|Company Name||Nike Inc.|
|Founded||25 January 1964, Eugene, Oregon, United States|
|Headquarters||Beaverton, Oregon, United States|
|Industry sector||Sports Shoes and Apparel.|
|Net Revenue FY 2020||$37.4 billion|
|Employees (May 31, 2020)||75,400|
|Net Income 2020||$2.54 Billion|
|Marketing Expenses 2020||$3.6 Billion|
An Introduction to Nike:
Nike (NYSE: NKE) is the largest brand of sports shoes and apparel in the world with a global footprint. It is a well-recognized brand in most corners of the world. Apart from its great quality products, Nike is known for its excellent marketing strategy and techniques that have helped the brand gain a distinct position and identity in the global market. Nike has its headquarters in Beaverton, Oregon, United States. The company has been growing consistently over the past several years. Nike’s revenue in 2019 reached $39.1 billion compared to $36.4 billion in 2018. In 2020, its revenue during the fourth quarter took a hit due to the pandemic, but the yearly revenue remained $37.4 Billion. Not just an excellent revenue growth rate, but the company has also maintained strong profitability. It enjoys one of the most impressive profit margins in the entire shoe industry.
As Nike’s focus on customer experience has grown, the company is providing its customers with an omnichannel experience. Customers’ expectations and preferences have changed fast in recent years. Their dependence on digital technology has also grown. Apart from bringing products that fit into their customers’ lifestyles, Nike has also altered its sales and marketing strategy to suit its customers’ tastes. However, Nike has focused on developing its own digital channel rather than depending on others like Amazon. It pulled out of Amazon’s e-commerce platform in 2019. However, the company’s investment in its own digital sales and distribution channels has paid off during the coronavirus crisis.
Apart from its core brand, Nike also owns Converse and Hurley. The US is the largest market for Nike and in 2019, it accounted for around 41% of the net revenue of the company. There were 384 retail stores of Nike operational in the US as of 2019, including Nike factory stores, brand inline stores, Converse and Hurley stores. Their number was reduced to 338 in FY 2020. With a growing focus on optimizing and delivering a superior customer experience, Nike is now more interested in serving its consumers directly than through retailers and wholesalers or other e-commerce channels. Its sales from direct to customer channels have also experienced faster growth in recent years. Nike has retained its leadership position in the shoe industry through a consistent focus on quality and in the light of changing customer preferences, it has modified its business strategy to maintain its lead.
Read more about Nike in this swot analysis analyzing its key strengths and weaknesses in 2020.
Market leading position:
Nike is the market leading brand of sports shoes and apparel. The company is enjoying strong financial performance over the last several years driven by its focus on product quality, innovation, sustainability and customer experience. Nike is a highly competitive brand just as it is highly customer centric. Its market leading position is a result of its consistent focus on product design, quality and changing consumer preferences. As a sports shoes and apparel brand, Nike enjoys the strongest popularity of all the brands in the industry. Based on its performance over the last five years, it is not difficult to infer that shaking Nike from its leadership position is very difficult for the rivals. While Adidas has advanced fast in recent years and poses a formidable challenge before Nike, the industry leader has still maintained a strong edge over its rivals.
Nike’s leading strength is the brand equity the company has built over the years. It has been able to successfully position itself as the brand for athletes. However, it is also the most trusted brand of sports shoes and apparel because of the premium quality of its products. Due to the outstanding quality and design of Nike shoes and apparel, Nike products are the favorite of the young customers worldwide. Throughout its history, the company has introduced several market leading technologies that have helped it dominate the sports shoes market. Nike has been a customer centric brand since its beginning and despite the rise in competition from other brands, it is the most trusted shoe brand. Its focus on customer experience has only increased with time resulting in growth in brand equity and profitability for the brand.
Nike has leveraged the power of marketing quite well. It is known as one of the best marketers in the entire industry. The company has achieved strong brand awareness and customer engagement through its unique marketing strategy. Its faster and robust growth is also a result of the heavy focus on marketing. However, the company has taken a very innovative approach to market its brand. Its approach differs sharply from rival brands. Nike’s approach to marketing is considered highly authentic. The company is mainly using digital channels for marketing and mixing it with traditional channels and in-store marketing. It also offers a large sum on marketing each year that it calls demand creation expenses. These expenses grew to $3.75 billion in 2019 from $3.58 billion in 2018. Nike’s marketing expenses in 2020 remained $3.6 billion. Apart from the growing competition in the industry, it also shows the company’s increased focus on marketing. Nike markets its products globally through a diverse spectrum of advertising and promotional programs and campaigns, including social media, mobile applications, and online advertising. Its focus on customer experience has also played an important role in growing the popularity of the brand. The company is providing its customers with an omnichannel experience and investing more in technology. This has led to superior customer experience and growth in sales from the direct to consumer channels apart from increased customer loyalty.
