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Sunday, July 5, 1998 - Page updated at 12:00 AM

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Nordstrom's Management Make-Over -- Zigzagging Profits Have The Company Scrutinizing Every Facet Of Its Business, But Shoppers Are Assured Service Won't Change

Seattle Times Business Reporter

Susan Sauls was tending her jewelry stall in the Pike Place Market a few years ago when a Nordstrom saleswoman walked by. "These are great," she told Sauls, eyeing her sterling-silver Stickpeople earrings and pins. "You ought to contact the buyer at Nordstrom."

Sauls called jewelry buyer Sharon Vipond, who invited her to bring in samples of her little wire figures with their cowboy hats, guitars, bad hair and cheeky attitudes.

Two weeks later, Sauls got her first wholesale order from Nordstrom for 166 pairs of earrings, followed by another order for 1,050 pair.

One Christmas Nordstrom did not carry her jewelry. But Nordstrom salespeople told customers how to find Sauls in the Pike Place Market. "It was like `Miracle on 34th Street.' It was above and beyond the call of duty," she said.

Nordstrom has built its reputation on such examples of individual customer service and one-of-a-kind purchases by sharp-eyed buyers. But as the company has grown, its business has become far more complicated.

Although Sauls was able to sell her jewelry in local Nordstrom stores and through a company catalog, she'd have to call more than a dozen different buyers if she wanted to regularly sell in all of Nordstrom's 67 major stores. That's because Nordstrom traditionally has had local teams of buyers in each of its markets.

While that strategy helped the company pick up quickly on local fashion tastes, it's had more difficulty getting everyone to agree on some important national trends. As happened two years ago, it was slow to bring in some popular fashions its competitors already were stocking.

Meanwhile, the cost of re-creating the Nordstrom image around the country was rising every year. Each time the company opened a new store, it plunked down $1 million or more to bring in a new merchandise-buying team for the area.

The Aug. 21 opening of the new downtown Seattle store will doubtlessly be Nordstrom's glitziest event of the year. But behind the scenes, executives are taking a more sober look at their business. Zig-zagging profits over the past several years have the 97-year-old company scrutinizing every facet of its business - from streamlining its buying and management staff to taking a hard look at the size of its future stores.

When profits fell to $148 million in 1996 after reaching $203 million in 1994, Chairman John Whitacre assembled the company's top executives. "We weren't really going anywhere fast if measured by market value," said Whitacre. The company's stock was mired in the $30- to $40-a-share range for most of the 1990s.

The executives set a goal of tripling Nordstrom's value to around $100 to $120 a share (those numbers don't reflect a recent stock split) by the end of its 100th anniversary in 2001, and boosting its ranking in Fortune magazine's list of most admired U.S. companies from 95th to the top 40. That would put it in the company of such corporate icons as Coca-Cola, Microsoft, Procter & Gamble, Boeing and Shell Oil.

"They are starting to talk about making Nordstrom a world-class company. I never heard that phrase from the prior (third-generation) management," said Daniel Barry, a retail analyst for Merrill Lynch in New York. Whitacre, 45, and the six Nordstrom brothers and cousins in their 30s who serve as the company's co-presidents, took over running the company in 1995.

Nordstrom's current examination is so pervasive and the changes being suggested are so extensive that some liken the effort to Boeing betting the company on a new-generation jetliner.

The retooling comes as Nordstrom is in the vortex of national retail competition. In San Francisco, its 335,000-square-foot store on Market Street is squaring off against Neiman Marcus, Saks Fifth Avenue, scores of upscale boutiques and Macy's West which, when it completes an addition to its Union Square store, will have close to 900,000 square feet of retail space.

The goal: Boost profits without cutting service

To many shoppers, it may seem that Nordstrom already is a stiff competitor and a highly successful business. The stores are tony, stocked with lots of merchandise and served by legions of salespeople.

