Economies of Scale - Retail Industry Analysis

Published Date: 23 Mar 2015 Last Modified: 06 Jun 2017

The economies of scale in the specialty retail industry are quite large. All of the companies in this industry have a very formidable first mover advantage. Many of the competitors in this industry already have working relationships with many of their suppliers and any new competitor will have a tough time cracking into the dealer network in order to establish themselves as any sort of threat. The other competitors such as Bloomingdale's and Saks Fifth Avenue have similar relationships with other fashion specific designers and it would be hard for new entrants to gain the licensing, and marketing to gain any sort of meaningful share in this industry. Nordstrom retail store already have a high reputation and steady customer base, therefore making it difficult for new entrants to gain market share.

Product Differentiation

New technology, such as RFID chips, has allowed companies to better manage their stores. Using this technology, Nordstrom has developed a way to better manage its inventory and to better serve its customers. Customers that go to the store's website are able to see what items are available at a specific store location, as well as items that are available in the company's warehouses. This system has made it much easier for customers to shop online, and has even allowed customers to find items online and then request to try them on at stores.

Extending its reach to the private-sales arena, the company acquired e-tailer HauteLook for $180 million in stock in early 2011. HauteLook, launched in 2007, offers discounted apparel, accessories, and home decor to registered Web shoppers in the US and Canada. As part of the deal, HauteLook became a subsidiary of Nordstrom, and it continues to be based in Los Angeles and led by founder Adam Bernhard. Nordstrom took notice of HauteLook amid the rising popularity of (and sales generated through) private-sale sites during the recession; also referred to as flash sales, sites such as HauteLook provide steep discounts on name-brand merchandise for short periods of time (generally 24 to 48 hours). Like other primarily brick-and-mortar retailers (such as ANN and Saks), Nordstrom is placing increased emphasis on e-commerce, a channel known for pulling in profits that (unlike retail stores) are not as restricted by overhead.

Nordstrom was the exclusive retailer for the Faconable line of clothing and you could only purchase their products at Faconable stores or Nordstrom. However, Nordstrom has sold its Façonnable boutiques in 2009 and began to operate a pair of Jeffrey luxury boutiques, a "Last Chance" clearance store, and sells goods online and through catalogs. With its easy-return policy and touches such as thank-you notes from employees, Nordstrom has earned a reputation for top-notch customer service. Members of the Nordstrom family, who own more than 15% of the company's stock, closely supervise the chain.

Distribution Channel

One of the nation's largest upscale apparel and shoe retailers, Nordstrom sells clothes, shoes, and accessories through about 110 Nordstrom stores and 75 stores called Nordstrom Rack which sells products at 70 percent discounted price in 30 states. Due to the economic downturn, consumers are looking to save more and get the most out of whatever they spend and as a result, are flocking to discount stores like Nordstrom Rack. This means that more emphasis is being placed on the company's competition with discount retailers. The company has responded to this new trend by increasing the number of new Rack stores it opens. For the new entrants, it will be difficult to gain an access to distribution channel.

Economies of Scale

The economies of scale in the specialty retail industry are quite large. All of the companies in this industry have a very formidable first mover advantage. Many of the competitors in this industry already have working relationships with many of their suppliers and any new competitor will have a tough time cracking into the dealer network in order to establish themselves as any sort of threat. The other competitors such as Bloomingdale's and Saks Fifth Avenue have similar relationships with other fashion specific designers and it would be hard for new entrants to gain the licensing, and marketing to gain any sort of meaningful share in this industry. Nordstrom retail store already have a high reputation and steady customer base, therefore making it difficult for new entrants to gain market share.

Product Differentiation

New technology, such as RFID chips, has allowed companies to better manage their stores. Using this technology, Nordstrom has developed a way to better manage its inventory and to better serve its customers. Customers that go to the store's website are able to see what items are available at a specific store location, as well as items that are available in the company's warehouses. This system has made it much easier for customers to shop online, and has even allowed customers to find items online and then request to try them on at stores.

Extending its reach to the private-sales arena, the company acquired e-tailer HauteLook for $180 million in stock in early 2011. HauteLook, launched in 2007, offers discounted apparel, accessories, and home decor to registered Web shoppers in the US and Canada. As part of the deal, HauteLook became a subsidiary of Nordstrom, and it continues to be based in Los Angeles and led by founder Adam Bernhard. Nordstrom took notice of HauteLook amid the rising popularity of (and sales generated through) private-sale sites during the recession; also referred to as flash sales, sites such as HauteLook provide steep discounts on name-brand merchandise for short periods of time (generally 24 to 48 hours). Like other primarily brick-and-mortar retailers (such as ANN and Saks), Nordstrom is placing increased emphasis on e-commerce, a channel known for pulling in profits that (unlike retail stores) are not as restricted by overhead.

Nordstrom was the exclusive retailer for the Faconable line of clothing and you could only purchase their products at Faconable stores or Nordstrom. However, Nordstrom has sold its Façonnable boutiques in 2009 and began to operate a pair of Jeffrey luxury boutiques, a "Last Chance" clearance store, and sells goods online and through catalogs. With its easy-return policy and touches such as thank-you notes from employees, Nordstrom has earned a reputation for top-notch customer service. Members of the Nordstrom family, who own more than 15% of the company's stock, closely supervise the chain.

Distribution Channel

One of the nation's largest upscale apparel and shoe retailers, Nordstrom sells clothes, shoes, and accessories through about 110 Nordstrom stores and 75 stores called Nordstrom Rack which sells products at 70 percent discounted price in 30 states. Due to the economic downturn, consumers are looking to save more and get the most out of whatever they spend and as a result, are flocking to discount stores like Nordstrom Rack. This means that more emphasis is being placed on the company's competition with discount retailers. The company has responded to this new trend by increasing the number of new Rack stores it opens. For the new entrants, it will be difficult to gain an access to distribution channel.