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Nordstrom has a spectacular story to tell about new technology that enabled the retailer to embrace its traditions of customer service and unique assortments while shrinking inventory and dramatically improving margins and sales per square foot.
Speaking to Wall Street analysts at the A.G. Edwards conference in Coral Gables, Fla., last month, executive vice president and chief financial officer Michael G. Koppel described how the company has enhanced performance since 1999 with the help of new information systems in every aspect of its business.
“Our company for a long time hadn’t been known for technology,” Koppel said. “Our folks have adapted very nicely to this.” In some areas, the returns have been higher than Nordstrom expected, he said.
Since 2002, the company has revamped its behind-the-scenes operations and sales floor with nine new pieces of software, much of it from Oracle. The overall goals were to improve the customer experience and optimize operations.
“Our sales per square foot are like a specialty retailer, yet our infrastructure is like a department store retailer,” Koppel said.
Sales per square foot increased to $370 in 2005 from $321 in 2001. (Figures for 2005 are estimates, as the retailer has not yet filed earnings.) Gross margin as a percent of sales grew to 36.6 percent last year from 32.9 percent in 2001. Meanwhile, selling, general and administrative expenses as a percent of sales decreased to 27.2 percent from 30.3 percent. As a result, earnings before taxes grew to 11.2 percent of sales in 2005 from 3.7 percent of sales in 2001.
The results reflect improved product selection and inventory discipline, as well as better cost controls, Koppel said.
The company automated its warehouse operations in 2002 with software from Manhattan Associates. The software cut two days out of Nordstrom’s supply chain and reduced warehouse labor costs by 45 percent. It also trimmed the cost of handling for each unit by 10 percent, Koppel said.
The next year, the company installed perpetual inventory software from Retek, now owned by Oracle, which let it know how every stockkeeping unit was performing at each location. It also managed markdowns and replenishment. To date, the system has benefited Nordstrom with an increase in gross margin of 300 basis points and 32 consecutive months of positive same-store sales.
In 2004, the company spent more than $100 million on a new point-of-sale system, which includes hardware from Fujitsu and internally developed software. The new POS system has reduced transaction time and allowed sales associates to access the Nordstrom Web site. They can look up any sku on the system and send it directly to any address. They can also see records of inventory transfers.The system has enabled the company to cross-dock 80 percent of transfers and customer shipments though its warehouses for speedier deliveries. Like many other retailers, Nordstrom now uses vendor tickets so it can look up prices, he said.
The new system also supports Personal Book, clientele software from Blue Martini that helps sales associates manage their contact with customers, such as tracking alterations, special requests and birthdays. The retailer installed the software in 2004, and while it is “tough to say” exactly what the results have been, Koppel said, sales have increased in stores where the software is used frequently, and good customers have increased their spend. More salespeople are using the software, and “we keep sharing winning stories, showing that those who are using it are having the best performance,” he said.
Nordstrom has always recognized sales associates who sell $1 million or more a year, and the number increased to 80 last year from 30 in 2004. “If you can give people the tools to improve the customer relationship, they’ll do better and better,” Koppel said.
Last year, Nordstrom added replenishment optimization from Oracle (Retek) and markdown optimization from Oracle (ProfitLogic). The former recommends optimum replenishment scenarios and has allowed the company to increase its percentage of in-stocks by 500 basis points. It has also increased sales of replenished goods by 8 percent on 3 percent less inventory. The company has not yet seen results from ProfitLogic, but expects it to help improve margins, Koppel said.
In the past few years, the retailer has installed financial and human resources systems from Oracle as well as a management dashboard from MicroStrategy. (The dashboard lets executives see company financials at a glance.) All of these have helped Nordstrom improve its controls and helped save money. “One of my challenges has been to reduce the 12,000 reports we have flying around the company,” Koppel said. “[The dashboard] has been a great help.”
Years ago, Nordstrom had buyers at each store, and became known for unique assortments with a point of view. Over time, as the company grew, that approach was not cost-efficient. However, “what technology has allowed us to do is look back and target the customer,” he said. Over the next two years, the company plans to enable sku-level planning and weekly merchandise planning with software from Oracle (Retek). The company expects that the software will let it modify plans with hot trends and increase sales and margins. The company also plans to integrate its online and store inventory systems.
In the meantime, Nordstrom retains flexibility in an open-to-buy that lets merchants seek out unique vendors and jump on hot items, he said.
“While we were putting all this technology in we can’t lose sight that what matters is giving merchants the flexibility to find what’s hot,” Koppel said.