Nordstrom's New York Rack Smooths Road for Luxury's Comeback

Nordstrom (JWN) has entered New York City -- not with a full-line department store (pictured) but with one of its Rack outlets, demonstrating that its bargain operation has more going for it than just helping the retailer cope with the economic downturn.

With its location on Union Square, Rack is entering a lion's den of mass-market retailing, taking on the bargain elite including T.J. Maxx, Forever 21and Filene's Basement. That's fitting however, as its rapid Rack expansion shows that Nordstrom knows it has to figure the mass market into its plans for the future.

The recession turned previous calculations about what belonged in the luxury end of the market and what belonged in mass on its ear. Designers who previously sold only to boutiques and luxury department stores began making handbags for Target (TGT). Macy's (M) employed former Kmart doyen Martha Stewart, sharing her name with with Home Depot (HD). Designers and retailers were following recession-wracked consumers who were trading down and rewarding companies that offer conspicuous values, such as TJX (TJX), parent of T.J. Maxx, a company that provides famous-label products other retailers can't sell.

As an outlet store, Rack is supposed to sell what doesn't move at Nordstrom's department stores. But that's only part of its mission. In New York, it's also familiarizing shoppers with the designers and styles that populate its the full-line stores, even if in a limited service environment. The ability to place Rack stores in geographies where Nordstrom can't find the right location for a department store -- a problem management claims it has in New York -- is a benefit beyond the sales made to middle-class customers who can't yet afford stuff at full-line Nordstroms. The New York Rack also gives the retailer a chance to see just what works in the Big Apple and what might be a harder sell.

And there's another related benefit, since Rack stores aren't just outlets. Unlike TJX stores, the majority of the items Rack stores sell are produced for them. What Rack sells consistently are the upscale designer names that populate the department stores, whether by redirection or intention.

With department stores such as Macy's taking more of a mass-market approach to consumers, there's a widening gap between retailing for middle-class shoppers and for the more affluent. With Rack, Nordstrom isn't necessarily joining the mass market, although it clearly covets the consumers who typically shop there. Beyond immediate sales, Nordstrom has the opportunity of using Rack as an invitation for mass-market consumers to join it on the luxury end when their incomes warrant.

The luxury market is rebounding after being hammered in the recession, but the returning shoppers don't necessarily represent healthy future growth. Nordstrom Rack makes it that much easier for shoppers to transition from the self-service to the full-service luxury store environment, one that might be a bit intimidating otherwise. Nordstrom Rack is a chance for middle-earning Gothamites to get a taste of something they might want more of later.