Malls are dying, but Nordstrom has no intention of being dragged down with them

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For the typical shopper, Nordstrom is all but synonymous with the mall. Yes, probably a glitzy mall in a fancy neighborhood, but still: the mall.

And indeed, Nordstrom’s mall-based department stores are how the Seattle-based retailer made its name. But in recent years, Nordstrom has broadened its business, building a massive e-commerce machine that now represents about one-third of sales, and expanding its discount Rack chain to reduce its reliance on its department stores and to get a bigger chunk of the exploding off-price market.

The upshot? Those elegant flagship stores, still mostly housed in malls, generated just 38% of company sales last year. And the impact of the COVID-19 crisis will only hasten the shift away from the high-end, in-store experience.

“It’s really an acceleration of pre-COVID trends,” Erik Nordstrom, chief executive and the great-grandson of the retailer’s founder, tells Fortune. “We really don’t think of ourselves as a mall-based department store.”

Like most retailers selling nonessentials, Nordstrom’s business got clobbered by extended store closures during the lockdowns: In the first quarter, Nordstrom revenue fell 40% to $2 billion, despite a decent performance by its digital arm, which actually grew. The crisis is forcing Nordstrom to rethink the role of its stores in its overall business; the company recently announced it was closing 16 of its 116 department store locations, the first large-scale store closing campaign in its 119-year history.

The closures come as a spike in new coronavirus infections in large swaths of the country is putting Nordstrom and other retailers on edge. “We thought the recovery would be further along than it is now,” said Erik Nordstrom, who became CEO in March.

For years, the large department stores were Nordstorm’s bread and butter, and its successful formula allowed it to go from regional player in the Pacific Northwest renowned for its customer service to a national chain.

Yet for all its success, sales at Nordstrom’s namesake luxe emporiums have been drifting downward for several years as more shoppers transition to buying online, and as brands have shifted their marketing muscle away from department stores and toward their own retail outposts. Saks Fifth Avenue, Bloomingdale’s, and Neiman Marcus have all been hit by the same trends.

In an attempt to get in front of the secular declines in shopping at malls and department stores, Nordstrom has built out clusters of small “Local” stores in its most important markets like Los Angeles and New York. These 3,000-square-foot locations are more service hubs than full-functioning stores, but allow customers to try on something bought online or have a garment tailored without having to travel to a full-line store. And that strategy is proving particularly prescient during the pandemic, given many shoppers’ continued reluctance to go malls or big stores.

But the Local concept is relatively new and only up and running in a few key markets, so Nordstrom also is looking at making greater use of its 247 Rack discount stores—where shopper traffic has rebounded more quickly—by offering services like order pickup to customers of its full-price locations as well.

As Nordstrom has leaned into the strength of its Rack locations, some analysts have questioned how far down the discount store road the brand could go before hurting its luxury aura.

The company dismisses this idea as overly binary. “Many consumer businesses can fall into the trap of hewing too tightly to the idea of, ‘Oh, they’re a full-price customer,’ ‘They’re an off-price customer,’” says CEO Nordstrom. “The fact is that most customers cut across lines.”

This is not to say the company is packing it in when it comes to mall-based stores. They are crucial for brand building and supporting e-commerce, says Nordstrom. And the CEO notes that all of the company’s department stores are in so-called A-malls, the centers with the highest-end tenants. “In general, we feel good about our locations,” he says.

Despite the challenges of the pandemic, Nordstrom still believes in the long-term soundness of a business model based on inviting stores that work with e-commerce and provide useful touch-points for shoppers. That includes the New York flagship Nordstrom opened last year at a cost of hundreds of millions that is now grappling with weak traffic after a strong start in the fall.

“Those who are returning to stores are enjoying having a human interaction,” says Nordstrom. “When more occasions return, like weddings, conferences, going into the office again, we’ll be well positioned.”

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