April 9, 2009
Nordstrom Doing More With Less
Nordstrom is all about inventory reduction.
Okay, maybe not all, but as a Bloomberg report points out, the company
has made a concentrated effort going back to 2000 to reduce its inventory
levels. Based on the same report, Nordstrom has been successful in its
endeavors, cutting days of supply to 62 days on average versus competitors
such as Macy’s (119 days) and Saks (140 days).
"If
Nordstrom were a car, it would be a hybrid Cadillac Escalade that gets
20 miles per gallon instead of the normal 12," Patricia Edwards, founder
of the research firm Storehouse Partners, told Bloomberg.
"Nordstrom’s
investment to drive sales is lower," said Liz Dunn, an analyst with
Thomas Weisel Partners. "They are doing more with less."
Nordstrom
is also not hanging on to merchandise that won’t sell at department store
rates. Instead the company looks to move the items to its Nordstrom Rack
discount outlets.
"If
we can identify what is not performing and move it out to bring in fresh
merchandise, that’s a decision we want to make," Peter Nordstrom, president
of merchandising, told Bloomberg.
Discussion Questions: Is inventory management
a greater piece of the success puzzle now than it has been in the past?
What is your take on the Nordstrom approach to the challenge? Where do
you see further opportunities for Nordstrom and others to get better
control over the goods sold in their stores?
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One of the “lessons learned” from the downturn is the critical impact of inventory management on earnings. Some retailers have been caught with too much inventory and have not been nimble enough to react, given the suddenness of the slowdown last fall. Others (such as Nordstrom) have worked for years on improving their “best practices,” and are less likely to see a drop in margins even during a severe recession.
Doing less with more isn’t just a valuable tool during a slowdown but also during the inevitable bounceback. Nordstrom stores appear to have robust levels of inventories but don’t appear overly cluttered or crowded to the consumer. The lower days-of-supply also means that they can keep receipts fresh instead of tying up dollars and floorspace on clearance problems. The “next level” of good inventory management, for Nordstrom and other national chains, will be to get the right content–as well as the right levels–in the right locations, not just through regional buying but through strong centralized systems.
Comparing Nordstrom to Macy’s is like the NYT article yesterday comparing Ford to GM.
We got that there are challenges to the department store model–one company is forward looking the other resting on its laurels and cutting staff to ridiculous levels. More here….
Nordstrom is a great example of the proper use of the term “paradigm shift.” Here is a company that was all about merchandising and customer service. Operating efficiency took a back seat to creating a superior “customer experience.” In some ways it is similar to the changes we are seeing in the “natural foods” segment as retailers formerly focused on merchandising and service are improving their operations (or being acquired). When a company who has focused intently on the demand side starts to take a look at the operating and supply side opportunities, the likelihood for improvement is great.
Although interest rates are down, the ability to find financing for large inventories is harder. Add to this the faster onset of obsolescence, the increased damage from a part time workforce, and customers who are suffering an overload of “buyer’s remorse” and it becomes more important than ever that the inventory be “right.” Don’t underestimate the value of the Nordstrom Rack discount outlets. The quick acceptance of a “wrong” inventory decision and the cleaning up of the high-end channel keeps the image fresh while allowing the company to recoup some of the costs.
Inventory will always be an important factor for retailers. Online outlets offer an opportunity for brick and mortar operators to support the “long tail” through their Internet presence while avoiding the proliferation of products to all locations. Better integration of the two channels that puts emphasis on customer service with the Internet offering and efficient fulfillment of immediate needs with the store seems to be the best way forward. A lot of people are trying to get this mix right. The ones who succeed will prosper.
Hasn’t inventory management always been a big piece of the puzzle? I wouldn’t keep stale product in a good economy either. We need to get back to basics here.
More with less is against the law of Physics. You need to add some different ingredients, thinking, and technology. In this case, Norstrom added technology and a different mind set. They did not just go out and reduce inventory. The lesson here as was pointed out above is that if you keep doing what you have always done you will not even get what you use to get.
The need for inventory varies by retailer. Ones with one supply lines (China sourced) will have greater inventory than those that source locally. The objective of inventory is service the customer. Out-Of-Stocks send customers to competition. Excess inventory only costs the company money.
