Nordstrom (NYSE: JWN) recently revealed plans for a new store concept -- Nordstrom Local will be much smaller than the typical department store while offering services, including manicures, personal stylists, returns, and more.
In this episode of Industry Focus: Consumer Goods, Vincent Shen and senior Motley Fool contributor Asit Sharma explain why Nordstrom is experimenting with this unconventional retail storefront and how Nordstrom Local is just another example of a trend that's sweeping through the retail sector.
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The team also takes time to discuss the potential for Amazon's (NASDAQ: AMZN) new headquarters and the outlook for Starbucks (NASDAQ: SBUX) since founder and CEO Howard Schultz handed over the reins to Kevin Johnson.
A full transcript follows the video.
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This video was recorded on Sept. 12, 2017.
Vincent Shen: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. I'm your host, Vincent Shen, and it's Tuesday, Sept. 12th. We're going to hit a couple stories making headlines this week before providing an update on Starbucks. Joining me via Skype for this retail and consumer round-up is senior Fool.com contributor, Asit Sharma. Great to have you back, Asit!
Asit Sharma: Great to be here, Vince! Thanks a lot for having me back!
Shen: Yeah, absolutely! A lot of Fools here at HQ have been chatting and debating over our first story, and I wanted to very quickly get your thoughts on it. Amazon has announced that the company is looking to open a second headquarters outside of its home base in Seattle. The founder and CEO Jeff Bezos started the company there 20 some years ago, but Amazon is outgrowing its campus there in the city. I read that they already have an estimated 33 buildings and 10% of all the commercial real estate downtown in Seattle. So beyond space constraints, there's also the challenge of competing for labor and the thousands of developers and engineers to sustain the growth at the company. So Asit, what do you think? I've heard a few people actually point to your area, Raleigh-Durham and the Research Triangle there as a great candidate for the new headquarters. That would be right in your neck of the woods.
Sharma: Yours too, Vince, actually, Washington DC, the Northern Alexandria, northern Virginia area is also top of list. I think Amazon is going to have an enormous impact on any area it comes to. They're looking to hire about 50,000 workers over the next couple decades, and they're going to spend $5.5 billion, their presence in the new market. On their Seattle campus, they have 40,000 employees, and by their estimates, they have added $38 billion to Seattle's economy between 2010 and 2016.
Sharma: So Seattle is a huge city to begin with relative to some smaller metropolitan areas. You take that impact and put it on, let's say a Raleigh-Durham or a Nashville or a Northern Virginia, it has a very long-term impact and changes the nature of how a city of that size will do business. There's lots of infrastructure that will have to be built. They have taking up 8 million square feet of space in Seattle alone, as you mentioned. So Amazon has already provoked, and I think it's going to provoke a frenzy of competition among hungry cities. I think it's a great benefit for any city that can win their business. But there are downsides, too. Here in Raleigh-Durham, we've got a very laid-back environment. We have Research Triangle Park, great universities, the coast, the mountains. And you can see how while Amazon's money would be beneficial and would certainly help our economic growth, it would also, we have to absorb thousands of new workers, traffic patterns would change, which is always a concern. So there are upsides and downsides to Amazon landing in any one city. My last point on this, New York Times, they put their quasi-study out starting with 25 metro areas and have whittled it down to Denver, saying that's really the only place that would fit all of Amazon's criteria, including the need for ready transportation in the city. There's only one city in the country that perfectly fits every criteria, and that happens to be Denver. So the East Coast would lose out in that case.
