Contrasting Approaches to Business Transformation

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“The characteristic vice of the utopian is naivety; of the realist, sterility.”

Edward Hallett Carr, The Twenty Years’ Crisis, 1919 – 1939

Overview

A career in business transformation offers a seemingly endless stream of reminders of the overwhelming preference by leadership teams and key decision makers for solutions that seem good, rather than those that are good (or, to be fair, those that have a higher likelihood of success). An excellent case in point can be found in the respective approaches of Nordstrom and Saks Global, two (primarily) U.S. department store companies striving to navigate strong secular headwinds, but which have charted very different paths to achieve the business transformation that each is seeking. One of these companies is charting a course for transformational change grounded in assets and organizational capabilities it has long controlled and with which it is deeply familiar, while the other is charting a course for transformational change via a sizeable acquisition.

What is happening in the sector in which these companies compete? Is the situation facing both Nordstrom and Saks Global truly so dire that two multi-billion corporations in the same sector should pursue, at about the same time, transformational change, with all the risk such initiatives entail? Given what both companies know and can reasonably surmise, is their course of action logical? How should we think about two companies, in the same industry, that agree on the need for business transformation but opt for paths that differ in fundamental ways?

Let’s dig in.

An Industry in Turmoil

The department store was once a revolutionary innovation. Inspired by two of the major international expositions of the 19^th century; the Crystal Palace Exposition of 1851 (London), and the 1893 Chicago World’s Fair, department stores became gigantic palaces of consumerism, designed to inspire awe and wonder. The scale platforms of their day, department stores thrived by delighting their urbanized, increasingly affluent consumer base with the incredible material abundance of the Industrial Revolution (presented in tangible, curated form).

As a format the department store did not vanish abruptly, rather it eroded steadily in the face of changing consumer lifestyles. Consumers continued to grow in affluence, but after mid-century U.S. consumers moved en masse to the suburbs. Shopping malls sprang up to meet the needs of these consumers, driving department stores to follow their customers with ever less differentiated store formats. By the latter decades of the 20^th century, department stores had ceased to be drivers of innovation or growth in retail, and in the early 21^st century the segment began a long and painful decline in sales as new scale players focused on first the big box store format and later ecommerce, all while luxury brands reduced their dependence on department stores by building out more robust direct-to-consumer strategies.

And now? The U.S. department store model is in secular decline. What does secular decline look like? Well, it looks like this:

Exhibit A: Advance Retail Sales – Department Stores (Jan99 – Jan25)

That is a 44% decline in quarterly sales over the past quarter century, a -2.2% CAGR for more than an entire generation. This is secular decline writ large: the bottom falling out of an industry segment that was once an economic powerhouse and is now struggling to justify its existence. Keep in mind, there remain sufficient revenue dollars in this segment to create and drive value, but any current or prospective owner in this sector must think hard about their approach to value creation given the headwind of declining segment revenue.

The challenges facing U.S. department stores go beyond the sector’s plummeting sales. Research from Bain & Co. indicates that the department store format is falling behind in customer esteem, as the segment’s survivors fail to effectively leverage their strengths while struggling to free themselves (and their customers) from weaknesses that have long been deemed inherent to the department store model.

Bain & Co. highlights the need for U.S. department stores to target transformational change:

Today’s evolutionary approach won’t create the visible and habit-changing impact that’s urgently needed to win back shoppers. But it’s not too late to shift gears. While the competitive outlook remains challenging, a fresh transformational push could capitalize on a few industry trends that offer department stores relief.

Charting a Course

An industry segment facing a scale, scope and severity of challenges such that the consensus solution is business transformation is, almost by definition, a segment in turmoil. Leaders of companies in such a segment must answer two questions familiar to any transformational leader:

What must to done to survive? What strategy, paired with what set of discrete action steps, can be taken to ensure the survival of the company in question?

What does survival look like? Survival is a necessary but not sufficient condition for success. Leaders who are satisfied with their answer to #1 must then dig deeper: Is there a survival state in which the company is generating an attractive economic return? Over what timeframe, and with what level of execution risk? If the end state is unlikely to be deemed attractive to key stakeholders, revisit #1.

What is fascinating to me about Nordstrom and Saks Global is that these two companies adopted superficially similar but substantively different approaches for #1, and as a result have a very different implied answer for #2.

The Nordstrom Approach

Nordstrom, led by members of the founding family, determined that the optimal path for business transformation would entail taking the company private in order to accelerate the pace of change. The family had made a previous offer to take the company private in 2017; however, the latest offer, in partnership with El Puerto de Liverpool, won board approval and is moving forward. The basic thesis here is that concentrated ownership will allow the company to execute transformational change at a pace that would be challenging for a public company. Additionally, the owners (the Nordstrom family and El Puerto de Liverpool) are positioned to reap windfall gains on their investment should it prove successful. In short, Nordstrom leadership has determined that the company possesses an attractive collection of assets and has pursued an approach that will reduce near-term capital markets pressure on the company and focus risk on the ability of leadership to execute a value accretive business transformation.

