Why Nordstrom has gone all-in on DTC brands

There was a time when, in order to become known among consumers, a brand needed to land in a department store. But as consumers sought out alternative channels to discover products, and brands proved it was possible to build a following exclusively online, the partnerships appeared less critical.

Now, Nordstrom is the one finding value in housing digitally native brands within its stores.

The department store in 2012 indicated its growing interest in online retailers when it made a $16.4 million minority investment into DTC menswear brand Bonobos. In conjunction with the deal, the brand would be sold on Nordstrom's website as well as 20 of its full-line stores — marking the first time Bonobos would be sold in a physical setting outside its New York showroom-style store.

The Bonobos tie-up was among the first of Nordstrom's "full throttle" direct-to-consumer partnerships, according to Shawn Grain Carter, professor of fashion business management at the Fashion Institute of Technology.

Since then, the department store has inked partnerships with some of the hottest DTC brands in the sector from Away and Thinx, to Kim Kardashian West's shapewear brand Skims.

In order to survive, broadening its customer base is key

The 120-year-old department store's primary customer falls within the Gen X or baby boomer demographics, "so, in order to target and expand their consumer base, Nordstrom has created these kinds of strategic partnerships," Carter said.

Gen Z and millennials have been more vocal about their desire to shop with brands that are environmentally sustainable as well as those that foster corporate social responsibility.

To that end, Nordstrom has forged partnerships with Everlane and Reformation, two brands that have baked sustainability into their DNA.

"These partnerships — as strategic as they are — attempt to do it in a way that gives the brand an opportunity to have a broader customer base," Carter said.

As more digitally native retailers make their public debut on the stock market, and reveal their financial information that was once private, it's become clear how difficult it is to sell goods exclusively online and make a profit. Chewy and Casper have yet to reach profitability since going public in 2019 and 2020, respectively. And up until this past year when pandemic-induced spending on home picked up, Wayfair notched growing losses quarter after quarter since going public in 2014.

The high advertising and marketing costs associated with acquiring customers online has pushed DTC brands offline through temporary pop-ups, permanent locations or partnerships with traditional retailers. In addition to Nordstrom, many retailers like Walmart and Target have forged deals with these brands, which Michael Felice, a principal in the consumer and media practice of Kearney, argues is a "broader play" for some DTCs. But what Nordstrom can offer to these brands is placement among a highly curated selection of products.

"What Nordstrom gets is an opportunity to grow with these brands that really target Gen Z and millennials, and to bring them in, in a way that they can do an enhanced consumer engagement experience," Carter added. "That demographic is not used to going in a department store within a mall to shop. That's not part of their socialization."

Because younger consumers are so adept at shopping online for goods, attracting these shoppers into its physical stores allows Nordstrom to potentially win them over by doing what it knows best: customer service.

"What Nordstrom wants to differentiate is simply, 'How do we capture more ... market share? And how do we capture a better [lifetime value] by having a younger customer that grows with our brand over the next five, six, seven decades?'" Carter added.

Department stores' place of relevancy — especially among those younger consumers it's seeking — has changed over the years. Before, for a brand to become known, it needed to be placed within a department store because that's where the consumer was shopping. As consumers sought out other channels and venues to spend their money, those retailers operating in the sector had to fight to regain that importance to consumers.

"Relevance is key to fashion," Carter says. "What has shifted is the designers are not in control, the consumer is in control. That's a huge shift. Nobody cared about influencers 10 years ago. You have influencers that have more of a say in fashion now than the fashion editors. Nordstrom is paying close attention and saying, 'Look, we've got to go with younger customers.' And the younger customers are saying our peers have more value in terms of merchandise assortment, and which brands have relevance, than a fashion editor and a fashion designer."

Nordstrom wins on exclusives

While bringing a popular direct-to-consumer brand into some locations is already enough to drive interest and traffic, some of its partnerships have gone one step further by offering exclusive products only sold through Nordstrom.

Warby Parker in 2015 teamed up with Nordstrom for a month-long pop-up in six of its stores. While the partnership included selling a "curated selection of frames" in the pop-up, the DTC brand also launched four sunglass styles that would exclusively be sold in Nordstrom.

"Nordstrom, in order to survive, cannot just cater to the parents. They have to cater to these young people who will grow with them. Otherwise, it's a missed opportunity for revenue and profit."

Shawn Grain Carter

Professor of fashion business management at the Fashion Institute of Technology

And Glossier in late 2019 tapped Nordstrom when it launched its perfume. The fragrance, Glossier You, was available in seven of the department store's locations in pop-up style venues. Each location featured a team of Glossier associates.

