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Nordstrom Inc. doesn’t acquire much and, when it does, those acquisitions take time to marinate.
This story first appeared in the August 24, 2012 issue of WWD. Subscribe Today.
The department store chain ventured outside its four-wall comfort zone in February 2011 by purchasing flash-sale pioneer HauteLook for $270 million, and some financial analysts have concluded that it spent too much to do so. But Nordstrom and HauteLook assert the mind meld between retail’s odd couple — one, a 111-year-old risk-adverse, personal service-driven company trying to sort out its digital role, and the other, a nimble Web outfit that carved out a California-casual niche when the recession thrust online fashion deals center stage — has just begun to bear fruit.
“It’s interesting and similar to buying a house. You literally go visit something three or four times, and then you make this big purchase. Then you move in it, and you kind of start to understand how the light hits the house, how things move in the house and where you want things,” said Adam Bernhard, chief executive officer and founder of HauteLook.
Moving from analogy to reality, he continued, “It took about six to nine months before we really started to see where the synergies existed. Nothing came out of the gate, but now — I think [more than] 12 months later — we’re really starting to see the two companies understand where the integration is going to be possible.”
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Like most traditional department store giants, Nordstrom feels it has to get younger and digitally shrewd. The acquisition of HauteLook, whose members average 30 years in age with an annual household income of more than $75,000, and early integration efforts are an attempt at both.
“We may have done a good job over the years with the Baby Boomer generation, but we have also got to figure out how to be relevant to the Millennial customer, and HauteLook has built a business on figuring that out,” said Nordstrom Direct president Jamie Nordstrom.
Marketing initiatives have been geared toward getting the HauteLook shopper to go to Nordstrom stores and getting Nordstrom shoppers to join HauteLook. Many of those initiatives have concentrated on HauteLook and Nordstrom Rack, the off-price division that is expected by yearend to have 119 units and to exceed full-price Nordstrom’s 117 stores. For example, HauteLook prompted customers on April 19 to enter a contest via Facebook to win Nordstrom Rack shopping sprees and received 20,000 entrants in four days. Later that month, from April 27 to 29, HauteLook put 175,000 inserts in bags at 40 Nordstrom Rack stores in California, Washington and Oregon offering discounts to Rack customers who signed up for HauteLook.
Nordstrom said, “They talk to customers who are rabid fashion fans on a daily basis. Our ability to get Nordstrom into that conversation has driven some meaningful results.”
Put more simply, Bernhard declared, “We are doing a very good job of moving our customers to Nordstrom.”
In addition to customer integration, HauteLook has been integrated into Nordstrom’s buying apparatus and supply chain. Bernhard noted that Nordstrom Rack buyers have been placed in HauteLook’s offices in Los Angeles and New York, where it has 300 and 25 employees, respectively, providing “us exposure to a lot more product.”
“We have the opportunity to participate in purchases that they’re doing,” he said. Whatever doesn’t sell on HauteLook often winds up at Nordstrom Rack stores.
HauteLook has also become Nordstrom’s new-brand testing ground. Last September, for example, the site teamed with makeup brand Lorac for two exclusive eye shadow palettes and sold thousands of the palettes in a day. The sales convinced Nordstrom, otherwise unlikely to take a chance on a small, unproven vendor, that Lorac would work in Nordstrom Rack. This September, HauteLook will offer another exclusive palette for $14 that will be made available in all Nordstrom Rack doors for a limited period.
“When you are able to introduce a new brand to customers through the flash-sale channel, they are much more likely to go buy that brand at regular price in a different channel. Certainly, brands that we work with understand that,” said Nordstrom.
Segueing to bigger brands, he highlighted that Nordstrom’s ability to provide access to flash-sale, full-price and off-price channels is an asset. “We have really been focused on our biggest brands and having the conversation with them around all the different ways we can partner with them,” he said. “We are able to be that one-stop shop for vendors.”
At the Rack, Leah Vermulen, a senior vice president at Tiburon Research Group, saw the retailer’s connection to HauteLook make a difference in the selection. “It was very beneficial to build relationships outside of their core relationship structure. It has certainly elevated the Rack’s offering,” she said. However, she cautioned that in her view, the quality of merchandise on HauteLook has diminished as competition among flash-sale Web sites has risen for the best goods. “There is not enough desired merchandise to go around,” claimed Vermulen.
