Amid the doom-and-gloom of the department-store landscape, Nordstrom is finding light in DTC.

“With direct-to-consumer, digitally native brands in store, the customer is engaged. It’s a positive for us,” said Tricia Smith, Nordstrom’s evp and gmm of women’s apparel. “But the terms are different — we had to change our partnership model from a transactional approach to a strategic approach. It’s a new day for us in merchandising now.”

By changing its merchandising strategy, Nordstrom has clinched deals with brands that never sold wholesale before, some initially setting out to avoid the wholesale channel altogether. Bonobos, Everlane, Reformation, Warby Parker, Greats, Good American, Raden and Madewell have all sold or currently sell through and select stores.

It’s paid off for the retailer: In the past six years, Nordstrom’s annual revenue has increased from $11.7 billion in 2012 to $15.1 billion in 2017. Digital sales grew in the double digits in the last year, according to the company, now accounting for 30 percent of the business. Co-president Pete Nordstrom predicted in October that digital sales would account for 50 percent of all business in under five years’ time. Limited-distribution product, which includes private-label Nordstrom brands as well as specialty retail partners like DTC brands, grew in revenue by 14 percent in 2017. For their part, DTC brands have come to make up an average of 5 percent of market share for their respective industries, like luggage, beauty and mattresses, according to IAB.

“Nordstrom was one of the earliest students of what was happening in the brand landscape,” said Kirsten Green, the founding partner at Forerunner Ventures, the VC firm that has invested in DTC brands like Glossier, Away, Bonobos and Reformation. “It became a self-fulfilling prophecy: They can now show new companies who are thinking of working with them their track record with similar partnerships.”

Over time, Nordstrom’s early interest in the space has only become increasingly relevant to retail’s shifting landscape. While traditional brands like Coach and Michael Kors tighten up inventory buys and reduce wholesale accounts in order to focus on direct sales, DTC brands born online are hitting a glass ceiling as the cost of online advertising and customer acquisition continues to climb. In search of new growth opportunities, these brands have already moved into direct physical retail stores and expanded into more product categories, leaving one retail stone unturned: wholesale.

Welcoming back the middleman
While DTC brands thought the online retail era meant infinite growth, they’re running out of steam.

“Digital marketing is just one part of a much bigger puzzle, and anyone who thinks they’re going to scale to a massive size by relying on digital advertising would be wrong,” said Ryan Babenzien, the CEO of DTC sneaker brand Greats, which launched in Nordstrom in 2017. “We look at growth holistically, and Nordstrom is one piece of the overall strategy. We don’t plan to get overly ambitious with the wholesale side of the business.”

It comes down to the deal: At the core of these conversations is the acknowledgement that more power has shifted to the hands of the brands by way of the customer.

“The customer has changed the path to purchase so that now, every wholesale brand has gotten into the business of becoming a retailer,” said Green. “At the same time, it doesn’t pan out in the long run to be an island of your own as a brand.”

Several brand founders who have worked with Nordstrom described conversations where the retailer was willing to bend to individual brands’ needs. Emma Grede, the co-founder of the digitally native denim brand Good American, said she only works with retail partners that will commit to sharing customer information back with the brand, as well as buy into its full size range. One founder who wished to remain anonymous said his brand was not selling product to Nordstrom at full wholesale margins, because the retailer understood the products were designed and manufactured without those margins built in. Smith, for her part, said that Nordstrom will sometimes assist small brands who don’t have their supply-chain logistics in place to account for wholesale inventory buys.

“They look at young brands like the honey that brings in the bees,” said the brand founder. “They’re very eager to partner with DTC and younger, more dynamic brands that will draw in a younger customer, and they have the foresight to think about what that means for the businesses on the other end — it’s not about selling in, but selling through.”

Not all retailers have yet come to terms with this power shift. One CEO who is working through a deal to sell in Nordstrom said he originally saw his brand more at home on Shopbop’s e-commerce site. He pitched his brand to the business, which came back and said that it has to make a certain margin on every product it sells, and that every sale must go through parent company Amazon as a wholesale seller. There was no room for discussion. The brand founder who worked out specific margin terms with Nordstrom said that he had a much different conversation with Bloomingdale’s, which treated it the same as any other wholesale brand.

“They didn’t understand we didn’t build the business for the wholesale model,” he said. “They burn companies — they get really excited and buy up a lot of inventory without recognizing the risk that comes with a non-mature brand. We just couldn’t move product in stores where we had very little brand awareness, yet we were in all of those stores. If you sell a million units, it feels great, but when you’re buying it all back, it’s terrible for your business.”

Striking a deal on new terms
Smith said investing in these brands has changed the way Nordstrom operates internally. Where it used to have a singular way of working with brands — compliance manual and all — it now practices fluidity.

“We used to be transactional, and now we have a higher degree of transparency and collaboration. We have to be open. We can’t say, ‘This is how you’ll work with us,’ not if we want their business,” she said.

The company works with brands to learn what data would be most beneficial to them, and then it reports back with both quantitative and anecdotal information around customer demographics, what other brands were bought alongside a brand’s product, and where sales are coming from. It also gives these brands a say in what products would perform best, as well as a role in creating visual presentations both in store and online. Buyers’ roles have been rethought in order to put more emphasis on discovering new brands and making deals with them. Opening Ceremony’s Olivia Kim was brought on in 2013 as Nordstrom’s vp of creative projects, and her “pop-in” concession model is seen as a testing ground for initiating new business.

Overall, Nordstrom’s inventory mix has become more varied, with digitally native and direct-led businesses accounting for its “emerging brand” business, rather than wholesale-led.

“Nordstrom has given the customer what it wants, and what the customer wants is what they don’t see in other department stores. They’re going after brands with a story to balance out brands with heritage,” said Ed Gribbin, CEO of apparel consultancy Gribbin Strategic. “Still, it’s a risk. But when the quantities are small and the brand is young, you’re making a gamble.”

Across the board, the retail industry will see more openness at the table when discussing such partnerships — and the conversations will continue, according to Richie Siegel, the founder of retail analytics company Loose Threads. “The direct purity is over,” he said.

“We’re seeing brands and retailers figure out new ways to work together in a way that makes sense — the business model of retailing is going to look very different in the future,” said Green. “We’re at the beginning of that.”