Nike (NASDAQ: NKE) is a leading brand of sports shoes, apparel, and equipment. Incorporated in 1967, under the laws of the State of Oregon, Nike is the largest seller of footwear and apparel globally. Apart from its branded retail stores, the company also sells its products online and through independent distributors. However, Nike does not make the products it sells. These products are made by independent contractors. Nearly, all the suppliers who make Nike shoes and apparel are located outside the United States. The U.S. is the leading market of Nike with the largest number of Nike branded retail stores. However, the company also has an impressive presence in the other corners of the world. Known for its focus on product quality and innovation, Nike spends heavily on research and design which is an important reason behind its leading position in the global market. Competition in the footwear industry has grown intense resulting in Nike growing its focus on research and development as well as marketing. However, a key reason behind the success of Nike is its unique business model and its core competencies. The company is enjoying growth in sales and revenue in recent years driven by its focus on innovation as well as changing consumer trends. Take a look at the business model of Nike and the main drivers of its revenue and profits.
Product Categories and Segment-wise Performance:
Nike brand generates revenue mainly from the sales of shoes, apparel, and equipment. Other sources include sales of Converse, Jordan, and Hurley products as well as Nike IHM.
The Nike brand makes products in six key categories which include: Running, NIKE Basketball, the Jordan Brand, Football (Soccer), Training and Sportswear (its sports-inspired lifestyle products). The company also markets and sells products designed for kids, as well as for other athletic and recreational uses such as American football, baseball, cricket, lacrosse, skateboarding, tennis, volleyball, wrestling, walking, and outdoor activities.
Athletic footwear products of Nike are designed mainly for athletic use. However, most of its products are worn casually or for leisure purposes. The main focus of the brand is on innovation and making high-quality products. Its top-selling footwear brands include the Running products, Jordan brand, and Sportswear which also account for the largest part of Nike’s revenue.
Nike’s revenue from the Running category has grown by 7% from 2017 to 2018 (5% on a currency-neutral basis). Nike’s wholesale equivalent revenue from ‘Running’ products grew to $5.2 billion in 2018 from $4.9 billion in 2017.
Revenue from the Jordan brand fell by around 8% (9% decline on a currency-neutral basis) in 2018 compared to 2017. Nike’s wholesale equivalent revenue from Jordan came down to $2.9 billion in 2018 from $3.1 billion in 2017. In the ‘Sportswear’ category, Nike’s revenue saw a growth of around 11% (8% on a currency-neutral basis) rising from $8.99 billion in 2017 to $10 billion in 2018. Sportswear category is the largest source of revenue for Nike followed by Running products, Training products and Jordan brand (based on revenue in FY2018).
Total Nike brand wholesale equivalent revenues grew by around 6% (4% on a currency-neutral basis), rising from $28,694 million in 2017 to $30,301 million in 2018.
The brand also sells a line of performance equipment and accessories under the NIKE brand name, including bags, socks, sports balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment and other equipment made for sports activities. The company sells small amounts of various plastic products to other manufacturers through its wholly-owned subsidiary, NIKE IHM, Inc., doing business as Air Manufacturing Innovation. The Jordan brand makes and sells athletic and casual footwear, apparel and accessories in the basketball category using the Jumpman trademark.
Nike makes products for men, women as well as young athletes. Men’s products form the largest category followed by women’s and young athletes based upon the revenue they generate. In 2018, Nike’s revenue from Men’s products grew by around 7% (5% on a currency-neutral basis). Nike’s wholesale equivalent revenues from men’s products rose from $16,041 million in 2017 to $17,114 million in 2018. The company’s revenues from women’s products grew by around 4% (2% on a currency-neutral basis). Nike’s wholesale equivalent revenues from women’s products rose from $6,644 million in 2017 to $6,915 million in 2018. Nike’s revenues from products for young athletes grew by 1% (- 1% on a currency-neutral basis). Nike’s wholesale equivalent revenues from products for young athletes grew from $4,838 million to $4,906 million in 2018.
