining position in Womens Apparel, which represented the largest proportion of our space and sales (~40%)

40
30 20 10 0 1997 1998 1999

Merchandise Strategy at Nordstrom

A Better Fact Base on What Was Behind the Issue
1998 Nordstrom Sales Mix vs. Market Growth Over 80% of our Womens Apparel sales were concentrated in serving what had become slower growth customer segments Given a similarity to other retailers offerings, it was becoming increasingly difficult to differentiate in these highly competitive customer segments however, despite declining sales many of these existing customer groups remained highly profitable Very little of our space was dedicated to serving what had become the high-turn, high growth market segments Specialty retailers had leveraged a strong offering in these segments to drive much of their early growth Our offer to any given existing customer group in the product market was highly fragmented (i.e., extremely high number of vendors), limiting the depth and authority in our offer and decreasing overall inventory turns

Classic

Mainstream

Modern/ Forward 10.5% Low 3.3%

14% Bridge Declining 18% Better Low Moderate 0.2%

14% Declining 19.4% Low 13.3% Moderate

High 0.3% High

Moderate
Moderate

Key:

% Nordstrom WA Sales Market Growth

Our store environment and department configuration did not send clear signals to customers, limiting the effectiveness of serving any given customer group (and making more difficult the shopping experience)

Merchandise Strategy at Nordstrom

Evaluating Options to Resolve the Issue

Examples of the Options we Evaluated Maintain our current participation across customer groups (as defined by price and taste), but improve our offer to each group by growing own-label brands and editing the number of vendors Increase representation with new customer taste groups, maintain current average price point and improve offer through own-label and vendor editing Increase representation with new customer taste groups while also dropping our average price point; improve offer through own-label and vendor editing

Evaluation Criteria and Considerations Expected turns, sales intensities and gross margins of vendor resources and overall customer segments Forecast growth rates of target customer segments Incremental operating expenses and capital costs required to execute

Expected operating income, economic returns and value creation of each alternative
Ability to implement given internal (e.g., organizational) and external (e.g., vendor agreements) constraints

Merchandise Strategy at Nordstrom

What We Agreed to Implement
Our Current Offering Market Growth Potential

Outcomes Significant changes in merchandise mix within Womens Apparel

Modern/Forward Customers Par Low to Moderate Weak High Weak High

Classic Customers

Mainstream Customers Advantaged

Bridge Price Point

Better Price Point Moderate Price Point

Advantaged Low Declining Moderate Weak Moderate

increased by ~200% the inventory $ and space dedicated to serving newer, high growth, high turn customer segments (modern/forward) reduced the total number of vendors serving each customer segment by over 50%; concentrating inventory $ with the most productive resources A new own-label strategy

Low Declining Moderate Declining Moderate

two new own-label brands, and the re-positioning of two existing brands to strengthen the offering and increase profitability across all customer segments
New department identities and environments focused on better grouping vendor resources serving similar customer groups creation of an entirely new department, t.b.d. focused on bringing a new set of customers into the store
6

Offering Strengthened in Existing Segments Increased Participation in Newer Segments

Merchandise Strategy at Nordstrom

Significant Implementation Challenges

1
Product Procurement and Assortment

2
Space Allocation and Floor Layout

3
Brand and In-Store Execution

Focus Areas: Identify new resources to be added; develop and reposition NPG brands; edit existing resources Determine product category mix across tailored, sportswear, dresses, coats and special occasion Execute purchase planning by segment, by region and by store

Focus Areas: Finalize optimal floor layout and space allocation plan (number and size of departments, critical adjacencies, etc.) Execute in new stores Determine transition plan for existing stores Execute in trial stores

Focus Areas: Align advertising and promotion strategy (brand strategy) Align in-store communication to customers; link to events strategy Determine department management structure and sales person configuration Internal communication and product knowledge

Merchandise Strategy at Nordstrom

Developing the New Store Layouts - My Life
Department Definitions Agreed as Part of the New Strategy
Classic Customers Mainstream Customers Modern Customers Forward Customers

One of the most challenging aspects of implementing the new strategy was reallocating space in all existing stores to:

Bridge

Studio (includes St. John and Special Occasion space) (23% of space)

match the newly defined departments

Individualist (includes Classiques) (11%) Savvy (7%)

achieve the space requirements of each target customer group create space for an entirely new department (t.b.d.) The goal was to come as close to the target space as possible and achieve improved adjacencies while recognizing:
N/A

Better Point of View (includes Preview) (26%) Moderate Narrative (16%) t.b.d (includes Halogen) (17%)

we needed to minimize as much movement as possible so as not to confuse existing customers we could not invest to change the hardcoded nature of our pads (therefore in some cases it was like fitting a square peg into a round hole) we had to do this for 60+ stores in approximately month
8

(Target % of Space)

Merchandise Strategy at Nordstrom

1st Year Challenges
Went from a Regional Buying Structure to a National Buying structure to more easily implement changes Approach with merchandise mix was same across all stores however all our stores do not have the same customer base.

Where We Are Today

We are back to a Regional Buying Structure that can support needs of all local markets.

Significantly improved comp store trends over the past 12 months that have beat most rivals (including Specialty stores) and suggested we are re-gaining share in both markets
Despite continued evolution and strengthening of our mix, Womens Apparel has been one of the strongest performing categories for us over this same time period Strong growth trends in departments such as t.b.d. suggest we are being successful in serving a newer customer group After a difficult transition inventories are better in line and profitability is up - this combined with the stronger sales trends has resulted in much improved stock market performance

We changed everything from environment to advertising to merchandise assortment to store location to buying approach---was it too much at one time??? We learned very quickly that what may have looked good on paper was not necessarily executed in the same manner at the store level We spent the majority of our time and efforts focusing on 33% of our business and got too far away from the customer we already had.

We have aligned our organization towards a continual focus on opportunities to strengthen and evolve our merchandise mix, while always ensuring that we are second to none in terms of the service we provide for customers in our stores