Nordstrom’s service with a style

March 20, 2014, 2:53 PM UTC
Nordstrom store at the Americana at Brand in Glendale, Calif.
Courtesy: Nordstrom

World’s Most Admired Companies rank: 17

Headquarters: Seattle
Employees: 61,000
The business: Operating specialty-retail department stores

At Nordstrom, customers are more than always right: They set the company’s direction. The specialty-retail department store chain, founded in 1901, has evolved into a $12-billion-a-year business with 262 stores in 35 states on the strength of its strong reputation for customer service and by adapting well to changes in shopper preferences. And apparently the upscale retailer, which has been in the top 50 on Fortune’s World’s Most Admired Companies list six years in a row, isn’t resting on its heels: Nordstrom continues to invest heavily in making its vaunted service better — and more accessible to digitally dependent customers. The company says it plans to invest $3.9 billion over the next five years to update online-shopping options, enhance full-service stores, and expand its fleet of off-price Nordstrom Rack stores. “It’s what the customer wants,” says CFO Mike Koppel. “It is not necessarily our strategy.”

Lure the cost-conscious

To persuade value-driven customers to shop at Nordstrom, the retailer is expanding both its off-price outlet, Nordstrom Rack, and its customer-loyalty program. Nordstrom earns $550 in sales per square foot in its 142 Rack stores, compared with $400 at traditional Nordstrom stores, says Deutsche Bank vice president Paul Trussell. The company plans to capitalize on those higher-margin shops by opening nearly 100 more Rack stores by 2016. Analysts say Nordstrom may also pump up its Fashion Rewards Plan, which offers discounts to 3.7 million private-label credit card holders.

Expand carefully

Nordstrom executives are known to look — and look hard — before they leap. New Yorkers have been asking for a Nordstrom in Manhattan for at least two decades, but the retailer won’t have a full-service store completed there until 2018. The company was scrupulous during its search for the right location and was willing to put off the project until an ideal spot on West 57th Street came along. Likewise, Nordstrom is just now wading into the Canadian retail market. The restraint looks smart judging by Target’s experience. The discount retailer opened 124 stores in Canada last year and continues to absorb huge losses from the expansion. Nordstrom plans to open just six stores there over the next three years.

Dominate online

Nordstrom is investing nearly $1 billion over the next five years to enhance its online shopping platforms by updating its mobile websites and offering faster delivery. In 2011, Nordstrom acquired flash-sale retailer HauteLook, which made a name for itself during the recession by promising exclusive discounts of high-end brands for a limited time. Since Nordstrom took over, HauteLook’s membership base has tripled to 15 million active customers.

This story is from the April 7, 2014 issue of Fortune.