But to shareholders and others who watch Nordstrom stock, the company's performance bears improvement. Despite stellar sales, profits have been up and down.

In the past 10 years, as it opened 42 new Nordstrom, Rack and Faconnable stores across the nation, sales rocketed from $2.3 billion in 1988 to $4.9 billion last year. With 96 total stores today, sales for 1998 are projected at $5.4 billion. But a critical measure of financial performance - the amount of profit earned before taxes - plummeted from highs of about 8.5 cents for every dollar of merchandise sold in 1988 and 1994 to a low of 5.5 cents in 1996.

To be among the top retail companies in the United States, Nordstrom needs to get that number up to 9 to 10 cents, where other top specialty stores are consistently, said Bill Nordstrom, one of the co-presidents. Last year, Nordstrom's figure was 6.3 cents.

The challenge is this: How can Nordstrom increase profits without cutting into customer service or the depth, breadth and quality of its merchandise? Six months ago, Nordstrom embarked on what it hopes will be the answer: a new lean and mean management strategy it calls "value based management."

Under this plan, the company for the first time was split into nine different business operations. Its major retail stores were divided by geographic region, while other divisions, such as Rack and Faconnable, were made autonomous units. The executives in charge of each will be held accountable for cutting costs and increasing profitability as well as sales.

The change was welcomed by retail stock analysts. As Merrill Lynch's senior vice president Barry put it, "Shareholders now are as important as customers." Proof of this is the recent run-up in Nordstrom stock to as much as $77 a share from $42 in January, an improvement analysts credit to higher profits, the new emphasis on performance and anticipation of a 2-for-1 stock split that took effect Tuesday. Adjusted for the split, the stock now is trading at $38.25 with twice as many shares outstanding.

Over the next few years, as Nordstrom implements changes in each of its new divisions, it would be a mistake to view the company only for the merchandise it puts on its shelves, says Thomas Tashjian, an analyst with Nationsbanc Montgomery Securities in San Francisco.

"The real issues of change are on the thought processes and infrastructure of the company," he said.

The "new Nordstrom"

Doing more with fewer people will be part of the equation. The "new Nordstrom" will employ fewer buyers and fewer upper and middle managers, but Nordstrom executives vow that customers will see little change. They say shoppers will continue to experience all the things they have come to expect: snazzy stores with thousands of pairs of shoes, fashions in a wide range of colors and sizes, piano music, spas, restaurants and all those salespeople.

"If the customer doesn't love the shopping experience, how are we going to create value for the shareholder?" asked Martha Wikstrom, the executive vice president and general manager in charge of Nordstrom's East Coast stores, the first of the nine divisions to try the company's new management approach.

Retail analysts warn against the obvious danger: that in trying to corral costs, Nordstrom might begin to look just like everyone else.

"We want some efficiencies but we don't want them to lose their uniqueness," said Laura Richardson, an analyst with the Pacific Crest Securities research company in Portland. It was individual initiative on the part of Nordstrom buyers that prompted the company to bring in cosmetics such as Hard Candy, Urban Decay and MAC before other department stores caught on to the trend, she noted.

The worry among Nordstrom-watchers is that innovation could be put on hold as the company casts its eye on the bottom line.

"I walked through the downtown (Seattle) store Sunday from stem to stern trying to find something new and hot and I didn't see anything," said J'Amy Owens, president of The Retail Group, a Seattle-based retail-design and consulting company. "I just don't see a lot of wood in the stove. It's time for them to put on a bigger show."

Owens is waiting for the opening of the new downtown Seattle store, which she predicts will be a rebirth for the company in its hometown.

At 380,000 square feet, the new flagship store will be 55 percent larger than Nordstrom's current 35-year-old downtown store.

It will be Nordstrom's largest store, and represents a huge investment. Company executives expect it to generate more than $100 million in annual sales, on par with Nordstrom's biggest stores in California and on the East Coast.

