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Nordstrom Inc. announced on March 2 that it will close the Canadian arm of its upscale department store business due to financial losses after nearly a decade in the country, the latest example of a storied retailer struggling to cope with the cross-currents of a shift to digital shopping, the worst inflation in four decades, higher interest rates and persistent concerns that the world economy is heading for recession.
As the story unfolds, here’s what you need to know:
What happened
Nordstrom’s routine quarterly earnings report brought good news for its shareholders, and bad news for its Canadian fans: the company raised its earnings outlook for 2023, thanks in part to the money it predicted it would save by closing its six department stores and seven Nordstrom Rack discount stores in Canada. Around 2,500 employees will lose their jobs.
Canada accounts for less than three percent of Nordstrom’s sales, according to Bloomberg News.
“We regularly review all aspects of our business to ensure we are poised for success,” CEO Erik Nordstrom said in a statement. “We entered Canada in 2014 with a plan to build and maintain a long-term business there. Despite our best efforts, we do not see a realistic path to profitability for the Canadian business.”
In the quarter that included important shopping holiday weeks, the company’s overall sales fell by more than four percent compared to the same period last year.
The retailer said that while closing its Canadian operations would result in a net loss of $400 million in total sales in 2023, earnings before interest and taxes would increase by $35 million.
It said it expects to close the 13 Canadian brick-and-mortar stores by the end of June. The company has already taken its e-commerce website offline. Customers will no longer be able to purchase products online, and Nordstrom will continue in-store returns and exchanges until March 17, after which all sales will be considered final, according to its website at Nordstrom.ca.
Those who placed online orders before March 2nd will still receive them, but tracking information will no longer be provided.
Nordstrom credit cards will also be discontinued.
Blame it on the internet
Nordstrom’s decision to pull out of Canada is the latest example of a legacy retailer struggling to find its place in the digital age. Technology and the rise of e-commerce continue to disrupt the wider retail sector, along with changing consumer behaviour.
E-commerce now accounts for about seven per cent of total retail sales in Canada, compared to just under two per cent in 2016, when Statistics Canada began tracking online sales from retailers with brick-and-mortar locations.
The department store’s business model was “very strong” a few decades ago, but as people become more accustomed to online shopping, walking through department stores has become “less and less compelling,” said Simeon Siegel, an analyst at BMO Capital Markets.
“Historically, a department store was based on convenience and curation. The problem is, there’s nothing more convenient than (shopping) online in your own living room,” Siegel said.
That forces companies to focus on the curation aspect of the products they sell while trying to solve the problem of what a profitable warehouse looks like in the digital age, Siegel added.
“As businesses generally focus on figuring out how big they should be, add-on businesses and add-on regions come under a lot of scrutiny,” he said. “If the core part of your business is more challenging, it becomes an easier decision to make a decision to stop the bleeding from additional parts of the business.”
Economic factors
The COVID-19 pandemic compounded the headwinds and disruptions retailers faced, and the current economic environment has worsened the outlook, said David Soberman, a marketing professor at the University of Toronto.
“The retail environment for apparel retailers … is tough in Canada right now,” he said.
In the last two quarters, Nordstrom’s revenue was below pre-COVID levels. The company said reduced consumer spending, due to high inflation and interest rates, hit the top line.
Inflation is slowing in Canada, but prices are still rising faster than incomes. Canadians are still shopping, exemplified by an increase in retail sales in December and an estimated increase in January, but the sectors driving this growth were auto and parts dealers and general merchandise stores.
“Consumer spending is still happening, and so I think it’s the department stores’ job to make sure they have the best version of the products for their unique (customers),” Siegel said. “Acknowledging that they (customers) feel consumer pressure does not negate the fact that they still need to buy clothes.”
Nordstrom’s footprint was too small
With 13 stores, mostly concentrated in or near Canada’s urban centers, Nordstrom likely lacked a big enough presence to be on top when shoppers sat down at their computers to look for items, Soberman said.
Consider a person in a small town who might want to buy a product from Amazon. If that person isn’t satisfied, they might consider checking out Walmart or Canadian Tire, simply because there are hundreds of these stores in the country. “The reason they got the secondary visits is because these brands are on the minds of Canadian consumers.”
Furthermore, fewer brick-and-mortar locations tend to suggest that a company’s e-commerce capabilities are less robust than Amazon’s in the world, and its inventory is more limited, he said.
Canada’s population is also about 10 times smaller than the US, a headwind for companies accustomed to exploiting market size.
“Nordstrom needs to figure out where they’re best positioned to try to capitalize and to try to avoid all the challenges that exist for department stores today,” Siegel said.
Nordstrom’s landlords are out of luck
For mall operators like Cadillac Fairview Corp. Ltd., Ivanhoé Cambridge and Oxford Properties, Nordstrom’s departure will result in lost rent payments and vacant space. In the Toronto region alone, the Canadian division occupies six retail locations. Calgary and Ottawa are home to two locations with Edmonton and British Columbia’s Langley and Vancouver having one outlet each.
“Whether there’s another dealer out there in the US or not, another dealer could come in from Europe or maybe even Asia,” said Ray Wong of Altus Group. “We’ll have to see if another retailer sees this opportunity to branch out into Canada or not.”
However, the opportunity will have a cost in a market where success cannot be guaranteed.
“To be able to get it ready for the next tenant, it can cost anywhere from $80 to $100 per square foot for new siding, HVAC and electrical separation of walls,” Wong said. “It can get a little more expensive, especially if you need to reconfigure the mall itself to accommodate the circulation of customers — it can cost anywhere from $80 to $120 per square foot to make it ready for other types of use.”
If renovations affect the mall’s corridor, costs could increase to $300 per square foot.
“These are not small numbers, especially with the size of Nordstrom,” Wong said.
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