The type of business plays an important part in the inventory story, too. Apparel and fashion retailers (excluding basics) do not want to be long in inventory as it must be marked down to move after the season. Closely monitoring what is selling and what is not should be standard operating procedure for every retailer, but in the real world, annual reviews are most common. Dropping slow- and non-selling items quickly is the right approach. This provides the opportunity to find items customers want. Changing items at retail is important to keeping a store current.
I was looking back on several of the previous discussions because I wanted to resurrect some of my comments on inventory. In my search I noticed that we have had far more topics related to price and promotion versus inventory and operations. But, when it comes to retail, price and promotion have a much more denigrating effect on the bottom line.
Consider the number in today’s example. Department stores sell about 60% of their first 2 months movement at full price. Let’s assume the remaining 40% is sold at an average of 20% off or a cut of 40% in margin. Therefore, the first 2 months would bring in an average of 85% of the full margin.
In Nordstrom’s case, with 62 days of average inventory, they are turning their inventory almost 6 times per year and based on the example above they are realizing 85% of their full margin on all of their sales.
Macy’s or Saks will carry inventory an additional two months. In those last two months, the product will be marked down further, ultimately wiping out the margin entirely. Therefore, for the full 4 months that they are holding the inventory, the average realization on the entire inventory could be as low as 40% or less of full margin.
Looking at comparable costs on same store comparisons, assuming that operational costs are the same, a Nordstrom store will deliver twice as much to the bottom line as a Macy’s. Then if Nordstrom takes some of those additional profits and invests it back into customer service, they have a pretty good chance of outselling that comparable Macy’s.
However, cutting inventory is not something one can do with the stroke of a pencil. Cutting inventory includes squeezing every bit of down time out of the process. It will mean more deliveries, more trucks and more people unloading the boxes and stocking the floor. It can not take 3 weeks to get the inventory to the floor for a particular selling season. It should take 3 days!
Unfortunately, like customer service, many retailers see these operational costs as expenses to cut rather than opportunities to invest in.
What I like about Nordstrom’s approach and model is that they move leftover inventory to Nordstrom Rack. As off-putting as it can be when stores have little traffic and the shelves are groaning with full-price merchandise, it’s downright depressing when rounder after rounder is crammed with clearance items falling off hangers (P.S. why are clearance areas always so poorly maintained?). At Nordstrom Rack, clothes are appealingly re-merchandised for a much more pleasant value shopping experience. Macy’s and others would do well to have their own outlet stores as well since, with open floor plan department stores, clearance areas are never really “out of sight” and they detract mightily from the full price environment.
While having “too much” inventory isn’t good, neither is having “too little”…particularly for upscale stores that are (hopefully) noted for deep selection and service; one thought I have is that Nordstrom can effectively take advantage of having multiple stores in the same market, using nearby stores to serve as reserve stock, and (thus) allowing a store to essentially carry “one-fourth” of an item and yet still–in a sense–have it “on hand”; this is much more difficult for a chain like Saks, with a multitude of single store markets (e.g. here in the Bay Area N has 8 stores, S only 1). And having a competent staff that can utilize this edge is, of course, essential. As for Macy’s, well….
They need to get more focused on customer service and knowing what their customers need.
Inventory takes up so much of the asset base of any retailer that poor inventory management can hit margins and cash flow pretty hard.
Too much inventory tends to back up quickly as there is no sense of urgency among customers to buy, and they wait out the retailer, increasing markdowns and swapping full priced sales for markdown sales. Sales and margins suffer.
There is always the fear that lean inventories will lead to increased out-of-stocks, and for in-stock basics that’s a legitimate concern, but not an excuse for excess inventories. For fashion goods, like much of Nordstrom’s merchandise, lean inventories can actually drive sales, by increasing the customer’s sense of urgency and frequency of visits, by turning inventory quickly and continually bringing in fresh goods.
Managing inventory often takes a back seat to driving sales, but it is one of the basic building blocks to success. In the past year most retailers have done a better job than in recent years, out of necessity, but Norstrom’s efforts distinguishes them from the rest.
The paradox of this recession is that even though the consumer is holding back and making fewer purchases, when they do purchase they still want trendy exciting product. There’s still a lot of retail out there and the consumer is definitely in control. Nordstrom is lucky. Nordstrom Rack allows them to quickly move out nonperforming product and pick up fresh new product for their full price stores. They win with the customer by giving them that steady flow of fresh product they demand, and they are able to keep inventory levels manageable.
