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Everyone's Spending More and More Money at Nordstrom Rack

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Maybe there's a new Nordstrom Rack in your town, or maybe there are several. More merchandise, more deals, more shoppers—over the next five years, Nordstrom Rack stores will continue to outpace full-line Nordstroms in America.

The company is walking a classic retail tightrope, trying to expand its discount business without damaging the status of its full-price offerings. More than any other department store chain, Nordstrom has always emphasized customer service—not always a quality that's associated with sale shopping. But so far, the strategy behind Nordstrom Rack has paid off. If you feel like you've been spending a lot more time shopping there, you're probably not mistaken.

For one thing, there are simply a lot more locations than there used to be. Since 2010, the number of locations has almost doubled from 86 to 167, while Nordstrom has continued to operate about the same number of full-line stores (116 on average). The company set an ambitious goal of 300 Rack stores by 2020 and, so far, has been on track to reach that number. According to Nordstrom's most recent earnings call, 27 Rack locations opened in the past year, and there are plans to open another 27 outposts this year.

"Sometimes there are some vagaries in the real estate market year-to-year," Blake Nordstrom, the company's president, told wary analysts during the latest annual presentation. "But we feel very confident looking ahead between now and 2020 given the criteria we use for new stores, the customer demand, the opportunities that are out there—we feel very confident to publicly state that we should have 300 stores by 2020."

"When customers shop with us in two or more ways, they spend more."

The growth seems tremendous when you consider the fact that competitive retailers sharing that same lower price point are dropping like fliesBut plenty of similar department stores operate a similar ratio of full-price to off-price locations. Barneys manages 16 full-line stores and 13 Warehouse locations, Saks Fifth Avenue manages 38 full-line stores and 82 Off Fifth locations, and Neiman Marcus manages 41 full-line stores and 43 Last Call locations. What makes Nordstrom different is the scale: 300 Rack stores translates to a lot of discount merchandise.

So far, Nordstrom's investment has paid off. CFO Mike Koppel disclosed during the presentation that both the Nordstrom Rack business and the company's online sales currently make up 40% of Nordstrom's overall sales, compared with 30% just three years ago. Rack stores and Rack's e-commerce counterpart are responsible for driving nearly four million new customers to the company just last year, representing Nordstrom's largest source of new customers in 2014.

About one-third of its discount customers also shop at Nordstrom, which speaks to the company's plan to increase customer loyalty by integrating its brands. "Many customers who shop with us through one channel choose to engage with us in more ways as they get to know us," Nordstrom Rack spokesperson Naomi Tobis tells Racked. "So we serve them in our full-price stores,, and through our Rack stores and now and HauteLook. And we know that when customers choose to shop with us in two or more ways, they spend more and they demonstrate greater loyalty."

"The great thing about Nordstrom Rack is the fact that they did not put them in major malls."

Nordstrom acquired flash sale site HauteLook back in 2011, which turned out to be a great play for both companies. Nordstrom notes that HauteLook has expanded its business by 150% since the acquisition, but it's also helped a great deal in preparing for a standalone Nordstrom Rack website. Once HauteLook was under Nordstrom ownership, the company used the team's e-commerce experience to develop and finally launch in May 2014.

"We were able to leverage the talent of our HauteLook team down in LA and their strength that they already had in the online off-price flash sale business," Tobis explains. "So when we did launch last May, we were able to offer the largest selection of off-price merchandise among our competitors, and since we've launched, we've more than doubled the catalog choices."

The site launch also acted as a catalyst to bring even more people into stores. Customers have the option to return their web purchases (both from the Rack and HauteLook) to any Nordstrom location, and the company confirmed in the annual presentation that over 70% of and HauteLook returns are done in-store. The decision to streamline online and in-store returns alone drove almost one million visits to brick-and-mortar locations in 2014.

From a logistical standpoint, Nordstrom has invested heavily in Rack delivery channels and strategic store locations to try and differentiate itself from the competition. There's an entire fulfillment center dedicated specifically to Nordstrom Rack and HauteLook orders, and Tobis points out that it allows the company to ship web orders much faster than its competitors.

"Nordstrom Rack stores are going to have a much better long-term sales growth."

"I think the great thing about Nordstrom Rack is the fact that they did not put them in major malls," C. Britt Beemer, retail analyst and founder of America's Research Group, tells Racked. "They're basically in very well-located strip centers or town centers. The thing about mall retailers is that they're fighting a losing battle. There's fewer and fewer consumers going to the mall every day, so if you're a mall-based retailer you're somewhat crippled."

Then there's the merchandise appeal. Outlet stores are commonly understood to carry past-season merchandise that trickles down from the retailer's full-line stores, fueling dreams of too-good-to-be-true deals. However, according to Racked's data on the state of outlet store merchandise, only 20% of Nordstrom Rack product comes directly from the full-line stores while the rest is bought straight from vendors.

Still, the brand mix is curated to feel very similar to regular Nordstrom stores (48 out of Nordstrom's 50 top-selling full-line brands are also sold in Racks) while prices are strategically aligned with the current state of many consumers' budgets. "I think Nordstrom is doing the right thing because based upon the economy and based upon how much money the consumers have to spend, the Nordstrom Rack stores are going to have a much better long-term sales growth than Nordstroms will," Beemer says.

When Nordstrom was just beginning its accelerated growth plan for the Rack, several media outlets wondered if tons of discount stores would dilute the upscale Nordstrom name. Rack's success has proven that, if anything, it's existence has only helped the brand become more visible to a wider array of customers. "The customer response continues to be great and we're happy if Nordstrom Rack introduces us to a customer who may never have shopped Nordstrom before," Tobis says. "It's a key part of our overall business and growth strategy overall for Nordstrom."