Nike does not make the products it markets and sells. The company has instead outsourced all the manufacturing to external suppliers. There are at least 124 footwear companies in 13 countries that make all the footwear that Nike sells. Several of these independent contractors which are located mostly outside the United States operate multiple factories. In 2018, the largest one of these factories accounted for around 9% of the total footwear production of Nike. Contract factories in Vietnam, China, and Indonesia manufactured $7%, 26% and 21% of Nike branded footwear respectively in 2018. Apart from these, the company has entered into manufacturing agreements with independent contract manufacturers in India, Argentia, Italy, Mexico and Brazil for manufacturing products for sale in the local markets. Nike mainly uses natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, nylon, polyester and canvas for the production of its footwear. It also uses polyurethane films for making Nike Air-Sole cushioning components.
Nearly, all of the apparel that Nike sells is also manufactured by independent contractors located outside the United States. In 2018, around 328 apparel factories located in 37 countries supplied Nike with apparel. Contract factories in China, Vietnam, and Thailand produced approximately 26%, 18% and 10% of Nike branded apparel in 2018. The main materials that Nike uses for making apparel include natural and synthetic fabrics and threads (both virgin and recycled); specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat and repel rain and/or snow; and plastic and metal hardware. In this way, Nike has outsourced nearly all of its manufacturing and still retained heavy focus on quality and innovation. Despite the large supply chain and manufacturing network spread over several countries, the company has maintained the quality of products.
Sales and Marketing:
Competition has grown a lot in the footwear industry. Some of the leading competitors of Nike include Adidas and Under Armour. Apart from the competition, there are other factors too that affect the popularity and demand of its products. Changing design trends, relative popularity of various sports activities, as well as seasonal trends, also affect the demand of these products. Nike has brought a varied product mix. However, to respond to the changing trends, it must also make adjustments to its product mix from time to time. Releasing new products regularly as well as extensive marketing is also essential to maintain the demand for Nike products. If the company is unable to respond to the changing trends, there will be an adverse impact on the demand of its products and the company’s profitability. The company employs several channels for the marketing of its brand and products. Apart from its physical and online sales channels, the company uses digital advertising and social media promotions for brand awareness and demand creation. Every year the company invests a large sum in advertising and promotions. In 2018, its total demand creation (marketing) expenses reached $3.6 billion compared to $3.34 billion in 2017. There was an overall 7% increase in the total marketing expenses of Nike from 2017 to 2018. Demand creation expenses of Nike include its advertising and promotion costs, including costs of endorsement contracts, complementary product, television, digital and print advertising and media costs, brand events and retail brand presentation.
Nike also has an extensive global sales network. The United States is its largest market and therefore has the highest number of physical stores. In 2018, the number of Nike brand retail stores in the United States was 392 and 790 in the international markets. The number of total Nike brand retail stores globally rose to 1,182 in 2018 from 1,142 last year. The brand also sells its products from Nike and Converse brand owned e-commerce platforms in more than 45 countries.
Leading Markets :
On a geographical basis, the business of Nike is divided into four main divisions which include North America, EMEA (Europe, Middle East, and Africa), Greater China and APLA (Asia Pacific Latin America). North America is the largest geographical market of Nike based on net revenue. In 2018, revenue from Nike brand products from North America declined by 2% (2% on a currency-neutral basis) from $15.22 billion in 2017 to $14.86 billion in 2017. Revenue from EMEA (Nike brand products) climbed 16% on the other hand, rising from $7.97 billion in 2017 to $9.42 billion in 2018. Revenue from Greater China also climbed by 21% in 2018 rising from $4.24 billion in 2017 to $5.13 billion in 2018. APLA (Asia-Pacific and Latin America) revenue of Nike increased by 9% from 2017 to 2018 rising from $4.74 billion in 2017 to $5.2 billion in 2018. The Converse brand is a separate reportable segment which saw its revenue fall by 8% in 2018 from $2 billion in 2017 to $1.9 billion in 2018.
