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How Nordstrom Is Benefiting From Direct-to-Consumer Brands

If you want to buy a pair of pants from popular clothier Everlane, there are only two ways to do so -- direct from the company (through its popular website or one of its six physical locations) or at Nordstrom (NYSE: JWN).

Direct-to-consumer, or DTC, has become a critical retail trend and a challenge for many traditional retailers. But Nordstrom is facing this challenge head on by embracing the channel and creating partnerships to benefit from it.

Why DTC?

Many companies have started to favor the direct-to-consumer approach, which is beneficial for several reasons:

  • Cutting out the middleman who's cutting into your profits
  • Better connections with your customers, learning from them in the process
  • Quickly expanding your mindshare and getting your name out to the world
  • Controlling your brand messaging and story

Image source: Nordstrom.

Many companies, such as Warby Parker and Everlane, started out with DTC models, while other companies, such as Apple and Nike, are moving their businesses in that direction and profiting from the transition.

Using a trend that's set up against it

By design, DTC is the antithesis of the wholesale-retail relationship. A McKinsey report discussed the rise of direct-to-consumer as a retail trend and how traditional retailers can respond to the new environment. One recommendation is to "rethink assortments and product offerings."

Nordstrom co-president Erik Nordstrom echoed this idea during the third-quarter earnings call when he said, "Our favorable inventory position allows us to be opportunistic in the marketplace and leads to having a good flow of new product for customers to discover." The company has been focused on carefully managing its inventory with turnover increasing for eight consecutive quarters, and inventory levels down 2.7% year over year as the company entered the holiday shopping season.

In the third quarter, full-price revenue fell 4.1% year over year, while off-price revenue was up 1.2% -- the company is trying curate its selection to be compelling for customers to buy at full price. CFO Anne Bramman added, "As we rebalance our merchandise assortment, we are increasing depth in key items in full price."

Why DTC brands work with Nordstrom

Nordstrom had the innovative solution to entice some of the most popular DTC-only brands to sell through its powerful channels. The brands have greater control over the customer experience with small in-store boutiques than they would in a typical wholesale-retail setup, combined with access to a larger customer base.

"It's been a true partnership, as Nordstrom shares our passion for putting community and brand values first," said Michelle Cordeiro Grant, founder and CEO of LIVELY, an activewear brand.

Erik Nordstrom elaborated on how the company approaches these collaborations during a conference last April: "I will say it's one of the most important things we do, is to be the partner of choice, the retail partner of choice for these up-and-coming brands. And often, even in our business, these brands are smaller companies. They're fast rising. They come on the scene, and we can be a pretty big partner for them. So how we respond really has to be flexible. Now what are the needs of this brand? How can we have a win-win and continue to enhance our reputation of being a partner of choice?"

Other DTC brands Nordstrom has partnered with include Glossier, Charlotte Tilbury, Sezane, and Reformation.

Creating the right platform

The person behind many of these partnerships is Nordstrom's vice president of creative projects Olivia Kim who "focuses on creating energy, excitement, a sense of discovery and a bit of disruption through engaging and unique shopping experiences at Nordstrom, both in-stores and online," according to the company's website. In other words, it's the opposite of business as usual, and that appeals to many of these companies that have challenged the rules of retail since their inception.

One of her projects is a shop that changes its merchandise monthly, often offering exclusives. Sometimes, it works around a theme, and other times, it offers customers a branding experience for a particular company.

Nordstrom, like other retailers, saw sales decline in 2019, and the company's share price fell 12% for the full year. However, it has weathered the retail storm better than competitors such as Macy's, which suffered even greater losses, is shuttering stores, and saw its share price lose nearly half of its value last year.

Nordstrom continues to adapt in a fast-changing retail environment, and this focus on the DTC retail trend is just one area where the company is rising up to meet modern consumers' needs.

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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Nike. The Motley Fool recommends Nordstrom. The Motley Fool has a disclosure policy.


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