Bernhard countered, “We have not had a problem getting the right supply.”
Although the flash-sale phenomenon was fueled by massive excess inventory during the recession, he contended the recovering economy produces its share of excess — a share that HauteLook believes it has a better chance at securing today because of its relationship with Nordstrom and its resilience as numerous other deal sites have failed. “A brand has a model built upon a percentage of their business in excess. As their business gets better, that percentage could stay the same, but it still means that there’s an increase in excess,” he explained.
Bernhard estimated that 80 percent of HauteLook’s merchandise is “opportunistic” excess, while the remaining 20 percent he dubbed “planned” excess intended for flash sales.
Since the Nordstrom purchase, HauteLook’s membership has grown exponentially. It had 4 million members at the outset of 2011, was up to 7.5 million at the end of the year, and has reached around 9 million this year, which Bernhard said is the largest membership in the online flash-sale sector. “We’re still acquiring members at the same rate that we used to — even greater,” he said. “We have not seen the acquisition price of those members go up in a significant way. Until we start seeing those types of things, we have a long runway still to go.”
Nordstrom’s support has buoyed HauteLook’s growth. The site began advertising on television in February with a budget Bernhard disclosed was in the seven digits and, pleased with the results, is vetting deals to incorporate its brand deeper into television shows this fall. “We had the comfort level that, with Nordstrom behind us, we had the funds available to do this type of promotion, and we’re continuing to leverage that,” said Bernhard.
HauteLook is leveraging Nordstrom’s abilities behind the scenes as well. The company is building a 750,000-square-foot, state-of-the-art fulfillment center. “We ship hundreds of millions of dollars worth of goods, and we need to have the expertise [to do so]. Having expertise from a company with the size and knowledge of Nordstrom will allow us to have a better experience for our members, which is going to be the difference between winning and losing,” said Bernhard, who stressed: “The moat is getting deeper between the haves and the have-nots in the private-sale business.”
Women’s is HauteLook’s single biggest category, constituting 40 percent of sales. Home and footwear are vying to be the second biggest category. Men’s is HauteLook’s fastest-growing category, but beauty and shoes are experiencing strong growth, too. “Our shoe business has doubled in the last nine months. A lot of that is due to the relationship that Nordstrom has with the shoe community. They’re known as the big shoe store in America, so we have been able to really leverage that,” said Bernhard.
HauteLook stopped travel and service deals following the Nordstrom acquisition to home in on the core strengths it shares with the retailer. Across various categories, HauteLook runs 20 to 25 new deal events daily, roughly double the number of deals it was running a year ago. Discounts are mostly between 50 to 75 percent off retail prices.
“We’ve narrowed the focus of what we offer, but in those categories [we do have], we want to make sure that we’re offering a broader spectrum,” said Bernhard.
HauteLook is making moves to keep the momentum in beauty and men’s going. In the fall, the site will launch a beauty sampling program tied to Nordstrom’s beauty department, and has tweaked the look of its men’s sections to enhance their masculinity. Based on Nordstrom’s online experience, HauteLook even decided in March to lop off the tops of male models’ heads in pictures displaying clothes. “Nordstrom intelligence that they had done over the years had told them that men don’t necessarily want to see the faces. Women want to see them,” said Bernhard.
The growth in the men’s business has influenced Nordstrom throughout its Web portfolio —the retailer was part of a $16.4 million round of funding for online men’s brand Bonobos and has partnered with GQ to showcase men’s products picked by the magazine’s editors. HauteLook’s figures underscore why. Bernhard said that 60 percent of purchases for men used to be made by women, and men made 40 percent, but the reverse is true now. About six months ago, he said, 6 to 8 percent of HauteLook’s database was men, and that has increased to 10 to 12 percent. HauteLook, of course, is the preferred flash-sale choice for Bonobos.
In both its men’s and women’s businesses, Nordstrom maintains the value of HauteLook is that it provides a platform for experimentation. “With Nordstrom and nordstrom.com, it is a big ship, and we are appropriately protective of our brand. We are always maybe a little hesitant to try out-of-the-box things, where with HauteLook, that’s always what it is about. That alone adds a ton of value to what we are doing at Nordstrom and will continue to pay dividends for a long time,” said Nordstrom.