Return policy stays put

With more than 75 percent of its retail-store space now outside the Northwest, the big challenge facing Nordstrom in downtown Seattle and the rest of the country is how to continue to distinguish itself in the face of mounting national competition.

Hanging onto its strengths - customer service and stocking a large selection of merchandise in every color and size - will be key as it embarks on its plan to boost profits.

"We want to hold as sacred our investment in service," said Bill Nordstrom.

Beyond that, "There are no sacred cows," said Jammie Baugh, executive vice president and the Northwest business operations' general manager.

"So much of this company was run successfully on intuition and gut. . . . This value-based management - this process of better study, better information, better decision-making - helps us add fact to gut."

Twenty-five years ago, Baugh noted, a sales clerk might have spent several hours with a top customer in one of Nordstrom's fashion-design departments, even serving her lunch in the fitting room. Now customers are pressed for time; having access to computerized information about their buying preferences prepares a salesperson to serve them more quickly and efficiently.

One thing Nordstrom says it will not change is its no-questions-asked return policy, a costly practice unmatched by few if any major retailers. The Bon Marche recently started limiting returns to 90 days from the date of purchase. Previously it had asked only for a receipt, with no specific time limit.

Though Nordstrom salespeople can lose their commissions, manufacturers can face a variety of expenses and the company itself has to eat costs on returned merchandise, its generous return policy has helped Nordstrom build a loyal customer base. One shopper told of buying a pair of shoes from Nordstrom that didn't have enough arch support. He happened to be wearing them one day as he walked by the downtown Nordstrom. Without a receipt or even a recollection when he had purchased the shoes, he explained the problem to a salesman and walked out with a new, better-fitting pair.

Better inventory tracking

Perhaps more likely than changes in customer service are changes that customers might not immediately recognize. Nordstrom is improving its inventory tracking system, for instance, to allow it to keep daily tabs on what sells and what doesn't. That means poor-selling items can be marked down and cleared out faster, making room for fresh merchandise.

Baugh, Nordstrom's Northwest general manager, said organizational lines within the company also are being clarified, putting more responsibility for merchandising decisions on the shoulders of general managers like herself.

Before, corporate merchandise managers in Seattle determined merchandising and advertising strategies for the company, while regional operations managers were held accountable for the sales results.

Now the corporate merchandising positions have been replaced by divisional merchandise managers who report directly to executives such as Baugh, who also are responsible for store operations in their regions.

"If inventories go up or markdowns are up, the expression that Whitacre uses humorously is you know who to choke. I have no one else to blame but myself."

Whitacre said some middle- and upper-level managers are being asked to take demotions "for the short-term." In return for going back to positions such as department managers, they'll be able to vie for more critical career jobs in the future.

Whitacre did not identify any individuals, but Merrill Lynch's Barry said the process is being handled sensitively. Some employees were promoted too fast as Nordstrom grew rapidly, he said, and they need more experience. The company is talking individually to those affected and while "the mood was down at first," the employees are approaching their work with "the common enthusiasm of a Nordstrom employee," he said in a report he wrote with Nathalie Brochu, a Merrill Lynch assistant vice president.

The company says it is trying to learn to do more with less. "We are looking to lean down the organization. . . . Fewer jobs that are bigger jobs with more senior people is what we're shooting for, especially in merchandising," said Whitacre.

Nordstrom's group of buyers, now about 700, will shrink to around 500, predicts Jennifer Black, an analyst with the Black & Co. research firm in Portland. Under the old way of adding buyers every time Nordstrom opened a new store, that number would have swelled to 1,200 in the next few years, she said.

With fewer buyers purchasing for larger groups of stores, Nordstrom should be able to negotiate better prices and advertising support from manufacturers, said Merrill Lynch's Barry.