Shen: I'm surprised. I feel like, in terms of location, there are the criteria that Amazon mentioned, and those include, by the way, it being a metropolitan region with about a million people, it's a walkable area, close to major universities with a qualified workforce, and within 45 minutes of an international airport. But just in terms of the location, a closer to the East Coast location would allow the company to straddle the U.S. with the two headquarters, whereas between Seattle and Denver they would still be pretty close and concentrated in that area. But there's also been comments from some of the public officials even in Seattle saying that the growth that they've seen driven by companies like Amazon has been great, but at the same time it's really put their infrastructure to the test. Even for a larger city, any area, 50,000 employees and this kind of development will definitely put some pressure on the local governments. But they're fighting for this opportunity because of the $5 billion of investment that Amazon will put into the region over a period of about 15 years. These cities are likely to offer pretty significant property income tax breaks and other incentives as part of their proposals.
So the proposals to Amazon are due Oct. 19th, and the company is expected to make a decision maybe next year. So the first phase of the build-out for up to about 1 million square feet of office space in this new location will be finished as early as 2019. So we'll definitely come back to this story once the decision is finalized, and we have more details. But if you have thoughts on where the next location for the Amazon headquarters will be, we would love to hear from you. You can shoot us an email at email@example.com.
For our next story, we have another company also generating buzz in the news this week, and that's Nordstrom. The luxury department store is going to be welcoming shoppers in West Hollywood, California to their new retail experience. It's a new store called Nordstrom Local, and that's supposed to open on Oct. 3rd. What makes this specific location so special is the fact that you won't find rack after rack of clothing and accessories there. So while a normal Nordstrom store is usually well over 100,000 square feet, this Nordstrom Local would be just 3,000 square feet, so a much, much smaller footprint. As a result, it'll be more service focused. They'll offer things like beer and wine, manicures, alterations and dressing rooms where personal stylists can help put together outfits for the customers. Asit, for some time, Nordstrom has been the cream of a very difficult crop among the major department stores. They're still managing to expand and open new full-line Nordstrom locations in addition to their Nordstrom Rack stores. But a lot of competitors have actually closed stores or consolidated their brick-and-mortar footprint. What do you think is going through management's mind as they roll out an experimental retail experience like this?
Sharma: Obviously, they want to keep up. Everyone can see that. The trends for shopping, as we discussed many times on the show, moving away from brick and mortar more toward online ordering. How do you survive and continue to open new stores? One way you can do it is to forge a different and stronger relationship with your customers. If you feel extremely loyal to Nordstrom and have a deeper bond than just going up to a rack and looking for a discount, you might be persuaded to order regularly, frequently stop in at your local store to pick up your clothes, and maybe pick up something else when you get there. So part of this thrust is to make it extremely enticing to do business with Nordstrom. I have to admit, I don't get manicures, but the thought of going into a small space without having to look at any physical merchandise, maybe grab a beer and thumb through some choices, hey, why not? It's a bright idea.
There's something else behind this that's not quite as visible to customers. This type of innovation in retail is also data-driven. Some of the tools that Nordstrom will use when you go in to Nordstrom Local will actually be on screens. Your stylist will walk you through certain choices, and you may click on a touchscreen and punch some choices in. The company is then going to obtain data from that, and they're going to gain a deeper insight into how you make your fashion choices, which is more useful to them than just studying patterns from you buying clothes in the store and taking them home.
Shen: Yeah, absolutely. The thing with this is, for Nordstrom, and what they're offering here is this experience to get people out the door and potentially visit with the many various services they offer. The Industry Focus team, we recently recorded a special Industry Focus 101 episode. The trend that I talked about in the consumer retail space was experiential retail. It just happened be really good timing before this Nordstrom Local announcement. But there are many, many more examples out there. Asit, before the show, you shared with me some very cool examples from the home improvement world and also with an apparel brand. And the big thing that jumped out to me was, virtual reality is potentially becoming part of the shopping experience? Can you tell us a little bit more about what's going on with Lowe's and Vans?
