Nike’s business model going digital at warp speed
Retailers the world over flinched when, in October 2017, then Nike CEO Mark Parker heralded his intention of expanding the brand’s direct retail business. A corollary of this plan was a strategic reduction in the number of the US sport giant’s multi-brand retail partners. The stated goal was to cut down to 40 the number of major clients that would be able to sell Nike products.
Four years later, it is hard to tell how extensively the plan to reduce the access of independent retailers to Nike products has been implemented. But it is abundantly clear that the announcement was followed by action.
Production problems in Vietnam, and more widespread global sourcing issues are currently impacting Nike's global growth, but not hindering it. Last December, in a conference call with financial analysts for the publication of the group’s Q2 2022 results, Nike’s senior management team, led since early 2020 by CEO and President John Donahoe, did not stint on superlatives to describe the world number one sport group's quarterly performance.
Direct retail sales growth is compensating for a weaker wholesale performance, and Nike is making steady progress with its transformation into a global retailer, its eyes firmly set on the profitability boost produced by dispensing with the services of retail intermediaries. In North America, Nike’s leading market, the group generated 48% of last quarter’s sales via direct retail.
Of course, Nike has an extensive, well-organised monobrand store presence in the region, and on the US domestic market in particular. But it is chiefly the boom in online sales that is confirming the validity of the group's retail strategy.
In the December conference call, Donahoe stated that “whenever there’s turbulence, I always go back to fundamentals. For Nike, that means putting the consumer at the centre and leveraging our long-term competitive advantages, which include a culture deeply rooted in innovation, a brand that deeply connects with consumers, fuelled by compelling storytelling, and an unmatched sports marketing portfolio. And we believe a fourth emerging competitive advantage for us is Digital, as we are one of the few brands that can directly connect with and serve consumers at scale.”
To reinforce this point, Donahoe noted that Nike’s e-tail sales in North America for the Black Friday week, the region’s premier promotional event, recorded a growth of nearly 40%, while the number of subscribers to Nike’s digital platforms in China increased by 13 million after Singles’ Day, on November 11.
Before the Covid-19 pandemic, Nike apps and websites were already thriving, but the scope of the group's digital activity has further increased in the last two years. “Nike’s digital growth is outperforming comparisons and being fuelled by our member-centric focus. Nike Digital grew 11% in the quarter, on a currency neutral basis,” said Matthew Friend, CFO of Nike Inc., during the conference call, adding that “Nike Digital is now 25% of Nike’s total brand revenue, up three points versus the prior year and more than double the digital mix in Fiscal 2019.”
In hard figures, this means that Nike generated a quarter of its $22.5 billion H1 sales online. At a time when Puma’s entire annual revenue is expected to top the €6 billion threshold, Nike has generated €5 billion in six months solely via e-tail.
The US giant is keen to establish itself firmly in this channel. According to the management, Nike is busy with new initiatives in both the commercial and operations areas. In the last quarter, the group's most visible initiatives in this respect were the creation of Nikeland in the Roblox metaverse, and the acquisition of NFT specialist RTFKT. Tapping a content-generation seam that blends product presentations and culture, Nike announced the opening of a design studio in New York that features weekly live-streamed presentations of new models, interacting directly with the Nike community.
“Our consumer engagement is three times higher than the industry average for livestreams,” said Donahoe, citing as an example the drop of Jordan’s AJ11 Cool Grey sneaker, for which Nike sent out invitations to its largest-ever female-focused customer group. According to Donahoe, the model sold out in the first hour. “The [customer] group was selected utilising our new Dedication Score, designed to reward member groups with high product affinity. We continue to see Exclusive Access serve as a defining marketing mechanism to connect with consumers,” added Donahoe.
The other direction Nike is following involves forging closer relationships with its remaining retail distribution partners. In the USA, Nike has developed a new kind of partnership with the Dick's Sporting Goods (DSG) chain, enabling consumers to link up their DSG and Nike accounts, in order to gain access to a range of special offers and experiences. “Our partnership with DSG is a new model for how brands and retailers work together, delivering product, experience, and connection services to delight consumers at scale. We are fulfilling our vision that, through connected member experiences and inventory, powered by connected data and technology, we can provide consumers with greater access to the very best of Nike with more speed, convenience and connection to our brand and to sport than ever before,” said Donahoe.
Leveraging data analytics seems to be key in this respect. By allowing customers of third-party retailers to join the Nike platforms, the group is relying on its ability to transform them into loyal consumers, by better and more directly responding to their needs. “Member engagement grew 27%, and repeat buyers grew 50% versus last year, driving higher average unit retail price, average order value and member buying frequency. This year, 40% of total digital demand is coming from our mobile apps, highlighting the strength of our digital platform,” said Friend.
In order to secure the continued growth of its digital business, Nike also indicated it is investing on digital solutions in the US. “In order to enable this growth and drive the shift in marketplace composition, we have accelerated investment to evolve our distribution network and scale a digital-first supply chain,” said Friend. “We have opened two new regional service centres on both coasts, which are able to deliver more units to consumers with shorter delivery times. We also enabled ship-from-store capabilities across our store fleet, all leveraging advanced analytics derived from our acquisition of Celect. On [industrial] automation, we have added more than 1,000 robots in our distribution centres to handle digital growth. In our digital distribution centre in Memphis, robots handled more than 10 million units that would have otherwise required manual labour,” he added.
It is therefore the entire business model of the Nike group, and not simply its retail distribution system, that is currently undergoing an in-depth transformation. One that, according to Donahoe, is enabling Nike to augment full-price sales and improve profit margins. Above all, the group is going full steam ahead with its Consumer Direct Acceleration (CDA) strategy. CDA was introduced in early 2021, and aims for a 60% share of sales to be generated by direct retail in fiscal 2025, 40% of them coming from the e-tail channel.
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