Case Study of Nordstrom Inc. (2005)
Nordstrom started out as a Seattle shoe store in the early 20th Century, but by the 1980s it was a department store chain with a near-cult following among affluent shoppers, thanks to its fashionable merchandise and extraordinarily high level of customer service. The company became virtually synonymous with upscale retailing.
The cachet associated with Nordstrom caused many economic development officials across the country to see the opening of one of its stores as an instant cure for a struggling central business district or aging suburb. A business magazine once called it "the Holy Grail of downtown development."
Over the past two decades, Nordstrom has exploited its image by demanding that cities promise to provide a hefty cash payment or other inducements before the sought-after retailer would even consider them for a store opening. In doing so, the company became one of the most brazen players of the subsidy game.
Nordstrom started out by demanding concessions from shopping mall owners. The retailer would insist that the stores be built and outfitted by the developer and leased for free. In 1992 one developer told a reporter: "You pretty much have to guarantee that when they open their doors for businesses, they will not have any money invested in the deal."
Soon it was government that was lavishing benefits on the company and the developers it worked with. In 1994 public officials in Norfolk, Virginia got the U.S. Department of Housing and Urban Development to offer $32.8 million in loans--secured by Community Development Block Grant funds--so that the city could pay for the construction of a store for Nordstrom. The retailer balked at a HUD requirement that 51 percent of the resulting jobs go to low-income residents, so the city turned to private banks for the funds.
The Norfolk deal was one of several in which cities sought to use HUD loans to finance Nordstrom projects. In 1994 Seattle used $24.2 million in federal funds to help purchase an old commercial building that was to be turned into a store for the company. Three years later, officials in Spokane, Washington obtained a $22.7 million HUD loan to help finance a redevelopment project containing a new Nordstrom as well as other shops, a multiplex movie theatre and a parking garage.
In 1995 developer John Buck sought a $14 million subsidy from Chicago for a Nordstrom-anchored mall on North Michigan Avenue, but Mayor Richard Daley scoffed at the idea of using public money to assist further development of the "Magnificent Mile," one of the world's top-grossing retail districts.
The Kansas City suburb of Overland Park had no such compunctions. It used $9.98 million in public funds to build parking garages and make access-road improvements to help lure Nordstrom to Oak Park Mall. In late 1995 the Rhode Island legislature approved a $72 million sales tax rebate deal for a mall that was to be anchored by the first Nordstrom in New England.
The pattern continued through the rest of the decade. In Des Peres, a wealthy suburb of St. Louis, shopping-center giant Westfield America got local officials to declare that a mall the company bought was "blighted," in order to make it eligible for about $30 million in tax-increment financing to be used to rebuild the complex and bring in Nordstrom. Around the same time, officials in Hurst, a suburb of Ft. Worth, Texas, agreed to divert up to $80 million in sales tax revenue over 20 years to subsidize the expansion of the North East Mall to include Nordstrom and other stores.
Forest City Enterprises, developer of the Short Pump Town Center mall in suburban Richmond, Virginia received $25 million in public financing assistance for the project, which contained a Nordstrom.
By the early 2000s, Nordstrom was in such demand that it could afford to turn down some lucrative proposals. The company decided not to proceed with the opening of a store in downtown Pittsburgh that was to be subsidized to the tune of $28 million. The retailer also snubbed Cincinnati, where officials had spent years putting together a subsidy package worth $48 million.
Occasionally, public officials followed Chicago's lead and rejected Nordstrom's demands for large amounts of financial assistance. For example, a plan to bring the retailer to the Valencia Town Center mall in Santa Clarita, California fell through because of opposition to the company's insistence on a $20 million subsidy.
In other cases, public officials found that Nordstrom was not the magic bullet they had assumed. The tax revenues generated by the publicly subsidized store in Spokane turned out to be disappointing. This made it difficult for the city to meet its repayment obligations on the HUD loan, forcing officials to divert other block grant funds.
Word of such shortfalls may explain why subsidies have not played a major role in Nordstrom's most recent store openings. In March 2005, Denver Mayor John Hickenlooper went out of his way to emphasize that "there are no city incentives" being given to the company in connection with its new store in the Cherry Creek Shopping Center. Perhaps public officials are realizing the drawbacks of being sucked into the retail subsidy syndrome.
Yael T. Abouhalkah, "Wooing Developers with Incentives and More," Kansas City Star, September 7, 1995.
Tim W. Ferguson and Josephine Lee, "Corporate Welfare," Forbes, April 20, 1998.
Lisa Biank Fasig, "Downtown's Future: A $50 Million Bet on a Horse Named Nordstrom," Cincinnati Enquirer, May 12, 2000.
Scott Finn, "Mall Wars: Richmond, Va. Shows How Far Governments Will Go to Attract Upscale Retail Shoppers," Charleston Gazette, October 20, 2002.
Steven Goldsmith, "Questions Linger Over Nordstrom Link to HUD Loans," Seattle Post-Intelligencer, August 23, 1997.
"HUD Money Tapped to Pay for Mall," Associated Press State & Local Wire, February 2, 2004.
Greg LeRoy, The Great American Jobs Scam, San Francisco: Berrett-Koehler 2005, pp.146-148.
Teresa F. Lindeman, "Giving to Get: Are Cities Offering Too Much in Incentives to Lure Nordstrom Stores Into Town?" Pittsburgh Post-Gazette, April 16, 1999.
Alex Marshall, "Nordstrom Balks at Stiffer Mall Hiring Rules," The Virginian-Pilot, May 18, 1996.
Alex Marshall, "Norfolk Wins Loans for Mall; HUD Money Crucial to Build the Nordstrom at MacArthur," The Virginian-Pilot, November 3, 1994.
Marisa Taylor, "North East Mall Expansion May Cost Hurst $80 Million," Fort Worth Star-Telegram, June 20, 1997.