A list of nations where Nike’s international branch offices are subsidiaries are located:
- Argentina, Australia, Austria,
- Belgium, Bermuda, Brazil,
- Canada, Chile, China, Croatia, the Czech Republic,
- Finland, France,
- Germany, Greece,
- Hong Kong, Hungary,
- India, Indonesia, Ireland, Israel, Italy,
- Macau, Malaysia, Mexico,
- the Netherlands, New Zealand, Norway,
- Panama, the Philippines, Poland, Portugal,
- Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland,
- Taiwan, Thailand, Turkey,
- the United Arab Emirates, the United Kingdom, Uruguay,
- and Vietnam.
Risks and challenges:
Not just in the United States, but in the international markets too, the athletic footwear, apparel, and equipment industry is marked by heavy competition. Internationally, the brand competes with a large number of sports and leisure footwear, apparel and sports equipment companies. Not just in terms of sales and marketing, but there is intense competition in manufacturing and supply chain as well. Since the number of suppliers for good quality raw materials is limited, large brands also compete for the best manufacturers. From their product offerings to marketing as well as digital presence and social media, the companies compete in all these areas fiercely. Intense competition in the industry also leads to higher expenditure on research and development as well as marketing.
Changing consumer trends:
The success of Nike to a large extent depends upon its ability to anticipate consumer demand and product trends in a timely manner. Responding rapidly to these changing trends may sometimes prove difficult because of product lead times. Changing consumer preferences may not be so easy to predict. So, it is not certain that every new product that Nike releases will gain the same acceptance and popularity. Nike needs to adjust its product mix from time to time in order to maintain its sales and profitability. Moreover, in the twenty-first century consumer preferences have changed faster than ever which also means higher risks related to sales and profits.
Need for a higher focus on innovation:
The commercial success of Nike products also depends upon technological innovation and quality control in the design and manufacturing process of footwear, apparel, and athletic equipment. Nike relies upon experts and specialists in the fields of biomechanics, chemistry, exercise physiology, engineering, industrial design, sustainability, and related fields, as well as research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and other areas for designing and testing new products.
Economic conditions globally can also have a positive or negative effect on the sales of Nike products. The state of the global economy has a direct impact on the sales of international brands like Nike. The impact can be most acute in the fast-developing and emerging economies. Lower consumer spending can also result in lower sales, revenue, and gross margins. Moreover, economic fluctuations can also result in limited access to financing in credit and capital markets at reasonable rates. In this way, the state of the global economy also poses significant challenges and risks before Nike.
Other risks and challenges:
Apart from the above-outlined risks and challenges, there are several more risks and challenges in the global environment that affect the business of Nike and its sales and revenues from various geographic markets. The need for compliance has grown and the political environment in major markets, as well as trade regulations and tariffs, can also make business challenging for Nike. Other forms of risks like data security and privacy risks can also have a negative effect on the operations and reputation of Nike.
Nike is renowned for its quality, design, innovation, and marketing. The swoosh logo sets it apart from its competition and the crowd of brands in the sports and leisure market. In 2018, while the overall revenue of the brand saw impressive growth, the company has seen its financial performance improve consistently over the last five years. Net Revenue of Nike grew from $34.4 billion to $36.4 billion from 2017 to 2018. Its gross profit also improved from $15.3 billion to $15.96 billion during the same period. The main reasons behind the growth of the brand include its focus on research and innovation as well as marketing. It is investing heavily in both areas. However, the international market environment is full of risks and challenges. With growing competition, Nike also needs to retain its focus upon R&D, marketing and ready to adjust its product mix rapidly with changing consumer trends. Running, training and sportswear products remained its primary drivers of revenue in 2018. Nike has adopted a strong business model and despite having outsourced nearly 100% of its manufacturing, Nike has maintained an excellent level of quality. These factors have helped it maintain its leadership in an intensely competitive industry. In the near future, Nike plans to increase its focus on sustainable raw materials in order to grow its popularity, customer base and sales as well.