“Just Do It” – Nike’s Direct-To-Consumer Efforts, Easier Said Than Done?
Nike has made recent efforts on direct-to-consumer and supply chain transformation, but is still experiencing stalling sales. Are the recent initiatives enough?
In September, Mark Parker, Chairman, President, and CEO, of NIKE, Inc. announced first quarter 2018 earnings for the world’s biggest sportswear maker. Despite product innovations in the running shoe segment with premium priced Air VaporMax and in the women’s sportswear category with more stylish offerings, the company reported a 3 percent decline in North American revenues and flat year-over-year revenues company-wide [1,2].
Nike’s struggles are indicative of a larger problem, as major U.S. retailers have shown lackluster performance over the past 18 months. Digitalization and recent online trends have increased customer expectations; people are demanding more customization, faster, at improved service levels [3,4]. Additionally, digitalization has led to an expanded definition of the value proposition of the retail industry. Companies can no longer compete solely on the functionality of discrete products, but rather need to distinguish themselves on the value and performance of their broader product system [5]. With this increase in customer expectations and an expanded business model, traditional retailers have a decision to make: either meet these new customer and industry demands by rethinking the way they design their supply chain, or move over for someone who will.
During its 2017 Investor Day, Nike addressed these near-term customer needs and business-model challenges head-on. The Company expanded on its new “Consumer Direct Offense” which aims to serve the athlete faster and more personally through its “Triple Double Strategy” – a focus to drive double digit growth in three core areas: speed, direct, and innovation [6].
In response to changing customer needs, Nike announced a focus on supply chain efficiency improvement (speed) and direct-to-consumer emphasis (direct). With “2X Speed” – Nike will invest in end-to-end digital capabilities to improve the efficiency of its supply chain and serve consumers faster, doubling the speed to market by reducing the average product creation timeline by over 50 percent. In “2X Direct”, Nike is changing the structure of its supply chain – focusing more on direct-to-consumer distribution by aiming to double direct consumer connections through its NIKE.com platform and other initiatives. Lastly, the “2X Innovation” initiative addresses the changing retail industry, as Nike promises to lead with more distinct platforms that give consumers new aesthetics, spanning both sport and style [6].
In response to medium-term strategic challenges, Nike is also pursuing new channels for distribution, including a pilot program it began earlier this year to sell lower-end items through Amazon. Additionally, Nike also alluded to discontinuing some of its distributor channels, only focusing on those that are “differentiated retailers” that present Nike’s products in a heightened, curated way [7].
Although it is reassuring to see Nike’s shift in focus towards the direct-to-consumer space, if the company truly wants to have a “Consumer Direct Offense” and transform its supply chain to keep up with today’s digitalization, it needs to “Just Do It”. First, Nike needs to invest in more initiatives that drive e-commerce purchases. An increase in social and other digital ad-spend could drive increased traffic to NIKE.com and allow the company to double down on its direct-to-consumer strategy. Second, Nike needs to figure out Amazon’s long-term role in the company’s strategy. Recognizing that the internet giant has a role to play if Nike truly wants to go all-in on direct-to-consumer is an important step, but a pilot program for only lower-end items isn’t enough. Despite concerns about loss of pricing power and brand control, Nike needs to make its relationship with Amazon more permanent and all-encompassing across product lines. Leveraging Amazon’s expansive supply chain would be the quickest and easiest way for Nike to digitalize its own.
Digitalization may be the cause of the retail industry’s woes, but it can also be its savior. The digitization of the supply chain enables companies to address the new requirements of customers, the challenges on the supply side, and the remaining expectations in efficiency improvement [8]. With increasing pressure to transform its supply chain to be faster, more flexible, granular, accurate, and efficient, what role do traditional partnerships play in Nike’s “Consumer Direct Offense”? Is there any value in investing in “differentiated retailers” such as Nike’s relationship with Nordstrom Inc.? What about more traditional wholesale partners such as the independent running and sporting goods stores? In overlooking these intermediary retailers, is Nike missing a big opportunity to influence athletes that are true champions of the brand? Or do these retailers only pose an additional cog in the outdated supply chain wheel?
(731 words)
References:
[1] “Nike, Inc. Reports Fiscal 2018 First Quarter Results,” press release, September 26, 2017, on Nike, Inc. website, [https://news.nike.com/news/nike-inc-reports-fiscal-2018-first-quarter-results], accessed November 2017.
[2] Pamela N. Danziger, “Nike’s Challenges In The U.S. Market,” Forbes, October 27, 2017, [https://www.forbes.com/sites/pamdanziger/2017/10/27/nikes-challenges-in-the-u-s-market/#64d4cb9427df], accessed November 2017.
