Nordstrom Market Structure, Strategy, and HRM Analysis

Market Structure of the Retail Industry

The market structure of the retail industry is that of monopolistic competition. As its name suggests, monopolistic competition is an environment composed of a large number of firms, each holding a portion of the market. Firms in this type of market structure offer similar products that are differentiated in some way. Nordstrom, for example, carries private brands exclusive to its stores. These brands include Hotel Collection sheets, Martha Stewart cookware, Psycho Bunny for men, INC brand clothes for women, and more. Even though these product offerings may be similar to competitors in terms of color or value proposition, they are differentiated by the fact that they are only available at Nordstrom locations.

Furthermore, many firms compete within the retail environment. Nordstrom must compete with JCPenney, Target, Walmart, Dillard's, Sears, internet retailers, and many other outlets, all of which are attempting to erode Nordstrom's market share. Each competitor also has a slightly differentiated product offering. All of the companies mentioned above sell clothing, but Nordstrom is a higher-end retail chain that caters to consumers with large discretionary incomes. This positioning allows the company to maintain sales volume targets, as the organization is less likely to be affected by a sudden downturn in the overall market. Because Nordstrom's customer base commands higher incomes and thus greater purchasing power, the company can charge premium prices for its product offerings.

By contrast, Walmart is a low-cost producer, Dillard's targets the middle-class consumer, and Nordstrom provides premium quality and service. They all sell clothing, but each offers a unique and compelling value proposition. The market environment continues to evolve as the economy recovers. More consumers prefer to spend discretionary income at lower-end retail chains as average incomes face pressure, while high-end consumers — largely unaffected by economic slumps — continue purchasing premium products.

Macroeconomic Environment and Implications for Nordstrom

Macroeconomic conditions within the United States indicate a slow and uneven recovery. Despite widespread pessimism, several positive indicators suggest further growth ahead. For instance, according to recent census reports, the unemployment rate fell from 8.1% to a more modest 7.8%. The overall supply of available housing has been diminishing each month while household formation has increased. Excess inventory within the housing market is being eliminated gradually, and there now appears to be a bottoming out of prices. Coastal areas that experienced steep home-value declines have begun to see demand increase — a development driven in large part by the "animal spirits" of American capitalism. Extreme monetary policies have enabled individuals to purchase homes at historically low interest rates, the lowest Americans have seen in over 50 years. On an inflation-adjusted basis, Americans can borrow money at a negative real yield due to the Federal Reserve's accommodative monetary policy (Shaw, 2008).

These factors have direct implications for Nordstrom's business. The company now has a consumer base that is more confident in the country's future outlook. This confidence encourages consumers to feel better about their purchases, to spend more at retail establishments, and to open additional lines of store credit, knowing their ability to repay is stronger. As consumer incomes continue to rise, so too will discretionary income, ultimately allowing consumers to spend more on aspirational items they desire but do not strictly need.

These aspects alone, however, will not resolve the broader macroeconomic challenges facing America. Monetary policy relating to mortgage rates does help mitigate adverse economic conditions. Much of the current difficulty stems from a "confidence crisis" rather than a pure financial crisis. On a macroeconomic basis, America is considerably healthier than most citizens believe. Corporations now maintain strong balance sheets with large cash reserves yet to be deployed. Microsoft and Apple, for instance, hold billions of dollars in cash. Companies are also earning record profits, with 74% of S&P 500 companies beating analyst earnings growth expectations in the second quarter of 2012.

American households are similarly improving their personal balance sheets. Banks have received record inflows of core, non-interest-bearing deposits. The latest FDIC report shows Wells Fargo growing deposits by over 12% for the year ending June 30, 2012, while Bank of America grew deposits by over 6% during the same period. Consumers are becoming more responsible with credit — prepaying or refinancing loans — and loan-loss provisions from the largest banks have fallen for eight consecutive quarters, reflecting a meaningful shift in consumer behavior. Delinquency rates (90 days or more past due) have also declined at major institutions including Wells Fargo and JPMorgan. According to a recent quarterly earnings call, 93% of all Wells Fargo mortgage loans are current, with an average FICO score above 680.

These statistics confirm that consumers are getting their personal balance sheets in order — paying down debt, saving more, and becoming more strategic in their purchasing behavior. This trend bodes well for Nordstrom, which can better align its business strategies with prevailing economic behavior. The company is now expanding its store base, investing in technology, and attracting top talent for the long term.

Quantitative easing has also had a modest impact on the overall macroeconomic situation. Through QE, the value of particular assets — especially stocks and homes — rises, spurring economic growth as Americans feel wealthier. Record-low interest rates further propel consumer spending, as monetary policy attempts to discourage saving. However, as noted, individuals are actually saving more given global uncertainty. Savers lose substantially in a low-interest-rate environment, as monetary policy combined with inflation erodes real returns over the long term. The Federal Reserve, anticipating this dynamic, aims to encourage spending, which constitutes approximately 70% of U.S. GDP. Signs of success are visible: retail sales at large retailers have increased over recent years, and Nordstrom has seen same-store sales rise over 3% across the first three quarters of the reporting year.

Consumer Behavior and the Business Cycle

The largest detractor from the macroeconomic environment is fiscal policy. By far, the greatest hindrance to growth is the perception — particularly among average Americans — that government is inept. The nation carries record levels of debt, much of it owed to China and Japan, and the current fiscal trajectory suggests even more spending ahead. If left unchecked, this path carries massive implications for society. The impending fiscal cliff — a combination of automatic tax increases and spending cuts — threatens to take effect at the very beginning of an economic recovery, harming consumers and businesses alike (Benjamin, 2008). Analysts project that enacting the fiscal cliff tax increases would trigger an immediate recession. Fiscal policy will therefore exert a very large influence on the macroeconomic environment going forward.

The shopping experience for the typical American has changed dramatically over the past several years. Economic pressures at home and abroad have made shoppers more apprehensive about their purchasing behavior. Declining average incomes further contribute to widespread pessimism. With unemployment near 8% nationally — and states like Florida and Nevada still experiencing rates near 10% — shoppers are attempting to save more and are deferring luxury purchases until they feel more financially secure (Shaw, 2011).

American shoppers are fearful about the future. Many feel they have not adequately saved for retirement or for the possibility of extended unemployment. Their shopping behaviors reflect the extreme pessimism permeating today's economy. Consumer behavior changes almost exclusively in response to prevailing economic conditions. During periods of mass euphoria, individuals purchase more goods and services, propelling economic growth upward. During such periods, shoppers do not worry about short-term economic uncertainty, their jobs feel secure, and many purchase items they might otherwise forgo — luxury clothing, larger vehicles, electronics, and other convenience items that improve quality of life. During periods of extreme pessimism, however, shoppers trade down and buy only necessities, typically selected on the basis of price. Luxury items are seldom purchased when uncertainty about the future makes such spending feel inefficient or undesirable (Blodget, 2010).

This dynamic plays out most strongly within the lower and middle classes. The upper class experiences some pullback, but not nearly to the same extent, as it generally has the means to weather economic turbulence without a significant decrease in quality of life. This cycle of over-optimism and extreme pessimism is likely to persist as the business cycle continues to move through its peaks and troughs.