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Nordstrom to spin off Internet subsidiary

The department store chain says it is creating an Internet subsidiary in partnership with Benchmark Capital.

Department store chain Nordstrom announced today that it is creating an Internet subsidiary in partnership with Benchmark Capital.

The Seattle-based retailer will invest $10 million in cash in its new Nordstrom.com subsidiary, which will take over the company's Internet and catalog businesses. Nordstrom will own a majority stake in the new subsidiary. Benchmark Capital, which will invest $15 million in the Internet arm, will have a minority stake in Nordstrom.com, as will Madrona Investment group.

One of the first outgrowths of the deal will be a new shoe site, which Nordstrom.com representatives dubbed as the soon-to-be "world's biggest shoe store." The site, located at Nordstromshoes.com, will offer some 20 million pairs of shoes by the holiday season this year, the company said. Nordstrom said it offers only 200,000 pairs of shoes through its current Web site.

Bob Schwartz, general manager of Nordstrom's Internet operations, said he expects the store to be up and running by November, which is when a $17 million advertising campaign will begin to promote the site. Schwartz said that shoes comprise 30 percent of the sales on the Nordstrom.com Web site.

The company plans to dominate the online shoe market and will use its new shoe site to push customers into other departments online, Schwartz said. "We needed to own something," he said.

According to Benchmark general partner Bill Gurley, Nordstrom.com will be set up as an independent subsidiary, in charge of its own daily operations. The online site and the catalog business will share a distribution center in Cedar Rapids, Iowa. Company representatives estimated catalog sales at roughly $200 million last year.

Although the Nordstrom.com's distribution will be separate from that of its parent company, customers will be able to return goods to any Nordstrom store, Schwartz said. Having this tie in to Nordstrom's physical stores means that unlike most e-commerce customers, Nordstrom.com's customers will have to pay a sales tax on items they buy on the site, Schwartz and Gurley acknowledged.

But Gurley said the benefits from connections to the physical stores will outweigh the tax drawback. "It certainly hasn't shown to be an impediment to business so far," he said.

Benchmark's e-commerce plays
Gurley, who will join Nordstom.com's board of directors as part of the agreement, said Benchmark's deal with Nordstrom differs from the investment firm's failed relationship with Toys "R" Us. For one thing, unlike the Toysrus.com pact, through which the two sides never signed a final contract, Gurley said the deal with Nordstrom has already closed and will take effect immediately. And Nordstrom.com has a management team in place; Toysrus.com management team still hasn't come on board.

Gurley said that Benchmark might consider deals with other brick-and-mortar businesses in the future, but because of the fallout from Toysrus.com, the venture fund would be cautious. The Nordstrom deal attracted Benchmark because of Nordstrom's strong brand, its attention to customer service, and that it has a direct sales operation in place for its catalog business, Gurley said.

"To the extent that we can find other situations that have these elements, we will do them," Gurley said. "I think it's rare enough."

Nordstrom launched its Web site in October 1998. Company co-president Dan Nordstrom, 36, who currently heads the company's direct sales division, was named chief executive of the new subsidiary.