Nordstrom suppliers long have complained about having to deal with too many Nordstrom buyers. For example, when Beanie Baby dolls first caught on 2 1/2 years ago, their manufacturer, Ty of Chicago, was getting more than a dozen different orders from Nordstrom buyers around the country. "I think we were driving them a little bit crazy," concedes Co-president Pete Nordstrom. Shipping got so backed up, he says, that he ended up hauling bags of Beanie Babies aboard an airplane to deliver them to one of the Nordstrom stores himself. Nordstrom finally solved the problem by having only two merchandisers place orders for the company.

Nordstrom can also be expected to increase the amount of merchandise it sells under the Nordstrom label and other names, as opposed to national brands. "Private label" merchandise, as it's called, already accounts for about 20 percent of the company's sales. Analysts estimate that its Classiques Entier line is about a $200 million a year business. Nordstrom has the license to manufacture Callaway Golf Apparel and is the exclusive retail outlet in the United States for Faconnable clothing by European designer Albert Goldberg.

Internet sales in the fall

With new operating controls being put in place, the company is in a good position to grow, say analysts.

Even though Nordstrom's stores average close to $400 a square foot in sales, nearly double the industry standard, analysts such as Dean Ramos of the George K. Baum stock brokerage in Kansas City, Mo., see room for improvement. With better inventory management, Nordstrom should be able to devote more space to selling and less to storage. Stores in the future could be smaller in total space but without a loss of display space, he says.

Nordstrom's stores typically have been split 50-50 between selling and non-selling space, according to Barry, the Merrill Lynch vice president. New stores will be able to devote 65 percent of square footage to sales, he predicted.

Nordstrom is only in 22 of the nation's top 50 metropolitan markets today, Barry noted. It could triple its retail stores to more than 200 during the next 10 years without saturating the U.S. market, he said. Barry said he would not be surprised to see Nordstrom announcing its first Canadian stores, in Vancouver or Toronto, by the end of the decade.

Nordstrom will begin Internet sales in the fall. That means Nordstrom merchandise can be on the doorsteps of customers anywhere in the world within two days, said Whitacre.

"I think they are in the midst of the most significant development since they went to California (in 1978)," said stock analyst Ramos. "The changes they are trying to do are big and sweeping. How they execute them is going to tell the tale of whether the company can move from what has been a somewhat inconsistent financial performance to being a top-tier performer in retailing."

Lee Moriwaki's phone message number is 206-464-2320. His e-mail address is: lmoriwaki@seattletimes.com

------------------------ Nordstrom by the numbers ------------------------

Women's apparel is still Nordstrom's mainstay, accounting for 36 percent of its overall sales. Since expanding to California in 1978, the majority of the company's retail space now is outside the Northwest, with California and the East Coast contributing over half the square footage of its full-line stores.

Percentage of 1997 sales by type of merchandise

- - - - - - - - - - - - -.

Women's apparel 36%

- - - - - - - - - - - - -.

Women's accessories 20%

- - - - - - - - - - - - -.

Shoes 20%

- - - - - - - - - - - - -.

Men's apparel 18%

and furnishings

- - - - - - - - - - - - -.

Children's apparel 4%

and accessories

- - - - - - - - - - - - -.

Other 2%

- - - - - - - - - - - - -.

Square footage by market area

- - - - - - - - - - - - - - - - -.

California (1) 4,258,000 (33.8%)

- - - - - - - - - - - - - - - - -.

Northwest (1) 2,692,000 (21.3%)

- - - - - - - - - - - - - - - - -.

Midwest (1) 1,867,000 (14.8%)

- - - - - - - - - - - - - - - - -.

East Coast (1) 2,883,000 (22.9%)

- - - - - - - - - - - - - - - - -.

Rack 857,000 (6.8%)

- - - - - - - - - - - - - - - - -.

Other 57,000 (0.4%)

- - - - - - - - - - - - - - - - -.

------------------- Who runs Nordstrom? -------------------

Key Nordstrom executives and their responsibilities:

1. John Whitacre, chairman, 45. First sole chairman not from Nordstrom family. Oversees all Nordstrom operations.

2. Blake Nordstrom, co-president, 37, responsible for Rack division, restaurant division, community relations, operations.

