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Nordstrom to Spend $3.2 Billion on Technology, Supply Chain Upgrades to Compete With Amazon, Macy's

The Seattle-Based Retailer Sees Big Potential in Los Angeles, New York
July 11, 2018
Nordstrom is investing in store upgrades and fulfillment centers to compete with Amazon and Macy's.

Nordstrom Inc. plans to invest $3.2 billion on its supply chain and digital initiatives in the next five years as the department store operator remains cautious about opening full-line stores to compete with online retailer Amazon and traditional rival Macy's Inc.

Nordstrom said it would spend on store upgrades, technology and fulfillment centers as the Seattle-based company ramps up operations in Los Angeles and New York to challenge Amazon as well as the largest U.S. department store chain, Macy's. It expects to have three supply chain facilities in the Los Angeles area by 2019 to provide next-day delivery to customers on the West Coast, executives told investors. Los Angeles is already the company’s top market, generating more than $1 billion in full-price sales annually.

The strategy marks the latest plans by a traditional retailer to counter the challenge posed by online shopping. The retail industry response is likely to affect demand for retail and industrial property across the United States in coming years. Nordstrom and its Nordstrom Rack outlets combined have more than 350 U.S. store sites that could be affected by a strategy shift, while rival Macy's accounts for more than 600 sites.

In New York, Nordstrom opened a men’s shop in Manhattan this past spring and will open a women’s store in the fall of 2019. Ken Worzel, who was hired as the company’s first chief digital officer and president of in May, called New York a "$700 million opportunity." New York is already the company’s top market for online sales.

Nordstrom’s top 10 markets account for 60 percent of sales, but Co-President Erik Nordstrom said the company isn’t in a hurry to open new, full-line stores. Its full-line stores accounted for $10 billion in sales last fiscal year.

"It’s not a surprise to any of us here that the U.S is overstored," Nordstrom told investors. "We’re in a different position."

Nordstrom operates 122 full-line stores in the United States, Canada and Puerto Rico and 239 off-price Nordstrom Rack outlets. By comparison, Macy’s has more than 600 full-line outlets, and rival chain Dillard’s Inc. operates 292 stores.

Nordstrom instead is focusing on its Rack stores as a customer acquisition strategy, with seven new outlets opening by the end of the year, including three in Canada, giving the company six full-line and six Rack stores there. Worzel said Canada represents $1 billion in sales potential, and noted that one-third of Rack shoppers eventually become customers of full-line Nordstrom’s stores.

In a move aimed at connecting the physical and digital shopping environments, the company also said this week that it will open two new merchandise-free "Nordstrom Local" stores in the Los Angeles area where customers can buy merchandise online and pick it up at the curb. Those stores are much smaller than either the full-line or Rack outlets.

Oliver Chen, managing director and senior equity research analyst at New York-based Cowen & Co., said in a research paper that Nordstrom’s digital sales drive growth. Online sales are expected to account for 40 percent of the company’s projected $18 billion in revenue by 2022, up from 26 percent now.

However, Chen cited the poor performance of both full-line stores and the Rack the past six quarters as cause for concern. Sales of women’s apparel at the Rack dropped 4.9 percent in the first quarter of 2018, though Blake Nordstrom cited inventory issues and poor merchandise choices as the reason.

Chen hasn’t yet issued a report based on the investor’s conference where the remarks were made, but in an analysis on July 2 he downgraded the company’s stock and hinted that it might have to close some full-line stores.

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