Department store Nordstrom (NOBE) said it will work with Benchmark Capital to establish a subsidiary for its catalog and Internet operations in the latest attempt at combining the brand of a traditional retailer with the savvy of a Silicon Valley investor to create an e-commerce powerhouse.
The deal comes just days after Benchmark's first attempt to team up with an offline chain fell apart, when the Menlo Park, Calif., venture-capital firm and Toys "R" Us (TOY) called off their high-profile joint venture.
"The things that don't kill us make us smarter," said Benchmark general partner Bill Gurley in an interview, predicting that the partnership with Nordstrom will be a success.
Nordstrom said it will retain majority ownership in the new venture, dubbed Nordstrom.com, while Benchmark and Seattle-based VC firm Madrona Investment Group will be minority owners. Benchmark will contribute $15 million into the venture, one of the largest investments for the firm that gained notoriety by backing successful e-commerce startups such as eBay (EBAY), Ariba and E-Loan. Nordstrom will add $10 million to the sum it has already invested in catalog operations and online, while Madrona will chip in just $1 million.
With $26 million in capital, Nordstrom.com will likely need additional financing next year, said Dan Nordstrom, copresident of the department store and chief executive officer of Nordstrom.com. Nordstrom said the company would consider an IPO.
Nordstrom.com will build on the retailer's existing $200 million online and catalog operations, which it launched in October of 1998. Its first major effort will be focused on Nordstromshoes.com. The company has an ambitious plan to offer 20 million shoes by the beginning of the holiday shopping season, a hundredfold increase from its current inventory. The company said that 30 percent of its online revenues come from shoes. The initiative will be backed by a $17 million advertising campaign, Nordstrom said.
"They have been pretty innovative online," says Lauren Cooks Levitan, an e-retailing analyst at BancBoston Robertson Stephens. "This is an opportunity to isolate the business [from the parent company] and attract corporate talent."
Nordstrom Chairman and CEO John Whitacre will join Gurley and Dan Nordstrom on the Nordstrom.com board of directors.
"Hopefully what Benchmark brings is people who can help them ramp up rapidly," Cooks Levitan says.
The deal between Benchmark and Toys "R" Us fell apart because the two companies could not agree on who would own the company, according to Benchmark officials. Insiders say the deal also suffered from a culture clash between the freewheeling ways of Silicon Valley investors and the more conservative style of the offline toy retailer. Adding to the problems was the toy giant's halfhearted commitment to online sales, according to Robert Moog, who first headed the venture.
This time, the two companies engaged in extensive talks before agreeing to become partners. "We've been working on this thing for about six months getting to know each other," Gurley said. "We've walked through all the details."
Benchmark officials suggested that things will turn out differently this time. "We are committed to delivering the leading fashion experience on the Internet, and with ourselves, Nordstrom and, most importantly, the employees at Nordstrom.com, we have all the resources necessary to make it happen," Gurley said in a statement.
Tom Alberg, a principal at Madrona Investment Group and a board member of online retailer Amazon.com (AMZN) since its founding, helped put together the deal.
Nordstrom has benefited from a strong degree of customer loyalty, as the Seattle-based department store built its brand on a reputation for providing quality customer service. The company will face the challenge of maintaining that loyalty in cyberspace where competitors' stores and price comparisons are available a few clicks away.
"We have to find a way to put that Nordstrom experience online," Gurley said.
The company is also likely to face fierce competition online from Federated Department Stores, the Gap and other companies. It may also face challenges from some of the manufacturers whose brands Nordstrom.com will sell.
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