3. Erik Nordstrom, co-president, 34, men's apparel, Faconnable, Nordstrom Product Group (the unit that produces Nordstrom's own labels), Midwest and Texas retail stores.

4. Peter Nordstrom, co-president, 36, Brass Plum (junior apparel), Kids Wear, Women's Specialized Division, accessories and cosmetics, California retail stores. (Blake, Erik and Peter are the sons of Bruce Nordstrom, a retired co-chairman)

5. Daniel Nordstrom, co-president, 35, shoes, catalog and Internet sales, credit, business and information technology, East Coast stores.

6. William Nordstrom, co-president, 34, finance and strategic planning, human resources, diversity affairs, real estate and store planning, sales promotion. (Daniel and William are the sons of the late James F. Nordstrom, a former co-chairman.)

7. James A. Nordstrom, co-president, 36, women's apparel, women's designer apparel, Northwest retail stores. (James is the son of John Nordstrom, a retired co-chairman.)

8. Jammie Baugh, 44, executive vice president, general manager of Northwest retail stores.

9. Martha (Marty) Wikstrom, 41, executive vice president, general manager of East Coast stores.

10. Robert Middlemas, 41, executive vice president, general manager of Midwest and Texas stores.

11. James O'Neal, 40, executive vice president and general manager of California, Arizona and Nevada divisions.

12. Susan Tabor, 52, executive vice president and general manager of 23 Rack clearance stores.

13. Gail Cottle, 46, executive vice president, general manager of the Nordstrom Product Group.

14. Victoria Dellinger, 38, vice president and general manager of the catalog division, which will include Nordstrom's Internet sales.

15. Jack Irving, 53, executive vice president and general manager of Faconnable, the clothing line by European designer Albert Goldberg.

16. Kevin Knight, 42, president, Nordstrom National Credit Bank, Nordstrom's credit divison.

17. John Goesling, 53, executive vice president and treasurer.

------------------- What's in the works -------------------

Nordstrom is undertaking one of the biggest reviews of its business in company history. It embarked on its "value-based-management" program in January. Here are some of the changes the Seattle-based specialty fashion retailer is making.

Before: The company operated as a single business unit trying to oversee all its stores and product groups from Seattle.

After: Nine autonomous business divisions have been created. Four divisions operate Nordstrom's retail stores in the Northwest, Northeast, Midwest and California. The other five cover Rack stores, Faconnable boutiques, catalog and Internet sales, the Nordstrom Product Group and credit. Each division is held accountable for increasing its own sales and profits and controlling costs.

Before: Decentralized merchandise-buying system, with local buyers in every store.

After: Fewer buying teams and greater use of technology to replenish basic items such as hosiery. Buyers still will be assigned to local stores for more important merchandise such as shoes.

Before: Corporate merchandise managers in Seattle determined merchandising and advertising strategy for the company.

After: Divisional merchandise managers reporting to the general manager in a specific region will determine merchandising strategy for that area.

Before: Nordstrom rapidly promoted people into management ranks as the company grew.

After: Nordstrom is paring back its middle and senior managers, holding out the opportunity for advancement as employees who go back to lower positions gain more experience.

Before: Nordstrom tracked its inventory through piecemeal, monthly reports.

After: With new computer programs, the company now can keep tabs of what sells on a daily basis.

Before: Stores were split about 50-50 between space earmarked for merchandise displays and for backroom storage and offices.

After: With better inventory control, analysts think Nordstrom can increase selling space to around 65 percent of the store.

Before: Nordstrom's rule for employees was to use their own good judgment in serving customers. That led to the company's reputation for top customer service.

After: No change.

Before: Customers could return merchandise anytime with no questions asked.

After: No change.

Copyright (c) 1998 Seattle Times Company, All Rights Reserved.

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