OSS Article 4 | Nike

Nike’s stock fell by 19% during the last trading day of June. That is, erasing all its gains for the past 4 years. The stock plummeted just after Nike announced Fiscal 2024 Q4 results: an 18% revenue drop for the Converse brand, an 8% drop in direct e-commerce sales, and continued weakness in China are among the alarms putting Nike in a challenging spot. What should Nike do to ensure growth over the next 5-10 years? Let’s analyze it in this issue:

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An Overview of Nike:

-Founded: 1964 (as Blue Ribbon Sports), renamed Nike Inc. in 1971.

-Headquarters: Beaverton, Oregon, USA.

-Employees: 83,700

-Major brands: Nike, Jordan, and Converse

-Product lines: Athletic and casual footwear, apparel, performance equipment, team merchandise

-Distribution channels: retail stores, digital platforms, independent distributors

-Manufacturing: Outsourced contractors in Vietnam (50%), Indonesia (27%), China (18%), and other 8 countries^[1]

Nike Inc. is the world’s undisputed biggest player in athletic footwear, with a 34% share of the global market,^[2] and its market share is as high as 62.5% for segments like Athletic Shoe Stores sales in the US.^[3]

Your favorite college basketball team? Most likely their shirts are branded by Nike, and their shoes are Nike’s Jordans. Your neighborhoods who recently got into running? Surely they are working out on Nike shoes. And your favorite local music artist? They’re probably rocking a pair of Converse in their shows.

Competitive Landscape: Nike’s Challenges

Nike’s total revenue was US$ 51.21 billion in 2023, up 10% from the previous year. Their sales come from every corner of the world: North America, Europe, the Middle East, Asia Pacific, and Latin America.

With such a promising outlook, it’s natural to think: is anything going so wrong with Nike to cause such a staggering decline in its stock? First, let’s look at the footwear market:

Trends in the Footwear Market: the Asian Giant

The global footwear market is valued at US$ 82.56 billion and is expected to expand at a CAGR of 4.8% by 2033.^[4] During the past 2 decades, the rise of China was the biggest driver for the market. In 2005, China alone produced more than 60% of the world’s shoes,^[5] and the country became the world’s largest consumer of footwear.^[6]

As such, the big players bet enormously in the region: Nike has collaborations with the biggest e-commerce platforms like Tmall and has bet big on Direct-to-Consumer (D2C) retail, with its D2C revenue shared increasing from 23% in 2014 to 40% in 2019.^[7]Similarly, Adidas operated 12,000 stores across 1,200 cities in China in 2018, with digital operations in the country growing by 50% in the same year.^[8]

Winning in China —and winning in China’s digital markets— were the most important wins that a big player like Nike could have. But then, COVID came:

 In 2022, Nike’s Greater China revenues decreased by 13% on a currency-neutral basis.^[9] The decline was driven by multiple factors: supply chain constraints, government restrictions, and a more challenging retail environment. The Chinese started consuming less and less across both digital and brick-and-mortar; and across all product lines.

This decline furthered into 2023 and beyond. During Q1 and Q2 2023, Nike continued temporary store closures and reduced retail traffic in China, alluding to COVID. 2023 revenue decreased by 13% currency neutral, and EBIT was down 27% compared to 2021.^[10]

What Was So Bad About Nike’s Fiscal 2024 Q4 Results?

If you take a glimpse at the results, the outlook doesn’t seem drastically bad:

However, the worries come when you disaggregate the numbers: compared to last year, Greater China only grew by 3% before considering currency changes —even with COVID now long gone— Direct-to-consumer sales —one of Nike’s strategic priorities— only grew by 1%. The only product line with double-digit growth is equipment, but it only represents 4% of the business.

Add to it that Converse sales were down 18%, and the outlook becomes worrying.

What is Nike Currently Doing to Address These Challenges?

In its most recent annual shareholder letter, Nike’s CEO shared that the company is currently executing the following strategies to ensure sustained growth:

• Emphasis on Innovation: Nike is currently performing a product makeover, with renewed performance and lifestyle products, especially within sports. With major sports events this year such as The Olympics, Copa América, and the European Championship.

• Healthy Inventory Management: as a consequence of declined consumption in the China region, Nike had an inventory problem since COVID broke out. Nike is now decreasing future inventory purchases and increasing promotional activity, which has brought inventory levels to a more stable place.^[11]

• Adapting to Market Trends: such as Athleisure —a fashion trend that blends athletic and casual wear— which had an 84% surge in orders since COVID and originated incoming strong players like Lululemon.^[12]

• Corporate Targets: Nike has 29 corporate targets for 2025 focused on four areas around corporate responsibility: Diversity, Equity & Inclusion (DEI), Responsible Sourcing, Powering the Future of Youth Sport, and Protecting the Planet. However, it is important that Nike positions digital growth among its explicit corporate targets as it looks toward future growth.

What Should Nike Do Over the Next Years?

The answer is no longer centered around growing in China. Nike’s answer to how to ensure future growth is centered around three pillars: adapting to new distribution trends, continue growing in sports, and winning in emerging markets.

• Riding New Trends: on the distribution end, Nike still has a lot of room to grow in the digital space, both through its direct channels and through e-commerce platforms. I would double-down on marketing and development efforts of the company’s apps: SNKRS, Nike Running Club, and the Nike app; and I would strengthen partnerships with e-commerce giants across the world: if it worked in 2012 with the Tmall partnership in China, it would work even better now with the many platforms that now have widespread adoption.

• Growing in Sports: Nike’s release of the Vaporfly when Kipchoge broke the marathon record marked a breakthrough for running shoes, with technology that was never seen before. Innovating with equipment for major sports events coming up soon —The Olympics and the World Cup to name a few— represents a gold opportunity to further expand Nike’s partnerships, branding, and sales.

• Winning on Emerging Markets: Winning in countries like Vietnam could be a growth opportunity analogous to what China was decades ago. Nike already outsources 50% of its production there and the country is growing steadily: 8% GDP growth in 2022, and a rising middle class.^[13] The company is well-positioned to supply for the increasing demand of the country’s rising middle class. The same case could be made for other countries like Indonesia.

Nike has several avenues to sustain its growth, even with its recent worrying financial results. For companies like Nike that have a global presence, emerging markets in which manufacturing is already happening and a middle class is rapidly growing, are a huge opportunity, and so are digital channels. The tricky part? Passing from ideas to execution for seizing those opportunities becomes more difficult in these kind of corporate giants with several layers of management.

Stay nimble,

Justin Abrams

^[1]Nike’s 2023 Form 10-K

^[2]Statista Market Insights

^[3] IbisWorld US Company Benchmarking Report

^[4]FACTS.MR

^[5]UN Industrial Development Organization

^[6]Statista

^[7]Daxue Consulting

^[8]China Daily

^[9]Nike’s 2022 Form 10-K

^[10]Nike’s 2023 Form 10-K

^[11]Nike’s 2023 Form 10-K

^[12]Forbes

^[13]US Department of Commerce