Nordstrom Leaves Canada, 9 Reasons Why
Another one bites the dust. On March 2, 2023 Nordstrom announced it is leaving Canada. It joins a slew of American retailers that came to Canada but decided not to stay. The most famous exit of all time is when Target abandoned 133 stores in 2015 after failing to make the model work after only two years in Canada.
So the question is, is it us or is it them? I’m Canadian so I fall into the “us” bucket. But the truth is Nordstrom’s failure in Canada can’t be simplified, by saying, as many are, that Nordstrom didn’t understand the Canadian market. A better way to describe what happened would be to say that Nordstrom in Canada died a “death by a thousand cuts.”
Nordstrom operates in one of the hardest categories in retail, apparel and accessories. Over the past decade that Nordstrom has been in Canada there have been material changes in the market. From new online luxury competitors, to the casualization of fashion, to a pandemic and now historically high rates of inflation. Based on where we are today Nordstrom wouldn’t look at the Canadian market nearly as favourably as it did over a decade ago when it was in the initial stages of considering coming to Canada. If you are curious about what has changed and why Nordstrom is leaving then consider these nine factors.
1. Competition. Apparel and accessories are among the most competitive sectors in all of retail. Anyone can start a clothing store and often they do. Let’s imagine what it was like in the first few decades after Nordstrom opened its first store in Seattle in 1901. If you wanted to buy a new outfit for work or for a party there weren’t many choices at that time. If you didn’t want to spend too much money you could shop at Macy’s or Sears. Nordstrom Rack didn’t even exist back then since the first standalone Nordstrom Rack store opened in 1983 in Oregon. Or if you wanted to spend a lot more you could shop at Nordstrom, Neiman Marcus or Saks Fifth Avenue. There were even fewer choices in Canada at that time.
But now the apparel sector looks quite different. In the upper end companies like Farfetch have taken sales away from retailers like Nordstrom. Farfetch is a luxury goods online marketplace that launched more than a decade ago in 2008. Last year Farfetch brought in $4.1 billion in gross merchandise value. Luxury consignment shop TheRealReal which is mostly online launched in 2011 and brought in $1.2 billion in gross merchandise value last year. When Nordstrom was planning its entry into Canada right round the time these luxury online retailers were getting started Nordstrom may have been unaware of these competitors or it may have underestimated how many consumers would flock to these sites. It’s safe to say now those competitors have made an impact.
Then Saks Fifth Avenue entered the Canadian market in 2016. All of that competition along with incumbent luxury retailers in Canada as well as monobrand luxury retailers like Prada who have significantly improved their digital capabilities over the past decade has made it more difficult for Nordstrom to succeed.
The lower end of the market where Nordstrom Rack competes is just as crowded. Nordstrom Rack which only has seven stores in Canada competes with formidable competitors like Saks Off 5th and Winners. While Saks Off 5th has a small footprint in Canada Winners has close to 300 stores in Canada. There were reports that Nordstrom was supposed to open 15 Rack stores in Canada but the fact that it only opened seven stores show that it realized it had to ramp down its expectations once it started operating here.
2. More brands are selling direct to consumer. A trend that has been in place over the last several years is that luxury brands continue to open their own stores and bolster their own eCommerce capabilities. Why should a brand sell wholesale when it can sell directly to its customers? This has resulted in many luxury brands lessening their reliance on wholesale accounts like Nordstrom. By 2021 Gucci and Prada generated 85% and 90% respectively of their sales directly from their own channels.
Speaking about the evolution of retail Alice + Olivia CEO and creative director Stacey Bendet said: “brands today are like media companies.” “Ten or 15 years ago it was really just about making great clothes. Today it is about telling a story, reaching your customer and engaging that customer in more dynamic ways.” For many luxury brands it’s easier to do this on their own terms. Just take a walk around Yorkdale mall in Toronto and you will see luxury brands including Fendi, Celine and Alexander McQueen with their own storefronts. Many of the luxury stores in Yorkdale were not there ten years ago. If you have your own store network you have less incentive to send the best merchandise to a wholesale partner.