Particularly in the context of American retail, Nordstrom’s ability to manage down its inventory levels over the years is impressive. It starts with the Nordstrom senior management’s focus on inventory control as a driver of profit growth via lower inventory carrying costs and avoiding restrictive credit covenants. With great systems, combined with an unusually talented buying and product sourcing group, Nordstrom continues to increase sales with less inventory. Most department stores lack the focus and the tools to manage inventory effectively. Plus, many “bought” gross margin by agreeing to ever-growing buy commitments from suppliers in exchange for season-saving margin checks. The result is an ever-growing hangover of unsaleable merchandise sitting in stores and clearance outlets. This is one of the reasons others have succumbed bankruptcies and liquidation. Nordstrom has the right formula and it can be learned and implemented elsewhere.
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One of the “lessons learned” from the downturn is the critical impact of inventory management on earnings. Some retailers have been caught with too much inventory and have not been nimble enough to react, given the suddenness of the slowdown last fall. Others (such as Nordstrom) have worked for years on improving their “best practices,” and are less likely to see a drop in margins even during a severe recession.
Doing less with more isn’t just a valuable tool during a slowdown but also during the inevitable bounceback. Nordstrom stores appear to have robust levels of inventories but don’t appear overly cluttered or crowded to the consumer. The lower days-of-supply also means that they can keep receipts fresh instead of tying up dollars and floorspace on clearance problems. The “next level” of good inventory management, for Nordstrom and other national chains, will be to get the right content–as well as the right levels–in the right locations, not just through regional buying but through strong centralized systems.
Comparing Nordstrom to Macy’s is like the NYT article yesterday comparing Ford to GM.
We got that there are challenges to the department store model–one company is forward looking the other resting on its laurels and cutting staff to ridiculous levels. More here….
Nordstrom is a great example of the proper use of the term “paradigm shift.” Here is a company that was all about merchandising and customer service. Operating efficiency took a back seat to creating a superior “customer experience.” In some ways it is similar to the changes we are seeing in the “natural foods” segment as retailers formerly focused on merchandising and service are improving their operations (or being acquired). When a company who has focused intently on the demand side starts to take a look at the operating and supply side opportunities, the likelihood for improvement is great.
Although interest rates are down, the ability to find financing for large inventories is harder. Add to this the faster onset of obsolescence, the increased damage from a part time workforce, and customers who are suffering an overload of “buyer’s remorse” and it becomes more important than ever that the inventory be “right.” Don’t underestimate the value of the Nordstrom Rack discount outlets. The quick acceptance of a “wrong” inventory decision and the cleaning up of the high-end channel keeps the image fresh while allowing the company to recoup some of the costs.
Inventory will always be an important factor for retailers. Online outlets offer an opportunity for brick and mortar operators to support the “long tail” through their Internet presence while avoiding the proliferation of products to all locations. Better integration of the two channels that puts emphasis on customer service with the Internet offering and efficient fulfillment of immediate needs with the store seems to be the best way forward. A lot of people are trying to get this mix right. The ones who succeed will prosper.
Hasn’t inventory management always been a big piece of the puzzle? I wouldn’t keep stale product in a good economy either. We need to get back to basics here.
More with less is against the law of Physics. You need to add some different ingredients, thinking, and technology. In this case, Norstrom added technology and a different mind set. They did not just go out and reduce inventory. The lesson here as was pointed out above is that if you keep doing what you have always done you will not even get what you use to get.
The need for inventory varies by retailer. Ones with one supply lines (China sourced) will have greater inventory than those that source locally. The objective of inventory is service the customer. Out-Of-Stocks send customers to competition. Excess inventory only costs the company money.
The type of business plays an important part in the inventory story, too. Apparel and fashion retailers (excluding basics) do not want to be long in inventory as it must be marked down to move after the season. Closely monitoring what is selling and what is not should be standard operating procedure for every retailer, but in the real world, annual reviews are most common. Dropping slow- and non-selling items quickly is the right approach. This provides the opportunity to find items customers want. Changing items at retail is important to keeping a store current.
I was looking back on several of the previous discussions because I wanted to resurrect some of my comments on inventory. In my search I noticed that we have had far more topics related to price and promotion versus inventory and operations. But, when it comes to retail, price and promotion have a much more denigrating effect on the bottom line.
Consider the number in today’s example. Department stores sell about 60% of their first 2 months movement at full price. Let’s assume the remaining 40% is sold at an average of 20% off or a cut of 40% in margin. Therefore, the first 2 months would bring in an average of 85% of the full margin.