Sharma: Lowe's. Surprisingly, your do-it-yourself hardware store is on the forefront of experiential shopping. If you live in Massachusetts, maybe near Framingham, they have a store in which there's a dedicated room to virtual reality do-it-yourself learning. You go into the room, put on a pair of goggles, and you're handed a controller. And with that experience, you can actually work through an entire do-it-yourself project. Myself, I'm not a very mechanical guy, and I hesitate to do some mid-level projects around the house because I'm scared I'll mess them up, and it'll end up costing more money, end up costing my wife grief. So I think if I had this opportunity locally to go into a store, put on a headset, virtual reality goggles with a controller and then work through a retiling project, and everything that I'm messing up is virtual, that would give me the confidence to go through with the project. You can see how ingenious this is on Lowe's part. If they can get these threshold-level people like me to become do-it-yourself-ers, they have increased that lifelong sale per customer and found a new base of revenue. So I'm very intrigued by that idea. Have you seen one of these by any chance? I think they just got one on the East Coast.
Shen: No, I have not been able to visit a store with this. But I definitely see what you mean, in terms of increasing lifetime value of a customer. I can imagine, I'm probably similar to you, in terms of my experience with home improvement projects and things like that. I'm not going to pursue something too big. But if I were to go to a store like this, have this experience with this kind of virtual reality simulation, get a much better idea of what it entails, and then I decide, I'm going to give this a shot, and all of the sudden I'm buying all the supplies at Lowe's, and then I might need special tools to finish the project, and I'm getting those at Lowe's as well. And all of the sudden, what was a tentative thing that might go to a contractor instead becomes a huge purchase with the company.
Sharma: Sure. One more quick note on that, you can bet that Lowe's is also collecting data, just as Nordstrom is going to collect data. If they see that both Vince and Asit are trying to learn how to install windows, they're going to push those do-it-yourself workshops in their stores and make money off of that. I think it's a very bright idea.
Sharma: The next example that I was interested in discussing today is House of Vans. I myself am a Chuck Taylor guy. I love to wear Converse. But Vans is a similar brand that's been around for a long time and has a second wave of cachet with the younger folks, the skateboard, BMX crowd. And so Vans is interesting in that its reach is primarily through large retailers. We've seen some of those going bankrupt. How do you sell in a world like this? Again, it's forging a relationship with the customer. So Vans' retail concept is called House of Vans. It's got a really beautiful flagship store in London, and it has several across the world. There's one in Chicago, Brooklyn has a House of Vans store. And the idea is to take 30,000 to 40,000 square feet and on a multi-level store, have a different experience on each level, sometimes very tenuously related to the actual product. House of Vans in London has one floor that's for art installations, it has an event space, it has several bars and cafes spread through the area. It has a level, and they call these tunnels, there's a tunnel of just concrete for skateboarding and sporting events. So I haven't physically been to this store, but from what I can see looking at the pictures on the web, there's very little physical product there at all. Here again, if you have these experiences, you feel more loyal to a certain brand. Personally, and I know a lot of our listeners are like this, I find a brand I like and I tend to be fairly loyal if it's well priced. So Vans will plant that impulse for you to have a great time at one of these House of Vans, and then later buy online, or maybe walk into a physical store and buy their product.
Shen: Sure. I want to bring this back a little bit to Nordstrom and draw some parallels from those examples that you provided with Lowe's and Vans, and some of the specific services that they're offering. The company's press release includes a comprehensive list of what customers can do at this Nordstrom Local. For example, we already mentioned the personal stylists, the manicures, the tailoring services. Also, you can buy online and pick-up in store, and customers can pick up the same day at Nordstrom Local if they order before 2:00PM, which is pretty impressive. There's curbside pickup, so your tailored outfit or your in-store pickup order can be brought out to you as you wait in your car. They also do easy returns. Basically anything you buy online or at a full-line Nordstrom store can go directly to Nordstrom Local and sent for a return. The last thing I'll mention is their style board. This is more of a tech-focused service that basically allows stylists to put together a digital catalog or look-book with items personalized for a customer, and then the customer can purchase items from that style board and also communicate with stylists through that app.
