We’re all still reeling from the announcement of Nordstrom leaving Canada, and just like Target, it’s likely to go down as another one of those infamous business school case studies. Retail Insider has already shared an excellent collection of expert commentary on the topic, which I highly recommend reading here.
In short, it seems to be a similar reframe:
They expanded too large too fast
They failed to understand the Canadian customer
They failed to acknowledge the importance of geography in Canada
This last point is always an interesting one. It reminds me of Peter Zeihan’s assertion that “Canada isn’t a real country”. We’re ten countries who sometimes agree on things. And this can be seen the in the amount of interprovincial trade within Canada… that is, not much. You can’t just check off a Canadian expansion as if you were just opening stores in another American state. And successful American companies in Canada seem to get this.
But what surprises me about this affair is that this isn’t a mystery. “Know you customer” is one of the first things you’re taught in business school. I refuse to believe the leadership at Nordstrom didn’t know this.
So, maybe we’re all just reacting with the benefit of hindsight?
I wanted to take a look into this and the obvious place to start, I think, is apparel spending per capita. You’re a luxury apparel retailer, you want people to be spending more on clothes than they did in the past. Just looking at the below chart, immediately you can see why Nordstrom would struggle in Canada,.
(These numbers are from slightly different surveys so you can’t compare them directly, which is why I indexed them to 2010. 2010 being the oldest data I had on hand for Canada.)
Apparel spending is growing strong in the US, while in Canada, we just aren’t that interesting in spending more on clothing.
But keep in mind that Nordstrom made the announcement to enter Canada in late 2012. These lines were already separating at that point. True, the US was in the throws of a deeper recession at the time, which likely made Canada a more attractive option. But, the lack of upward movement in Canadian spending should have been a red flag, it wasn’t a growth market. Not for apparel.
Again though, maybe we’re just looking at this with the benefit of hindsight?
But, while looking for these numbers I found another report that may hint at what went on. Below are some projections about the total size of the global apparel market, through to 2027, published by Statista in November 2022. I’m hiding the actual numbers because it's just the trendline that is important.
Remarkable right?
Sorry, let me fiddle with the axis to make it even more impressive.
Wow! We’re on the cusp of some amazing growth! (or inflation?). What a crazy coincidence that after nearly a decade of stagnation when we start looking at this problem the trend is poised to completely turn around. We should all start buying apparel stocks today.
Or not… it’s pretty clear from the consistent year-on-year growth in the forward looking part of the this graph that some annualized growth rate was assumed in the model starting 2023. But that’s a problem, because generally people would assume the growth rate is an output of the model, not an input. In no world do I believe that 2027 market size will be realized.
And I don't mean to be critical of Statista here. Assuming a growth rate is very common practice in forecasting. It just speaks to the difficulty of interpreting these kinds of models.
Now I don’t know what happened in the Nordstrom boardrooms when they decided to enter Canada. I wish I could have been a fly on the wall to witness those discussions. But here’s my bet:
I bet that before entering Canada Nordstrom built a lot of models to determine their best course of action.
I bet they went through some very complicated forecasting exercises to understand growth opportunities in Canada.
I bet they struggled to reconcile different sources of household spending statistics in Canada vs the US.
I bet they ended up assuming growth rates in Canada based on work they did in the US.
And I bet the models that forecasted explosive growth and that ‘now is the time to act’ weren’t questioned as rigorously as models that showed tepid growth and limited market potential.
Maybe taking over those old Sears leases was just too tempting of a deal, and they found a way to justify it. It’s Target and Zellers all over again.
This is the perennial challenge for those of us in the research and analytics world. We have every incentive to tell overly optimistic stories. Ultimately, it’s what the client wants to hear. And happy clients tend to be billable clients. Besides, it’s not our money on the line if one of these forecasts leads to bad investment decisions.
It’s a problem. Sometimes the role of research and analytics is to be the chamber of sober second thought. I can only guess, that this may have been a case of torturing the data until you got the result you were looking for.