In Nordstrom’s case, with 62 days of average inventory, they are turning their inventory almost 6 times per year and based on the example above they are realizing 85% of their full margin on all of their sales.
Macy’s or Saks will carry inventory an additional two months. In those last two months, the product will be marked down further, ultimately wiping out the margin entirely. Therefore, for the full 4 months that they are holding the inventory, the average realization on the entire inventory could be as low as 40% or less of full margin.
Looking at comparable costs on same store comparisons, assuming that operational costs are the same, a Nordstrom store will deliver twice as much to the bottom line as a Macy’s. Then if Nordstrom takes some of those additional profits and invests it back into customer service, they have a pretty good chance of outselling that comparable Macy’s.
However, cutting inventory is not something one can do with the stroke of a pencil. Cutting inventory includes squeezing every bit of down time out of the process. It will mean more deliveries, more trucks and more people unloading the boxes and stocking the floor. It can not take 3 weeks to get the inventory to the floor for a particular selling season. It should take 3 days!
Unfortunately, like customer service, many retailers see these operational costs as expenses to cut rather than opportunities to invest in.
What I like about Nordstrom’s approach and model is that they move leftover inventory to Nordstrom Rack. As off-putting as it can be when stores have little traffic and the shelves are groaning with full-price merchandise, it’s downright depressing when rounder after rounder is crammed with clearance items falling off hangers (P.S. why are clearance areas always so poorly maintained?). At Nordstrom Rack, clothes are appealingly re-merchandised for a much more pleasant value shopping experience. Macy’s and others would do well to have their own outlet stores as well since, with open floor plan department stores, clearance areas are never really “out of sight” and they detract mightily from the full price environment.
While having “too much” inventory isn’t good, neither is having “too little”…particularly for upscale stores that are (hopefully) noted for deep selection and service; one thought I have is that Nordstrom can effectively take advantage of having multiple stores in the same market, using nearby stores to serve as reserve stock, and (thus) allowing a store to essentially carry “one-fourth” of an item and yet still–in a sense–have it “on hand”; this is much more difficult for a chain like Saks, with a multitude of single store markets (e.g. here in the Bay Area N has 8 stores, S only 1). And having a competent staff that can utilize this edge is, of course, essential. As for Macy’s, well….
They need to get more focused on customer service and knowing what their customers need.
Inventory takes up so much of the asset base of any retailer that poor inventory management can hit margins and cash flow pretty hard.
Too much inventory tends to back up quickly as there is no sense of urgency among customers to buy, and they wait out the retailer, increasing markdowns and swapping full priced sales for markdown sales. Sales and margins suffer.
There is always the fear that lean inventories will lead to increased out-of-stocks, and for in-stock basics that’s a legitimate concern, but not an excuse for excess inventories. For fashion goods, like much of Nordstrom’s merchandise, lean inventories can actually drive sales, by increasing the customer’s sense of urgency and frequency of visits, by turning inventory quickly and continually bringing in fresh goods.
Managing inventory often takes a back seat to driving sales, but it is one of the basic building blocks to success. In the past year most retailers have done a better job than in recent years, out of necessity, but Norstrom’s efforts distinguishes them from the rest.
The paradox of this recession is that even though the consumer is holding back and making fewer purchases, when they do purchase they still want trendy exciting product. There’s still a lot of retail out there and the consumer is definitely in control. Nordstrom is lucky. Nordstrom Rack allows them to quickly move out nonperforming product and pick up fresh new product for their full price stores. They win with the customer by giving them that steady flow of fresh product they demand, and they are able to keep inventory levels manageable.
Particularly in the context of American retail, Nordstrom’s ability to manage down its inventory levels over the years is impressive. It starts with the Nordstrom senior management’s focus on inventory control as a driver of profit growth via lower inventory carrying costs and avoiding restrictive credit covenants. With great systems, combined with an unusually talented buying and product sourcing group, Nordstrom continues to increase sales with less inventory. Most department stores lack the focus and the tools to manage inventory effectively. Plus, many “bought” gross margin by agreeing to ever-growing buy commitments from suppliers in exchange for season-saving margin checks. The result is an ever-growing hangover of unsaleable merchandise sitting in stores and clearance outlets. This is one of the reasons others have succumbed bankruptcies and liquidation. Nordstrom has the right formula and it can be learned and implemented elsewhere.