Nordstrom Inc. announced on March 2 that it would 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 famous retailer struggling with the countercurrents of a shift to digital shopping , the worst inflation in four decades, higher interest rates and ongoing concerns that the global economy is heading into recession.
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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 2023 earnings outlook, thanks in part to projected savings from the closure of its six and seven Nordstrom Rack Discounter department stores in Canada. Around 2,500 employees lose their jobs.
Canada accounts for less than three percent of Nordstrom’s sales, according to Bloomberg News.
“We regularly review every aspect of our business to ensure we are equipped for success,” CEO Erik Nordstrom said in a statement. “We entered Canada in 2014 with a plan to establish and maintain a long-term business there. Despite our best efforts, we do not see a realistic path to profitability for the Canadian business.”
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In the quarter, which included key shopping holiday weeks, the company’s overall sales fell more than four percent compared to the same period last year.
The retailer said that while closing its Canadian stores would mean a net loss of $400 million in total sales in 2023, it would increase earnings before interest and taxes by $35 million.
The 13 Canadian brick-and-mortar stores are expected to close by the end of June. The company has already taken the e-commerce site offline. Customers can no longer purchase products online, and Nordstrom will continue to accept returns and in-store exchanges through March 17, after which all sales are final, according to the website at Nordstrom.ca.
Those who ordered online before March 2nd will still receive them, but tracking information will no longer be provided.
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Nordstrom credit cards will also be discontinued.
Blame the internet
Nordstrom’s decision to pull out of Canada is the latest example of a traditional retailer struggling to find its place in the digital age. Technology and the rise of e-commerce continue to disrupt the broader retail sector, along with changing consumer behavior.
E-commerce now accounts for about 7 percent of total retail sales in Canada, compared to just under 2 percent in 2016 when Statistics Canada began tracking online sales from retailers with physical locations.
The department store business model was “very strong” a few decades ago, but as people get used to online shopping, it’s becoming less enticing to wander through convenience stores, said Simeon Siegel, an analyst at BMO Capital Markets.
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“In the past, a department store was based on convenience and curation. The problem is that there’s nothing more convenient than shopping online in the comfort of your own living room,” Siegel said.
This is forcing companies to focus on the curation aspect of the products they sell while trying to solve the problem of what a profitable department store looks like in the digital age, Siegel added.
“As companies generally focus on figuring out how big they should be, subsidiary companies and subsidiary regions are under a lot of scrutiny,” he said. “When the core of your business is more challenging, it’s easier to stem the bleeding from peripheral areas of the business.”
economic factors
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The COVID-19 pandemic has exacerbated the headwinds and disruptions retailers have been facing, 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 difficult in Canada right now,” he said.
For the past two quarters, Nordstrom’s revenue has been below pre-COVID levels. The company said that lower consumer spending due to high inflation and high interest rates hit the return on sales.
Inflation is slowing in Canada, but prices are still rising faster than incomes. Canadians are still shopping, illustrated by a rise in retail sales in December and an estimated rebound in January, but the sectors that drove this growth were auto and parts dealers and convenience stores.
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“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. “Realizing that these (customers) are feeling the pressure from consumers doesn’t negate the fact that they still need to buy clothes.”
Nordstrom’s footprint was too small
With 13 stores primarily concentrated in or near Canada’s urban centers, Nordstrom likely lacked a presence large enough to be memorable when shoppers sat down at their computers to browse merchandise, it said sober man
Imagine a person in a small town who might want to buy a product on Amazon. If that person isn’t satisfied, they might consider checking out Walmart or Canadian Tire simply because there are hundreds of these stores across the country. “The reason for these return visits is because these brands are in the minds of Canadian consumers.”
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Additionally, fewer brick-and-mortar locations tend to indicate a company’s e-commerce capabilities are less robust than the world’s Amazons, and inventory is more limited, he said.
Also, Canada’s population is about 10 times smaller than that of the United States, a headwind for companies used to exploiting market size.
“Nordstrom needs to figure out where they are best positioned to try to capitalize and avoid all of the challenges that department store retailers face today,” Siegel said.
Nordstrom’s landlords are out of luck
For mall operators like Cadillac Fairview Corp. Ltd., Ivanhoé Cambridge and Oxford Properties, the departure of Nordstrom will result in lost rent and vacancy. In the Toronto area alone, the Canadian division occupies six storefronts. Calgary and Ottawa host two locations, with Edmonton and British Columbia’s Langley and Vancouver each housing a branch.
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“Regardless of whether there’s another retailer in the US or not, another retailer could come from Europe or maybe even from Asia,” said Altus Group’s Ray Wong. “We’ll have to see if another retailer sees this opportunity to expand into Canada.”
However, the opportunity will come at a cost in a market where success cannot be guaranteed.
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“To get it ready for the next tenant, it could cost anywhere from $80 to $100 per square foot for new paneling, HVAC, and wall electrical isolation,” Wong said. “It can get a bit more expensive, especially if you have to reconfigure the mall itself to accommodate customer traffic — it can cost anywhere from $80 to $120 per square foot to prepare it for other types of use.”
If the renovation affects the mall’s corridor, the cost can increase to $300 per square foot.
“These are not small numbers, especially at Nordstrom’s size,” Wong said.