3. Scale. Critics have said Nordstrom scaled its operations in Canada too fast drawing many comparisons to Target’s entry and exit from Canada. Nordstrom’s entrance into Canada was quite different from Target’s. Nordstrom launched in Canada with one store in 2014 and by 2023 it had 13 stores (six full line stores and seven Rack stores), hardly moving at a breakneck speed. Target on the other hand opened 133 stores in Canada within a two-year period ending in 2015. Nordstrom took its time in the Canadian market trying to make it work over a fairly long period of time.
In one year, this year, Nordstrom is opening 20 Rack stores in the United States. In Canada, the first Nordstrom Rack store opened in 2018 and five years later there are a total of seven of these stores, hardly a sign of a retailer moving too fast. The slow opening schedule is likely a sign that Nordstrom was being cautious in light of underwhelming sales.
Perhaps where Nordstrom missed the mark was in the size of its stores. Take Nordstrom’s store in the Toronto Eaton Centre. That store is 213,000 square feet. It’s a massive store that sells mostly clothing, footwear and beauty products. Stores that large aren’t doing as well as they used to unless they sell other things like groceries, like Walmart does. Nordstrom may have been thinking that its store in downtown Toronto could do well like its 320,000 square foot flagship store in New York City. But New York City has millions more people than Toronto and a lot more high-income households.
There is also a trend in recent years of retailers downsizing to smaller sized stores. In 2021 Bloomingdales opened its first smaller square foot format store, Bloomie’s, coming in at 22,000 square feet whereas a typical Bloomindales is around 150,000 square feet. Macy’s has also opened smaller Market by Macy’s stores that are between 25,000 to 50,000 square feet while full line Macy’s stores can be close to 200,000 square feet.
Nordstrom is well aware of this trend and has opened small Nordstrom stores in the United States called Nordstrom Local which can be under 3,000 square feet. These stores aren’t meant to replace full line stores since they do not carry clothing but they have lots of services. “Shopping today may not always mean going to a store and looking at a vast amount of inventory,” said Shea Jensen, Nordstrom’s former senior vice president of customer experience in 2017. “It can mean trusting an expert to pick out a selection of items.” The trend towards smaller store formats arose well after Nordstrom made its initial plans for the Canadian market.
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4. Demographics. A question that came up before Nordstrom launched in Canada was, are there enough high income shoppers in Canada to support the brand? It’s hard to say but one thing we know for sure is that competition in the apparel market has really heated up over the past decade. A significant portion of that competition was likely not considered when Nordstrom was making its plans to enter Canada. The CEO and founder of Farfetch, José Neves, has said that when he first launched his luxury online marketplace no one thought it would work. People did not believe consumers would buy expensive goods online. But they do now. If some of those competitors were not in the market over the past decade then Nordstrom would have performed better.
5. Brand awareness. Both Nordstrom and Nordstrom Rack could have benefitted from more marketing. While Canadians who have shopped in the United States are familiar with Nordstrom it might not have been enough to drive traffic into their stores in Canada or online. If a retailer doesn’t do a lot of marketing, have promotions (Nordstrom full line stores rarely have sales) or have a lot of stores which act as marketing vehicles (there are close to 300 Winners stores in Canada) then it’s hard to make people care. In Nordstrom’s court filings it admitted it suffered from low brand awareness in Canada.
6. Economic shocks. If there was one thing that wasn’t in Nordstrom’s ten year plan for Canada it was the COVID-19 pandemic. The pandemic has been especially hard on the retail sector. The last three years could have been years when Nordstrom made changes to its Canadian business which could have led to success. But instead Nordstrom had to try to stay afloat. The pandemic has been especially hard on apparel retailers with apparel being the only retail sector in Canada that NPD covers that hasn’t recovered to above pre-pandemic levels.
Then once it looked like retailers were getting a handle on the health crisis high inflation showed up. "The holiday season was highly promotional, and sales were softer than pre-pandemic levels," said Nordstrom CEO Erik Nordstrom. "While we continue to see greater resilience in our higher-income cohorts, it is clear that consumers are being more selective with their spending given the broader macro environment."
