On Friday, upscale retailer Nordstrom (JWN +0.00%) opened a new 230,000 square foot flagship store in Vancouver, British Columbia. The opening of this store is one of the crucial milestones in Nordstrom Canada's multi-year journey to profitability.
Vancouver is a very promising market for Nordstrom. It is less than 150 miles from the retailer's hometown of Seattle, so Nordstrom should already be a familiar brand to many residents. Vancouver has also become something of a luxury retail mecca in recent years. Finally, Nordstrom has snagged a great location for its store.
Moving into Canada (successfully)
Many American retailers -- most recently, Target -- have entered the Canadian market with grand expectations, only to flop. However, Nordstrom was careful to avoid many of the potential pitfalls of expanding to Canada.
For example, Nordstrom was patient in planning its move north, waiting for the best store locations to become available. It has spent heavily to ensure that it replicates the great customer service customers receive in its U.S. stores. Finally, it is expanding at a deliberate pace, so that it has time to learn about the market and adapt.
Nordstrom began slowly expanding in Canada last year. Photo: The Motley Fool
This careful strategy makes perfect sense given the cost of moving into Canada. In addition to the capital costs of building new stores there, Nordstrom is also expecting several years of losses as it grows to scale. In 2014, Nordstrom Canada posted an operating loss of $32 million. In February, the company projected an even bigger $60 million operating loss for 2015.
That said, this projection was probably overly pessimistic. In recent months, Nordstrom executives have stated that the first two stores in Canada (in Calgary and Ottawa) are both "performing above plan." That shouldn't be a very big surprise, though: those stores are located in the sixth and seventh best-performing malls in Canada in terms of sales per square foot.
Vancouver should be a great store
Given the early success of Nordstrom's Calgary and Ottawa stores, the Vancouver store should be a smashing success. It is located in Pacific Centre: the most productive mall in Canada, according to Retail Insider, with sales per square foot of C$1,498 last year.
Additionally, with 230,000 square feet, Nordstrom will have room for a broader collection than it has in the smaller Calgary and Ottawa stores. (Those stores measure 140,000 square feet and 158,000 square feet, respectively.) Opening a new store is never a slam dunk, but these factors, along with Nordstrom's strong position in the Pacific Northwest, mean that the Vancouver store could become one of the most profitable in the company.
Indeed, Nordstrom is putting more focus on big, flagship stores in downtown big-city locations, following a general trend in the retail industry. These stores tend to get a high proportion of sales from tourists, and are therefore less susceptible to e-commerce cannibalization. (Additionally, many tourists are in a spending mood.)
Up until now, Nordstrom has operated three such flagship stores: in Seattle, San Francisco, and Chicago. Nordstrom is currently in the midst of fairly extensive (and expensive) renovation projects at all three stores, looking to turbocharge their performance. The Pacific Centre store in Vancouver should be a worthy addition to this collection.
Expect more of the same
Nordstrom has more flagship stores on the way, too. The next one will open about a year from now, in downtown Toronto's Eaton Centre. This is also a very promising location: the Eaton Centre came in just behind Pacific Centre in terms of mall productivity last year, with sales per square foot of C$1,420.
But in a way, all of these stores are just practice for the main event. In 2018, Nordstrom plans to open its first-ever location in Manhattan: a 285,000 square foot store in what will be one of the tallest buildings in the world.
Recently, Nordstrom has been talking about making the Manhattan location not just the best store in the chain, but one of the best stores in the world. Given the big market for luxury goods in New York City and the store's prime location near landmarks like Columbus Circle, Rockefeller Center, and the Theater District, that goal isn't far-fetched.
Nordstrom is doubling down on flagship locations to take advantage of the superior economics of high-volume retail stores. The new flagship in Vancouver and the upcoming store in Toronto -- located in the two best malls in Canada -- should be great additions to the store fleet, helping Nordstrom Canada reach sustainable profitability in the next few years.
However, these stores will also be important as testing grounds as Nordstrom gets ready to unveil its most important flagship store of all, in midtown Manhattan.
