Six months after the Nordstrom family took their namesake retailer private in a $6.25 billion deal, the company is doubling down on an unconventional strategy: using its off-price Nordstrom Rack division as the primary gateway to acquire premium customers. The approach challenges traditional retail segmentation and positions the 124-year-old company to capture both value-conscious and luxury shoppers in an increasingly polarized market.
“We learned that the best acquisition channel for us, just in terms of sheer numbers of people, really comes through the Nordstrom Rack,” Pete Nordstrom, president and chief brand officer, revealed in an exclusive interview at the opening of Nordstrom Rack’s newest location in Lake Grove, NY. This customer acquisition strategy has become central to Nordstrom’s post-privatization playbook, as 25% of Nordstrom Rack shoppers migrate over to the full-line Nordstrom store.
Nordstrom’s Dual Format Playbook
While department store competitors struggle with declining foot traffic and market share erosion to pure-play off-price retailers like TJX Maxx, Ross Stores, and Burlington, Nordstrom is leveraging its dual-format model to create what executives describe as a self-reinforcing ecosystem that defies prevailing market theory.
The most counterintuitive element of Nordstrom’s strategy involves the physical proximity of its full-line and off-price stores. Conventional retail wisdom suggests that placing a discount format near a premium store would erode the higher-margin business. Nordstrom’s experience proves otherwise.
“Our highest-performing Nordstrom Rack stores are directly adjacent to our best Nordstrom stores—and there is no cannibalization between them,” Nordstrom revealed. The company has been operating both formats for over 35 years, which has informed real estate decisions that would seem risky to traditional retailers. The Nordy Club, Nordstrom’s loyalty program, which has over 14 million members, caters to both Nordstrom and Nordstrom Rack loyalists, providing unique benefits to both shoppers.
Nordstrom Believes In Aspirational Shoppers To Fuel Growth
The luxury market is experiencing a fundamental shift as aspirational shoppers, who now comprise 60% of the personal luxury market, have declined 13 percentage points since 2013. More than a third of these shoppers have reduced or paused spending in the past year. Nordstrom’s ability to serve both value-seeking and premium customers through complementary channels positions it uniquely in an increasingly bifurcated retail landscape where the middle market continues to erode. “We have super affluent customers shopping our Nordstrom Rack stores because they’re just wired to want a deal. It’s not that they can’t afford full price—it offends their sensibilities to not get a good value,” explained Nordstrom. “What motivates people to shop is a great experience. Aspiration is part of that—leaning into discovery, finding things you didn’t expect to see,” believes Nordstrom.
Nordstrom Rack Relies On Premium Brands
Unlike traditional off-price competitors that focus primarily on value, Nordstrom Rack has carved out a unique position in the market by offering access to premium brands typically unavailable at other discount retailers. “The brands you have here, you typically would not see at the other off-price retailers,” said Nordstrom. The company maintains direct relationships with premium brands, including Veronica Beard, Vince, and Rag & Bone. These partnerships reflect sophisticated vendor strategies: brands use Nordstrom Rack as a discovery platform, knowing customers often graduate to full-price purchases.
Product assortments offered by these vendors are distinct between Nordstrom and Nordstrom Rack. “We’re selling last season’s product. We are not competing for the same item at different prices,” said Gemma Lionello, president of Nordstrom Rack. This non-competitive approach, combined with robust data sharing, creates vendor partnerships unavailable to standalone off-price competitors who rely heavily on excess inventories. The premium brands are what keep the customers loyal to Nordstrom Rack. In denim, for example, customers can be introduced to Joe’s, AG, Rag & Bone, 7 For All Mankind, Madewell, and Jason Wu. “You will not find a better selection of premium denim in off-price anywhere else,” exclaimed Lionello.
Nordstrom Rack Private Label And Full-Price Beauty
Expanding private label brands is another focus for the company. Currently, private label brands make up about 8% of the total revenue, and the company sees that nearly doubling. “We have the voids in the market where a private label really makes sense for us, because we are a house of brands. A lot of the appeal is that people get to see great brands at great prices. The Nordstrom brand is a great brand, but what validates all of that is you have brands everyone knows,” said Nordstrom.
Nordstrom Rack’s product assortment is not just about great value, but since stores are conveniently located in local communities, last year the company added a broad assortment of full-price beauty products to aid in replenishment and discovery for its local customers. The assortment falls in line with its young adult lifestyle beauty seeker while providing assortment options for its more traditional customer.
Nordstrom Rack Bets Big on Physical Retail
While many retailers are retreating from physical retail, Nordstrom Rack has aggressive expansion plans to hit 400 stores by 2028. “When it comes to Nordstrom Rack, they want us to be their hometown store. They want us to be within 15 minutes from where they work or live,” explains Lionello. The company plans to have nearly 300 stores by the end of 2025, with 22 new openings this year signaling big commitments in physical retail. “The expansion reflects hard customer data rather than optimism,” said Lionello.
Nordstrom Rack Invests In Innovations That Drive Customer Experiences
Early this year, Nordstrom Rack rolled out store fulfillment and buy-online-pickup-in-store capabilities, which differentiate the company from traditional off-price competitors who have struggled to implement omnichannel initiatives. AI tools currently assist with reporting and analysis, with future ambitions for inventory allocation and replenishment automation. “We want to be able to allow our buyers to do what they do best, which is pick great products, and if we can save them time and give them more time to be in market, that’s really our goal,” explains Lionello. Future innovations include navigation assistance and store-finding capabilities, acknowledging that self-service environments require different customer support than full-service stores.
Nordstrom’s Private Ownership Enables Laser Focus Without Quarterly Pressures
Nordstrom emphasized that while no new strategic initiatives emerged from going private, the removal of public market distractions has accelerated execution of existing plans. “It’s just more laser focus on the actual business, in the commercial part of what we do,” Nordstrom explained, describing the operational benefits of privatization. Nordstrom is appreciative of having been a public company, as it gave the company a great platform to grow. Nordstrom’s is and will always be a merchant-first culture, and being private allows the company to emphasize execution over financial engineering. “I think we could be better merchants. And if we can be better merchants, we can have a better business,” expressed Nordstrom.
The Nordstrom family’s willingness to take the company private has created space for measured evolution. In the example of technological investments, rather than chasing buzzworthy innovations, the focus remains on tools that directly support the core retail mission. Early applications of AI and machine learning have centered on personalization algorithms and demand forecasting that improve the relevance of product recommendations without adding friction to the shopping experience.
Nordstrom Rack’s Future Success
As Nordstrom approaches its 125th anniversary, the company’s strategy reflects a balance between honoring its heritage and embracing change. “We’re a brand with heritage, but we’re not a heritage brand, so we need to keep evolving and be relevant and modern,” Nordstrom emphasized. The path forward involves continued expansion of the Nordstrom Rack footprint, with particular focus on markets where the company can operate both formats, full-line and off-price, in close proximity. The success of this strategy will ultimately be measured not in quarterly comparable store sales, a metric the company no longer needs to report, but in the lifetime value of customers who discover Nordstrom through its Nordstrom Rack stores and gradually migrate to higher-margin full-line purchases. Early indicators suggest the formula is working, though the company’s private status means detailed performance metrics remain closely held.