[3] Matthew Townsend, “Nike Declines After Athletic Giant Gives Bleak U.S. Outlook,” Bloomberg, September 26, 2017, [https://www.bloomberg.com/news/articles/2017-09-26/nike-s-anemic-u-s-growth-forces-company-to-rely-more-on-asia], accessed November 2017.
[4] Alicke, K., D. Rexhausen, and A. Seyfert, “Supply Chain 4.0 in consumer goods,” McKinsey & Company.
[5] Porter, M. and J. Heppelmann, “How smart, connected products are transforming competition,” Harvard Business Review (Nov. 2014).
[6] “Nike, Inc. is Accelerating a Consumer-led Transformation to Ignite its Next Phase of Long-Term Growth,” press release, October 25, 2017, on Nike, Inc. website, [https://news.nike.com/news/nike-inc-is-accelerating-a-consumer-led-transformation-to-ignite-its-next-phase-of-long-term-growth], accessed November 2017.
[7] Sarah Halzack, “Nike’s Solid Game Plan Has an Amazon-Shaped Hole,” Bloomberg, October 26, 2017, [https://www.bloomberg.com/gadfly/articles/2017-10-26/nike-investor-day-solid-game-plan-amazon-shaped-hole], accessed November 2017.
[8] Rexhausen and Seyfert, “Supply Chain 4.0 in consumer goods,” McKinsey & Company.
This is a very interesting topic and certainly a challenge that many retailers are facing today. I found it striking that there seems to be 2 discrete segments emerging among Nike’s customer base – those that will purchase directly from Nike and favor customization, and those that seek out the lower end merchandise that still have the brand and quality behind them. I would suspect that in the former category, Nike will still be able to compete on the basis of individual product quality as well as strong brand recognition. However I do believe they are smart to pursue channels such as Amazon for distribution of the mass-market merchandise. In response to your question regarding other distribution partners such as Nordstrom – I believe this channel can serve primarily as positive marketing and a strategy to keep the brand “elevated” in the eyes of consumers, but is unlikely to achieve scale and be additive to their goal of becoming more direct and efficient.
I agree that digitization and supply chain efficiency is at the core of change management programs as retailers shift from traditional brick and mortar strategies to omni-channel business models (retail, wholesale and e-commerce). I believe large businesses such as Nike, with strong brand presences, should continue selling through all available distribution channels even as their own model becomes more efficient. This includes specialty retailers — Nike currently sells through 900 doors and these respective online platforms (to the extent they exit).
Consumers may have to go direct to seller in order to obtain access to breadth of products, but first entry or introduction to a product comes in many different forms for various end consumers. Nike’s decision to sell through amazon did tarnish the already strained relationship with Nike’s 900 independent doors. Unfortunately, these doors have an “outsized influence on the brands that serious runners choose and who set the trends that others follow” [1].
While it is true that specialty retailers have found a way to coexist with Amazon through its seller partnership offering, it is still a tenuous situation when volume-driving brands such as Nike decides to add Amazon distribution. These stores, in turn, provide less support on the customer front in terms of brand exposure, thus leaving room for competitors to take market share.
[1] https://www.forbes.com/sites/pamdanziger/2017/06/27/nike-selling-on-amazon-and-what-it-means-for-specialty-running-retailers/#275af4387f21
Whitney, great article! It is so interesting to learn about how Nike is reorienting themselves in the new ecommerce world. Nike has historically been a leader in product innovation as well as store experience. I remember when the Nike flagship store opened in Chicago and it was beyond a store, it was an experience! I see the initiatives that you document here as Nike’s attempt to start the transformation, but to your point, there’s so much more to be done to become a leader in the future.
The question that you asked that is the most interesting to me is: how do partnerships, such as those with Amazon, Nordstrom and other retailers, play a role in the long-term strategy? In my opinion, they are going to be crucial. Foremost, this will enable Nike to get broad reach to people who are already shopping in these channels and may not otherwise go to Nike.com. Moreover, they will be able to leverage the supply chains to get clients what they want, when they want it. I believe that long-term the branded dot com website plays a strong role in building the brand and should have differentiated products to the other channels that they’re selling in, but it will be a place to cater to Nike aficionados rather than your casual customer buying a new pair of sneakers. That way, Nike will not have to overhaul the supply chain to stay in sync with every supply move that Amazon makes, but rather they can focus on their core customer promise through the dot com property. Moreover, one day they may be able to share warehouse space and leverage the supply chain capabilities of Amazon, even for those shoes they sell on their branded site. Amazon may seem like the foe right now, but one day I could see a very successful and symbiotic relationship between the two companies with each doing what they know best.