I list out all these specific services, because they remind me so much of initiatives that physical retailers are testing and implementing and expanding all over the country to differentiate their stores. You think about, for example, the first one. In-store pickup is available now at most major retailers, and not-so-major ones as well. It's just all part of the omni-channel strategy. Curbside grocery service was a big push for Wal-Mart and even Amazon when they were testing some of their retail concepts. And technology has been a huge lever for apparel companies like Urban Outfitters, and they have stores that are similar to the House of Vans. And technology is growing super quickly in terms of applications and usage in the restaurant sector, too.
In the past couple of years on Industry Focus , we've discussed on multiple occasions other companies experimenting with some of these ideas like Nordstrom, like Lowe's, and even the focus on small format stores has been seen with Whole Foods and Target and a lot of other of the larger retailers. What you mentioned in terms of the connection that it offers and the loyalty that it helps drive with customers, I think that's a big driving force behind all of this. You create a unique, fulfilling experience that will be enough to convince shoppers to make the trip and see it for themselves, and even if they don't buy anything at the store -- like in the case of Nordstrom Local, they're not going to carry much inventory, if any at all, that won't move the needle for this company. Nordstrom had $15 billion in revenue in the past year. But the connection that the company hopes to forge with you means that when you're ready to buy, whether you're on mobile or online or in store or wherever it may be, hopefully it's enough of an impression that they can count on you as a customer.
Our last story here, with Starbucks, another case where they've driven this experience with their store, recreated the European coffee shop experience. We wanted to provide an update for the company, in that we're approaching about six months now since the founder, Howard Schultz, stepped down as CEO of the company. He passed the reins on to Kevin Johnson, who was formerly the COO. I won't speak too much about the stock price, since half a year is not much time for any CEO to leave their mark on a company, especially one this large. But investors weren't as happy with the latest quarterly results. Shares did trade down about 10% due to some reduced guidance and lowered expected growth. Asit, you've been following this company for some time. When people talk about things like market oversaturation for Starbucks and shrinking growth opportunities, what do you think shareholders should be focused on going forward?
Sharma: One of the things shareholders should be focused on is Starbucks' ability to divorce itself from a goal that it created. There's a mini-monster in every Starbucks earnings report, and that is the U.S. comparative sales. How did stores in the U.S. do versus last year's comparable quarter? Starbucks had an incredible streak. I think it went over 25 consecutive quarters or so of U.S. comparables -- we call them comps -- U.S. comps growth of 5% or more. Quarter after quarter after quarter. And it became kind of this rallying cry, and investors and analysts became addicted to this number. And it was part of the reason that the stock has had such a great run, because it seems like Starbucks was capable of this almost linear growth that was just going to occur, and they had the entire globe to keep opening stores. The U.S., despite other industries seeing slowdowns over the last five or six years, Starbucks was able to keep showing that growth.
What's happened is, inevitably, U.S. growth has slowed a bit. The company had a couple of quarters this year where it hasn't hit that 5% mark. For this most recent quarter, they did. If you are an investor, you're rooting for management to get beyond that. We've seen Howard Schultz, in his last couple quarters as CEO, try to push back at the notion that the U.S. stores should hit this number every quarter. So that's a good sign. You're looking for Starbucks, though, to be able to keep traffic in their stores flowing. At some point, and we don't know when this is, 10 years, 15 years, the globe will become saturated with Starbucks stores. The density in the U.S. is already reaching a point where you're having to go to secondary metropolitan markets to find growth. So as an investor, you want to see what Starbucks can do to keep driving traffic. And so far, they've been pretty successful. They have the seasonal promotions that everyone is familiar with, the pumpkin spice latte. They continually upgrade their mobile ordering capabilities to get customers in stores continually through their loyalty program. And the product is addictive. So I think as an operations person, Kevin Johnson, the new CEO, part of his job is merely to keep that traffic flowing, and that's what you're looking for whenever you read through a Starbucks report.