Most recently, Boy Smells partnered with Nordstrom to house its latest product launch: fragrances. The brand last week debuted its Cologne de Parfum collection, which features both masculine and femanine olfactive notes, further promoting Boy Smells' "genderful" ethos. Beginning April 8, Nordstrom will become the exclusive retailer outside of the brand's own website selling the product until September.

"We see Nordstrom as being unique in the US department store landscape, and as a brand we share similar values of diversity and inclusion," Boy Smells creator and co-founder Matthew Herman told Retail Dive by email. "We love that [Nordstrom] is forward thinking which I believe is why they've remained relevant for so many years."

The perfume counter has long been a fixture in department stores — often separating men's fragrances from women's. For Herman, having Boy Smells' product sold within Nordstrom means providing a more inclusive selection of products to consumers so that they can be their authentic selves.

"Given [Nordstrom's] expression of progressive brands, many of them mission driven, it's apparent that they cater to diversity and inclusion, which is our sweet spot," he said. "We are not just a company that makes beautiful scents, we have the opportunity to make products that allow consumers to live in a deeper sense of authenticity, with products made [for] more modern identities that don't fit into neat and simple boxes. It is very important that all retailers start embracing brands that stand for the way future consumers identify. It's just smart business. To know where things are headed."

Exclusives generate interest among consumers and create a sense of scarcity for the brands' products. They also help protect the brand from stepping on its own website traffic by selling through Nordstrom.

"There has to be a reason to go to Nordstrom to get it," Kearney's Felice said. "Therefore, the exclusive creates the excitement around the brand, which is good for the DTC and good for the retailer to bring traffic into the store."

It's become clearer that Nordstrom's relationship with digitally native brands has become more important to its overall strategy.

In 2013, Nordstrom brought on Opening Ceremony's Olivia Kim to direct its Creative Projects business. Under Kim, the department store launched its "Pop-In@Nordstrom" concept, an ongoing series of pop-up shops with rotating brands. The pop-ups will either host a variety of brands centered around a single theme, or bring in a single brand to showcase. Brand partnerships have included a number of DTC brands like Warby Parker, Goop and Casper.

Nordstrom also has an extensive partnership with rental company Rent the Runway. Select stores in Los Angeles in 2019 began serving as order pickup and drop-off locations for Rent the Runway customers. The stores not only featured drop-off boxes in those stores, but also try-on areas, tailoring services and gift wrapping, among other things.

Rent the Runway had already had drop-off locations at some WeWork locations across the country. But what made the Nordstrom-Rent the Runway tie-up different was that the two brands' customer bases already were closely aligned.

Now, after Rent the Runway announced in August that it's permanently closing its owned retail stores, the Nordstrom drop-off areas serve as one of the few physical touchpoints the brand has with customers.

"[Nordstrom's] got a very robust diversification strategy. And why? Because younger people are buying this stuff. They're buying secondhand clothes, they're shopping at vintage, they're shopping for resale and they're shopping different subscription services," Carter said. "So Nordstrom, in order to survive, cannot just cater to the parents. They have to cater to these young people who will grow with them. Otherwise, it's a missed opportunity for revenue and profit."

But many of the partnerships also complement Nordstrom's existing offering. In November, Casper began selling its mattress and sleep accessories in 31 of Nordstrom's full-line stores, as well as on its website. The tie-up marked the DTC mattress brand's 23rd retail partnership, which also include Target, Costco and Sam's Club.

"What Nordstrom is doing is saying, 'We have everything for your lifestyle. So if you live in an apartment, or if you live in a rental or if you own your home, you can come to Nordstrom and know that we have what you need,'" Carter said.

Post-pandemic, partnerships will be critical to driving traffic back to stores

Nordstrom was particularly hard hit when the pandemic took hold. Like many nonessential retailers, it was forced to temporarily shutter its stores back in the spring. Because of this, its foot traffic to full-line stores plunged 98.3% and 93.3% year over year in April and May, respectively. As stores reopened, traffic improved slightly — down 44.7%, 35% and 34.4% in November, December and January, according to data from Placer.ai.

The retailer also heavily carries apparel, a category that has faced months of declines since last March as consumers have had less of a need to purchase clothes for work and special occasions. Nordstrom last week reported that net sales fell 20% year over year to $3.6 billion during its all-important holiday quarter, while sales at its full-line business in particular fell 19% from last year to reach $2.5 billion. E-commerce in the quarter represented the majority of sales.

But as the vaccine becomes more widely available, consumers are starting to plan for life after COVID. Finding ways to lure shoppers back into stores will become increasingly important to Nordstrom as it fights for consumer's dollars against things like experiences and eating out.

"I think [the partnerships] will end up being a core part of the strategy going forward," said David Ritter, managing director at Alvarez & Marsal Consumer and Retail Group. "I do expect mall traffic to bounce back to a certain extent, but I'm not sure we'll ever go back to pre-pandemic levels."