In its experimentation, HauteLook has been paying a lot of attention to personalization and mobile. Already, members receive tailored e-mails depending on what brands and categories interest them, but personalization can go much further. “If we can get the formula right where we’re delivering you what you want to see.…I can add more events without adding more noise,” said Bernhard.
Concerning mobile, he said: “There is going to be a large percentage of people who always come through the e-mail, but we are actively focused on getting out of the in-box.” Twenty-five percent of HauteLook’s weekday traffic and 25 to 40 percent of its weekend traffic is from customers using mobile devices.
While Bernhard touts mobile, he is less excited by commerce on social media Web sites. In December 2010, HauteLook tried a sales event with Diane von Furstenberg in which merchandise was exclusively sold on Facebook. In the months since, HauteLook has done 15 other sales events on Facebook in conjunction with its Web site, but hasn’t done additional sales events exclusively on Facebook.
“People don’t go to Facebook to shop. They go to Facebook to see what their friends are doing and to post what they’re doing,” said Bernhard. He argued the same goes for Pinterest. “I don’t believe that people want to go to Pinterest to buy things,” he said.
That kind of Internet knowledge may be helpful to Nordstrom, but Rob Wilson, president of Tiburon Research Group, suggested it doesn’t justify HauteLook’s purchase price, which was $180 million in stock and earn-out payments originally approximated at $90 million over three years. Nordstrom settled the earn-outs with a payment of $30 million last year. The earn-out settlement is “an admission in my view that it was a disaster from a financial perspective, and that is very quick for them to have come to that realization,” said Wilson of HauteLook, adding: “My guess is that it is going to be a small part of Nordstrom for many years to come, but my gut tells me it won’t be a material driver of their top line or bottom line.”
During its fourth-quarter 2011 conference call, Nordstrom executive vice president and chief financial officer Michael Koppel said HauteLook dragged down earnings by 23 cents, 3 cents more than Nordstrom anticipated, or in the neighborhood of $50 million. Next year, Koppel forecast the pull on earnings would be half that amount. Despite the drag, he projected HauteLook’s revenues would increase 60 percent this year, a rate similar to last year. HauteLook generated an estimated $150 million in 2011 revenues. “We’re going to continue to invest in that business and, hopefully, over the next few years, see some more profitability there,” said Koppel.
In the first quarter ended April 28, Nordstrom reiterated it expects HauteLook to grow by 50 to 60 percent this year, although its e-commerce investments in technology and services such as free shipping are cutting into profit margins.
Bernhard and Jamie Nordstrom defended the price the retailer paid for HauteLook. “Our company is worth a lot more than it was prior to the acquisition if you look at the competitive landscape and the evaluations of some other people in the private-sales space. I think it was a fair deal for all,” said Bernhard.
Nordstrom said, “We feel very good about the return we are going to get out of the investment and the long-term prospects of HauteLook.”
Speaking generally about flash sales, he stressed: “This is not a fad. This is something that clearly has a lot of growth potential, and customers are going to want to shop this way for a long time.”
Craig Johnson, president of Customer Growth Partners, acknowledged Nordstrom may have overpaid for HauteLook, but described it as a “very savvy and forward-looking move” for the company because it sends a cultural signal to “an otherwise somewhat conservative and homegrown organization that innovation and outside ideas will be welcome and nurtured.
“Haute is still relatively small in the overall scheme of things, but is ‘fighting above its weight class.’ Its best days are ahead of it,” said Johnson.
Certainly, the HauteLook deal hasn’t scared Nordstrom away from the online sector. The retailer is planning to invest $140 million this year and $1 billion over the next five years in its online operations. Revenues from Nordstrom Direct rose 29.5 percent last year to an estimated $913 million. (Nordstrom did not break out revenues from its Direct division last year, and the $913 million figure is calculated using the most recent growth rates and past revenues disclosed for the division.)
The retailer made three online investments last year, including HauteLook, which amounts to more deals than it had done in any recent decade, and is scouting future deals to boost its digital presence.
“If I had to predict, I’d say you probably will see us make more investments like that, but think about it in terms of capabilities and how we can improve our ability to serve customers online because that’s where we think the growth is,” said Nordstrom.