Shen: Yeah. The big thing that seemed to drive the market's reaction to the latest results, like you mentioned, them having to step down on guidance and the growth not quite being at levels that, frankly, investors have come to expect, and management having to push back on that a little bit. Some other big developments that I think were relevant to the long-term growth runway for this company, for example, something that flew under the radar a little bit more as a result of the market reaction to the quarterly results, Starbucks spent $1.3 billion also to acquire the remaining half of its joint venture in China, which effectively brings that entire Chinese business entirely into the Starbucks fold. And this is a big development, because China is a huge market and a growing one for them. A lot of people believe it will become as important as the U.S. market in terms of the scale and the profitability. Keep in mind, I think Shanghai actually lays claim to the most Starbucks locations, with about 600, of all the major cities that Starbucks operates in.
Something else I thought was interesting, too, in terms of when Howard Schultz stepped down as CEO, he's still with the company, but his focus has turned to the food and dining side. Food is actually about 20% of revenue for the company now, growing in its own importance. Schultz wanted to take some of his time and focus on developing these destination restaurants and premium experiences under the Starbucks brand. In terms of these other initiatives, both abroad with these other categories in terms of restaurants, what do you think, Asit? Is this enough, you think, to satisfy investors as long as the company has some time to get its legs and keep hitting on the numbers they need to hit, and growing, especially, their presence in China?
Sharma: Depends on your holding period. Foolish investors tend to hold on to great stocks as long as it's humanly possible. If you're that type of investor, then Starbucks is doing all the right things. The two examples you mentioned, Vince, are both pushing toward one goal, and that's to increase the operating margin of Starbucks. Over time, the long-term, owning its own locations in China makes a lot of sense, because that's a greater amount of margin that will fall to the bottom line. There was a period where Starbucks thought a great mix would be 60-40, meaning about 60% self-owned stores and 40% franchise stores, would help them grow really quickly. And they've done that in China. But if, inevitably, growth slows, what do investors then love? They love earnings. And we've seen companies historically, like McDonald's, like Coke, that have been able to satisfy investors as their growth slowed by increasing profitability.
So what you mentioned, Vince, this drive to acquire the rest of its remaining joint venture on the mainland in China is actually going to really help earnings far down the road. Same with moving toward packaged goods that they're selling in store aisles, to the premium roastery concept, which Howard Schultz is also pushing, that is to provide these, again, experiential purchasing experiences in beautiful roastery environments in major cities, and up our desire to buy a higher level of coffee, which drops a higher level of margin to Starbucks' bottom line. So if you intend to hold this stock past a three year period -- say five years, seven years, ten years and beyond -- it makes a lot of sense. And I think that the new CEO, Kevin Johnson, shares these broad goals with Howard Schultz. And as I've said just a few moments ago, he's an operations guy. He's someone who can execute on this vision. So, I think the company is in good hands and still has a bright future. I know we said we wouldn't talk about the stock price, but since Howard Schultz announced he was stepping down, the stock is down about 7.5%. Not much at all. That was, again, since December of last year. But not the typical growth Starbucks has had over the last few years. I think it will resume for those who are patient.
Shen: And just to close out with a set of numbers that puts some of that international growth opportunity, especially in China, into perspective, you look at what is currently the most important market for the company, the United States, and the number of locations they have, I think somewhere in the neighborhood of 14,000 locations just in this country, whereas in China with their current base of about 2,500 stores, it just puts into perspective what the opportunity still exists there, and what investors can look to and track the progress of as a key priority for the company going forward. Otherwise, that's all the time we have today. Thank you, Asit, for joining us!
Sharma: Thanks a lot, Vince!
Shen: People on this program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear during the program. Thank you, Fools, for listening! Fool on!
Asit Sharma has no position in any of the stocks mentioned. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Starbucks. The Motley Fool recommends Lowe's, Nordstrom, and The New York Times. The Motley Fool has a disclosure policy.