Technology has remained a key driver of change in the sports shoe and apparel industry and even more so in the last five years. Just like the retail industry technology has been driving sweeping changes in the sports shoe industry as well. Nike has brought several game changing shoe technologies for its customers and fans like NIKE Air, Lunar, Zoom, Free, Flywire, Dri-Fit, Flyknit, Flyweave, ZoomX, React, Adaptive and NIKE+ technologies which prove Nike’s dedication to the design of innovative products.
However, the role of technology in Nike’s ecosystem has grown exponentially in the latest years as the company has moved to offer an omnichannel shopping experience to its customers. Now, Nike is a digital-first company that is using digital technology to serve and engage its customers worldwide. Apart from that, it is relying heavily on cloud technology to manage the digital experience it offers. Nike uses AWS to serve its customers globally. Apart from its website and app, it has also brought other fitness apps that engage Nike fans and customers. Cloud technology has been driving swift changes across Nike and all functions including manufacturing, marketing, and sales, and relying on it to grow operational efficiency. However, the company is also reaping the benefits of being an early mover in the industry. It was able to manage strong sales globally with the help of cloud technology and digital sales and distribution channels during the pandemic.
Sales and profitability:
Nike is a brand of premium sports shoes and apparel that has been enjoying strong sales and profitability over the past several years. Its net revenue grew from $36.4 billion in 2018 to $39.1 billion in 2019. The gross profit of the company grew to $17.5 billion in 2019 from $15.95 billion in 2018. Nike also enjoys the best profit margins in the industry. Its gross margin in 2019 grew to 44.7% from 43.8% in 2018. In fiscal 2020, Nike’s gross margin reduced mainly due to the impact of Coronavirus falling to 43.4%. While its net income also slipped, the company has still performed well during the crisis.
Nike’s 2019 Income before income taxes increased 11%, as revenue growth and gross margin expansion were partially offset by higher selling and administrative expenses. Its gross margin grew 90 basis points mainly due to higher full-price average selling price (ASP), on a wholesale equivalent basis, favorable changes in foreign currency exchange rates and growth in NIKE Direct. These benefits were partially offset by higher production costs. Selling and administrative expenses remained higher as a percent of revenues, reflecting investments in data and analytics capabilities, digital commerce platforms and an initial investment in a new enterprise resource planning tool to accelerate Nike’s end-to-end digital transformation.
In its 2020 annual report, Nike noted
“Income before income taxes decreased 40% for fiscal 2020, primarily due to lower revenues and gross margin resulting from the impacts of COVID-19, as well as higher selling and administrative expense. For the first nine months of fiscal 2020, gross margin expanded 30 basis points compared to the first nine months of fiscal 2019. However, this was more than offset by a decline of 820 basis points in the fourth quarter of fiscal 2020, primarily due to the impacts of COVID-19. For fiscal 2020, NIKE, Inc. gross margin decreased 130 basis points as higher full-price average selling price (ASP), on a wholesale equivalent basis, was more than offset by higher product costs due to incremental tariffs in the U.S., as well as factory cancellation charges, higher inventory obsolescence reserves and the negative rate impacts of supply chain costs on a lower volume of wholesale shipments in the fourth quarter of fiscal 2020.”Nike annual report fy 2020.
From 2016 to 2020, Nike’s net revenue has grown by around $5 billion. However, in fiscal 2020, while Covid-19 has hurt Nike’s business, the company has managed to control the overall impact to a large extent. Apart from that, Nike’s debt is well covered by its operating cash flow. The interest payments on its debt are also well covered by EBIT.
Nike is known globally as a maker of premium shoes and apparel. One of its core strengths is product quality and also one of the leading factors that differentiates Nike from the other brands. The global growth and popularity of the company is also driven by its focus on product quality. Superior product quality has led to higher demand and improved sales and profitability.
Quality is a leading factor that differentiates Nike from the other brands. While its leading rivals including Adidas are also heavily focusing on quality, Nike’s position and image are distinct from the others. The company’s supplier management practices have also played an important role in helping it manage product quality better than its rivals.
The growth of Nike can also be attributed to its focus on quality and investment in technologies that have helped it consistently improve the quality of products and customer service. The company has outsourced all its production but still maintains strong control over the quality of raw material used and that of the final products. Its focus on product design and investment in R&D have also helped it establish itself as a brand obsessed with quality.
Supply chain management:
Nike’s popularity rests on the design and quality of its products which are produced by independent suppliers and contractors. The company has outsourced all of its production to external suppliers but maintains heavy control on their production and quality management practices. It is also using digital technology heavily to manage suppliers throughout the world which are located mainly in the Asian nations.