Exhibit B: Nordstrom Location in Seattle

What must be done to survive? Nordstrom leadership has evidently concluded that the pace and scope of its current transformation initiatives was insufficient, and that an acceleration of the pace of business transformation is necessary for survival. Further, the company determined that by leveraging the founding family’s substantial equity holdings, the company has a path to return to private ownership in order to escape the fishbowl scrutiny of the capital markets. It should be noted that, among retail industry analysts, Nordstrom’s approach is not without detractors.

What does survival look like? Nordstrom leadership seems content with the collection of assets and capabilities the company possesses and only wishes to increase the freedom of action of leadership in optimizing the mix and deployment of those assets and capabilities.

Strategy thesis. The key thesis for Nordstrom’s leadership here is that the elements of a successful business transformation are in place, and the strategic imperative is to minimize any barriers to an optimal pace and scope of business transformation.

The Saks Approach

Saks Global, surveying the same retail landscape as that faced by Nordstrom, settled on a business transformation approach based on increasing scale, with the goal of realizing cost synergies and increasing negotiating leverage with suppliers. Through the $2.7 billion acquisition of Neiman Marcus (which includes Bergdorf Goodman), the company has brought three of the highest profile luxury department store brands under one ownership group. In short, Saks Global has determined that the company did not possess assets of sufficient quality to succeed in the market, and has therefore pursued a transformational acquisition in order to create an organization of sufficient scale to succeed in the current retail landscape.

Exhibit C: Saks Global Location

What must be done to survive? Saks Global, facing the same broad secular challenges as Nordstrom, also settled on a transaction (the acquisition of its largest competitor, Neiman Marcus) as a key element of its business transformation approach. Unlike Nordstrom, however, this transaction reduces leadership’s degrees of freedom by further straining the company’s liquidity.

What does survival look like? The leadership of Saks Global sees a path in which their company, having gained control of the top luxury retail brands, can simultaneously win with consumers based on scale while driving cost synergies across the newly merged companies and gaining increased leverage over suppliers.

Strategy thesis. The key thesis for leadership of Saks Global seems to be that the path to maximal value creation is transformational M&A followed by aggressive cost cutting.

Realists vs. Utopians

The quote with which I opened this article was actually the last piece of a longer quote, which goes to illustrate my point: astute observers of the human condition have long recognized and categorized different types of change agents. This quote ably dissects a common taxonomy: that of the realist vs. the utopian.

The utopian, fixing his eyes on the future, thinks in terms of creative spontaneity: the realist, rooted in the past, in terms of causality. All healthy human action, and therefore all healthy thought, must establish a balance between utopia and reality, between free will and determinism. The complete realist, unconditionally accepting the causal sequence of events, deprives himself of the possibility of changing reality. The complete utopian, by rejecting the causal sequence, deprives himself of the possibility of understanding either the reality which he is seeking to change or the processes by which it can be changed. The characteristics vice of the utopian is naivety; of the realist, sterility.

Edward Hallett Carr, The Twenty Years’ Crisis, 1919 – 1939

This taxonomy marks Nordstrom is the realist, grounding its business transformation efforts on known quantities. Saks Global can be seen as the utopian here, seeking to catalyze its business transformation efforts through a transaction. See Exhibit D.

Exhibit D: Divergent Paths to Business Transformation

Preliminary Results

The judgment of the market at this early stage is that the Nordstrom approach (here, and here) seems to be enjoying better results. Saks, meanwhile, has managed to impose crushing losses on its bondholders (see Exhibit E), struggled to fund past-due vendor payments, and embroiled itself in a no-win fight with Dallas over the much beloved Neiman Marcus flagship, all while clearly struggling with liquidity challenges that a massive debt-funded acquisition have not lessened. And the cherry on top of the Saks Global sundae of misery is the latest data on observed sales performance, which shows Saks and Neiman Marcus (including Bergdorf Goodman) under-performing Nordstrom (see Exhibit F).

Exhibit E: Performance of Saks Global Bonds (Dec24 – May25)

Exhibit F: Observed sales trends at luxury department stores

Conclusion

Nordstrom and Saks today represent a fascinating natural experiment. The two companies are the battered yet proud survivors of the crushing waves of restructuring that have washed over the retail sector for the past quarter century. Both companies face broadly similar challenges. However, whereas Nordstrom is seeking to guarantee its survival by accelerating already in-progress business transformation efforts, Saks is hoping that its acquisition of Neiman Marcus will drive transformational change by delivering scale, cost structure synergies, and negotiating leverage with suppliers. The two companies are similarly, but not equivalently, situated, and so both approaches could ultimately prove successful, or not. It is noteworthy that already Saks seems to be struggling to navigate the increased complexity and additional stakeholder constituencies which its approach entailed, whereas Nordstrom seems to be enjoying the benefits of a simpler, more humble approach to transformational change. This case is interesting in that the divergent views of leadership for the two companies are illustrative of one of the key elements of business transformation: the ultimate success or failure of business transformation efforts often rests on the clarity with which leadership teams are able to discern their optimal strategy framework.

About the Author

David Johnson is the founder and managing partner of Abraxas Group, a boutique advisory firm focused on providing leadership and support services to companies in need of transformational change. He is an accomplished thought leader with multiple articles and speaking engagements on the topics of business transformation, change management, performance improvement, restructuring, turnaround, and value creation to his credit. David can be reached at: david@abraxasgp.com.