7. Assortment. Nordstrom will go down as another American retailer that came to Canada with a promise but didn’t deliver on it. Many consumers found the things that make Nordstrom special like its shoe department, clothing section and service to be underwhelming in Canada. It simply did not feel like you were shopping in a Nordstrom store in the United States which created a lot of disappointment. Many consumers commented that there was less product selection in Canada and the merchandise wasn’t as high end as they expected. The only location that felt closer to the shopping experience in the United States was the Nordstrom full line store located in Vancouver.
The issue of having the right selection is also a problem that Nordstrom is grappling with in the United States. “From a store perspective, the biggest challenge [for Nordstrom] is getting foot traffic back,” said Neil Saunders, managing director of GolbalData Retail in 2021. “To do that Nordstrom has to ensure it is offering interesting products, many of which should be exclusive and not available elsewhere. It will also need to look at the product mix and pull back on underperforming categories such as formalwear.” To resolve that issue Nordstrom has been focusing on selling more home, activewear and kids merchandise.
Another issue that Nordstrom couldn’t have foreseen is the trend towards more casual clothing. This trend started before the pandemic but accelerated when people started spending more time at home as the health crisis took over our lives. This trend did wonders for retailers like Aritzia who’s revenue in 2022 was up a whopping 48.3% in the nine months ended November 2022 to reach $1.6 billion.
Why buy a Theory suit for work at Nordstrom when you don’t have to? Why not relax in loungewear from Aritzia or lululemon? Both of these are Canadian companies and formidable competitors that have been on the right side of the trends in the apparel market. "Nordstrom's operating trajectory has been weaker than most retailers, including its department store peers, since the start of the pandemic in early 2020," Fitch Ratings said in a statement. "Nordstrom's results have since trailed retail peers given its focus on fashion and occasioned-based apparel."
8. Financial impact. Nordstrom made $515 million in 2022 in Canada but lost $72 million. By closing its Canadian operations Nordstrom was able to increase its profit outlook for 2023 because of the money it is saving by existing the Canadian market. “We regularly review every aspect of our business to make sure that we are set up for success,” said Erik Nordstrom. “We entered Canada in 2014 with a plan to build and sustain a long-term business there. Despite our best efforts, we do not see a realistic path to profitability for the Canadian business.” Erik Nordstrom also said that winding down its Canadian operations "will enable us to simplify our operations and further increase our focus on driving long-term profitable growth in our core U.S. business."
It's important to note that Nordstrom has been struggling with sales across the border as well. In the fourth quarter of 2022 sales for its consolidated operations (Canada and the United States) were down 4.1% to reach $4.3 billion. Since Nordstrom predicted its sales would decline again in 2023 its Canadian operations were on the chopping block. For the 3% of Nordstrom’s sales its Canadian unit represented it wasn’t worth the headache of trying to make it work. “The issue in Canada is really just a small issue compared to Nordstrom’s much bigger problems,” said David Swartz, equity analyst at Morningstar Research Service. “I think the management thought that the expansion into Canada was really more of a distraction.”
9. Shareholder drama. If an activist investor has time on its hands it will target a department store retailer. From Macy’s to Kohl’s activist investors are trying to shake things up. Let’s take the case of Kohl’s. In recent years activist investors have pressured Kohl’s to sell itself, spin off its eCommerce business, sell and lease back its real estate and replace board members in an attempt to take control of the board.
Why does this matter? In September of last year El Puerto de Liverpool SAB, a company that owns high end department stores in Mexico bought 9.9% of Nordstrom’s stock. A few days after the transaction occured Nordstrom adopted a poison pill which allows shareholders to buy additional Nordstrom shares at a discount essentially diluting ownership in the company. Companies take this action to protect themselves from a hostile takeover.
Seeing how activist investors have pressured other retailers Nordstrom is trying to protect itself. The Nordstrom family is Nordstrom’s largest shareholder owning about 30% of the shares of the company and now El Puerto de Liverpool SAB is the second largest shareholder. “You wouldn’t have to be a gigantic company now to buy a controlling stake in Nordstrom because the stock price is so low,” said Swartz at the time.
If you are running Nordstrom you do not want any additional scrutiny because of a poor performing Canadian business that represents a far bigger headache than the 3% of company revenue it’s generating.