Nike has an excellent supply chain management strategy whose focus is on quality as well as long term and strong relationships with the suppliers. While the company faced several controversies in the past related to supply chain management, with time it has improved its supplier management practices a lot with a clear focus on ethics, quality, and labor management. Nike suppliers follow a code of conduct that ensures they are managing their labor force and sourcing raw materials responsibly.
112 factories located in 12 countries supplied Nike shoes in 2019. Four leading contract manufacturers accounted for 61% of the company’s footwear production in 2019. All of them accounted for more than 10% of the company’s footwear production during the year. However, none of the producing factories accounted for more than 10% of footwear production in the year; the largest factory accounted for only 9% of the total. Most of the Nike brand footwear production took place in Vietnam, China, and Indonesia. Together, the three countries accounted for 49%, 23%, and 21% of Nike brand footwear, respectively.
334 factories in 36 countries produced Nike brand apparel in 2019. Most of Nike’s apparel production took place in China, Vietnam, and Thailand. Together, the three countries accounted for 27%, 22%, and 10% of Nike’s apparel production during the year. The top five apparel manufacturers together accounted for 49% of the company’s apparel production in 2019.
Mainly dependent on the US market:
Nike, despite being the world’s biggest sports shoes and apparel. The brand is dependent mainly on one market for the highest portion of its sales and revenues. The company generates most of its revenue from the United States. The company generated 43% of its Nike brand revenues from the North American market alone in fiscal 2019, which fell to 41% in fiscal 2020. The company generated $16.1 billion in FY 2019 from the United States market and in 2020, $14.6 billion. While the company’s revenue in 2020 has declined due to the Covid-19 pandemic, the US being the most affected region globally, its impact has also been strong on Nike’s fourth-quarter revenue in 2020. The US market accounted for 39% of its total revenues in 2020 compared to 41% in 2019.
Dependent on retailers and wholesalers:
While Nike has grown its push towards direct to consumer sales, it has depended traditionally on retailers and wholesalers to achieve sales globally. In 2020, Nike’s revenue from direct to consumer sales improved as compared to the previous year. Still, DTC sales account for just around one-third of its net revenues in 2020. The company generated around $24.3 billion from sales to wholesale customers in 2020 compared to $26.7 billion in 2019. However, the decline can be attributed largely to the fall in sales in the fourth quarter due to the pandemic. Nike’s DTC revenue increased to $12.9 billion in 2020 from $12.3 billion in 2019. The dependence of customers on digital sales channels has grown but the company might take some years till it has achieved an equal proportion of sales from both channels. However, based on the increased focus of the company on DTC sales, it may not take Nike very long to be there.
While organizational culture is a critical pillar of organizational success, this is an area where Nike has been unable to achieve significant progress. Nike’s culture is not as outstanding as several other leading brands in various industries. Often it is also cited as one of the most critical barriers to Nike’s faster growth. According to sources, the previous CEO Mark Parker has once accepted that Nike was facing internal challenges related to organizational behavior. However, the company has also faced legal challenges related to the treatment of its employees. In the past too, Nike faced some serious allegations and legal scrutiny over its treatment of its supply chain labor force. While the company took several significant steps to resolve the problem, it has not been able to establish a culture that fosters higher inclusion and creativity. If the company successfully resolves the problems related to organizational culture, it could find its growth momentum increasing.
Optimizing direct to consumer channels:
Nike’s sales from direct to consumer channels have increased in 2020. A lot of this push has come from the pandemic. However, the company must focus on optimizing its direct channels more to grow its profitability. Traditionally, it depended more on external distributors and retailers for sales to customers. while on the one had, it helps the company deliver superior customer experience, on the other it helps the company grow its profit margins. Another major benefit for the brand is that it will help Nike reduce its dependence on retailers and distributors. By growing its direct to consumer sales channels’ penetration, the company will be able to offer better customer experience and win higher customer loyalty.
While Nike’s core market, the United States, is the main source of revenue for the brand, the impact of a recession or a pandemic on the US economy will also hurt Nike sales and profitability. Nike therefore needs to grow its focus on the other economies and particularly the emerging economies that are seeing faster growth. In countries like India, Brazil, and Mexico, a large group of middle class buyers has emerged in recent years. Once the pandemic’s impact is over, these economies could generate substantial revenue for Nike if it can grow its penetration of these markets.
HRM and organizational culture:
Another area where investment can be highly profitable for Nike is its HRM strategy and organizational culture. The company must focus on building an organizational culture that brings higher creativity and fosters innovation. Apart from that, Nike should also place a higher focus on employee satisfaction. This would help the company improve its employees’ performance and organizational productivity. Nike has previously courted a lot of controversies related to supply chain management and its labor force. While the situation has improved in recent years, its HR related issues are not entirely over, and the company should gain higher employee satisfaction through inclusion and diversity programs. A few years back, the company was hit with a lawsuit by female employees related to gender pay discrimination. It is why the company needs to invest in managing its female staff better and managing diversity in its workforce well.
Technological innovation can also help Nike find faster growth and expand its market share. While Nike has already benefited in this area by moving its business to the clouds earlier than its rivals, the company can gain significant leverage by sustaining its focus on technological innovation in the coming years. Apart from improved customer experience, Nike’s investment in technology will also help it gain stronger sales in the international markets. The future of the company depends heavily on innovation. Nike has decided to become a digital-first company. Its growth remained obstructed in many areas in the past and technology has helped it find new high growth segments. Over the next several years, technology can also help Nike widen the gap between itself and its rivals. However, its competitors are also going to play catch-up. Technological innovation is an area Nike must take very seriously.
Legal and regulatory threats:
Legal and regulatory pressures are also slowing the growth rate of Nike. While legal threats are mostly an essential barrier, regulatory threats may sometimes create major pressures that can hurt expansion and growth plans of large businesses. There are several types of legal threats and compliance in all areas including labor and product quality is essential for Nike to avoid hefty fines. Regulations related to consumer data have also grown .
Overall, the level of competition in the shoes and apparel industry has grown very fast during recent years, which has led to a higher focus on marketing and product quality and innovation. Nike invests heavily in all these areas, and its operating expenses have continued to grow with increased competition in the industry. Among its leading competitors are Adidas, Under Armour, and others, including Fila and New Balance. Other sports shoes and apparel brands are also investing heavily in marketing, product design, quality, and innovation. Due to the intense competitive pressure, Nike has also started investing more in customer experience and technology. Moreover, increased competition has, to some extent, affected Nike’s growth rate negatively.
Another major threat before Nike is that of counterfeits. Counterfeit products of lower quality and priced lower than original products can affect Nike’s brand image. While the counterfeits can be easily identified in most cases, they can still hurt Nike’s sales and revenue. Nike dropped Amazon in 2019, mainly because of the problem of counterfeits on the platform. However, while the company is trying to get rid of the counterfeit problem by expanding its reach through direct to consumer channels, counterfeits still remain a difficulty for the brand.
Economic fluctuations in the global market can also hurt Nike’s sales and profitability. Coronavirus severely hurt economic activity across several markets and various industries, including travel and fashion. People stopped shopping for the nonessential items as the pandemic spread through various markets and regions. The result was that it brought down Nike sales, and its revenue was severely hurt. Economic fluctuations caused by other factors can also hurt Nike’s sales and revenue globally.
Growing Operating expenses:
The company’s operating expenses, including the amount spent on technology and marketing and sales, have continued to increase year on year. The growing competition in the industry is an important reason Nike is spending more than ever on marketing and customer experience, driving operating expenses higher. Growth in operating expenses hurts revenue as well as gross profits. However, considering the level of competition and how customers’ expectations have changed over the years, it is difficult for Nike to control operating expenses from growing in most areas.
The pandemic has had a strong negative impact on the sales and revenue of businesses like Nike leading. The pandemic’s impact was especially very strong in the most advanced markets like the US, where the infection rate was the highest of all the markets. Nike’s core market is the US, which accounts for its highest sales and revenue. The pandemic’s impact is going to last even after a vaccine has arrived, and Nike will have to consider how the pandemic has changed consumer behavior around the world to manage its sales and profitability successfully.
Nike’s growth in the recent years is a result of its consistent focus on product quality and growing investment in technology. The company has experienced growth in its revenue from direct to customer sales channels. Nike is trying to reduce its dependence on external sales channels in an effort to grow its revenue and profitability. The company enjoys the strongest margins in the sports shoes industry. However, the competitive pressure has kept intensifying and to beat the competition, Nike grew its focus on technology, customer experience, product quality and marketing. The result was that Nike’s operating expenses grew and so did its profits. Coronavirus has brought new challenges before Nike and the company has experienced a decline in its sales and profitability. As the pandemic’s impact has been the strongest on the US market, its impact on Nike’s revenue has been harsh since the US is Nike’s largest market. Nike was able to manage the impact of the pandemic to a large extent successfully due to its investment in technology over the last few years. Now, its focus is on digitalization and offering its customers a superior customer experience. Cloud technology is driving faster growth for Nike in various areas including marketing and customer service. The pandemic has brought a major and long lasting impact in terms of consumer behavior and digital technology will become the primary driver of growth for Nike and its rivals. Since Nike is an early entrant in this area, it will reap the benefits of its investment in cloud technology and digitalization faster than its rivals.