Nike Live store, Long Beach, CA – Photo: Nike
What? Should Nike drop Zappos and others to focus on consumer-direct?
Nike is ending its wholesale relationships with Belk, Dillard’s, Zappo’s and other retailers as the athletic lifestyle brand continues to focus more of its attention on its own consumer-direct operations, according to a note by Susquehanna Financial Group analyst Sam Poser.
Other retailers that Nike is cutting out include Bob’s Stores, Boscov’s, City Blue, EBLens and Fred Meyer, as reported on by Footwear News. Mr. Poser cited “proprietary checks” as his source for the news, which he labeled as “positive” for the brand.
Nike has neither confirmed nor denied the plans to end its relationships with the accounts cited by Mr. Posner, saying instead that it is “doubling down” on its digital business, company-operated stores and “a small number of strategic partners” that share its approach.
John Donahoe, Nike’s CEO, told analysts in June that the company’s consumer-direct strategy would help it emerge from the COVID-19 pandemic stronger than at its outset. He announced at the time that Nike would accelerate its efforts going forward.
Nike, he said, had set a goal of conducting 30 percent of its total product sales via digital channels, both its own and trading partners, by 2023. The company expected to reach that goal this year, a full two years ahead of its previous plan. As a result, Nike is looking at half of its business being generated online in the next couple of years.
“Consumer direct acceleration is more than just the next phase of our strategy. It’s the spark that will ignite and empower our entire company to serve consumers, our business and our teams better,” said Mr. Donahoe. “As we shift our operating model to fuel this strategy, Nike’s leadership position will become even stronger in the future as sports continue to resonate with consumers amid a global shift toward health and wellness.”
Mr. Donahoe has continued to emphasize memberships as a means to drive Nike’s business to new heights. In the last quarter, Nike reported that it added 25 million new members, double what it had during the same period in 2019.
“Membership is a big word, but in my mind it breaks down three simple things,” he said. “Do we have an identified one-on-one relationship with a consumer? Can we increase our level of engagement with that consumer in value-added ways? And then does that increased engagement lead to greater retention and share of wallet if there are other purchases?”
- Nike Will No Longer Sell to Zappos, Dillard’s & These Big Retailers, Analyst Says – Footwear News
- Nike, Inc. (NKE) CEO John Donahoe on Q4 2020 Results (Earnings Call Transcript) – Seeking Alpha
- Will Nike’s digital drive build stronger ‘one-to-one’ relationships with consumers? – RetailWire
- Nike debuts member-driven concept – RetailWire
Discussion Questions
DISCUSSION QUESTIONS: What is your take on Nike’s reported plans to sever its wholesale relationship with Zappos and other retailers? Do you also see Nike emerging as a stronger company than it was before the pandemic began?
Poll
BrainTrust
Rodger Buyvoets
CEO/Founder, Crobox
David Weinand
Chief Customer Officer, Incisiv
Like many things being accelerated during the pandemic, so too is Nike’s push to direct-to-consumer. Given the tumult and disruption (and low sales) of traditional retailers, making a strong push now to direct-to-consumer makes sense. Nike has had aspirations of becoming a direct-to-consumer brand for some time now and ultimately I do believe this will make Nike stronger, though how long this might take is impossible to say.
Now that is a line in the sand. Focusing on growing their DTC business makes a ton of sense given the power of the brand and the relationship they have with their customers. In addition, from this list, it appears they are dropping primarily second tier retailers, which will further strengthen their brand equity. To see those kinds of growth numbers in membership further builds the case that direct is the way to go for Nike.
I know Nike gets a lot of positive press for various initiatives and they have certainly done some cool tech things in their stores, but it really does strike me that the company is thrashing.
It seems to change direction every year.
The company built what was meant to be a flagship store on Lincoln Road in Miami Beach. The store wasn’t exactly right for the location for a variety of reasons, but it was gorgeous for sure. A year later it announced it was reducing its focus on many of its stores, and the Miami store was not on the list of “we’re going to focus on it.”
Now it’s back to focusing on its own stores. Just the flagships? Or are stores like the one on Lincoln Road strategic again? Even for 50 percent of the business?
Now the lure of gross margin dollars is sending it away from retail outlets. So honestly, I see it continuing the same back-and-forth strategy it had before the pandemic. This is not pandemic-related. It’s Nike. Do I think it will ultimately achieve 50 percent of its sales online? Sure, but that would have happened anyway. Once you know how a shoe fits, why go back to a store again?
So it’s just Nike being Nike.
I have never been a fan of “also DTC” for brands that sell to retailers. I don’t like to see manufacturers compete with their own channels of distribution. I would not mind so much if Nike decided to become its own exclusive retailer and a DTC online retailer.
Nike is an extremely powerful brand with a great deal of pulling power. Ultimately, customers will follow Nike and use whatever channels sell the product. This gives Nike the ability to pull back from distribution arrangements that don’t fit with its brand image or general strategy. The withdrawal from Dillard’s and Belk is obvious: neither chain particularly embodies the Nike ethos and both are on a long-term downward trajectory. The termination with Zappos is more significant but it underlines Nike’s desire to directly own the online space and the digital relationship with the end-user. Such an arrangement is better for the brand, better for margins, and better for understanding customers. If Nike was a weaker brand it may have to be less discriminating in its choice of partners, but as things stand it can afford to call the shots.
Nike is the epitome of the D2C brand with high consumer self-identification. The company has built its D2C strategy on advances in digital technology and new consumer purchase behavior. Nike is not abandoning the wholesale channel but is applying a modified Pareto 80/20 rule to protect the bulk of their sales in that channel while reducing their associated costs to drive higher margins. Combined with its membership strategy, Nike is creating a different future where they can leverage and extend the power of the brand.
I agree completely. This is about leverage, control and pulling in higher margins to boot.
Some of the names on the list (especially Zappos) are surprising, even if most of the accounts are secondary volume-drivers. This may be a step closer to DTC without walking away from truly significant accounts like Foot Locker, Dick’s or Kohl’s.
But what does DTC mean in this context? If Nike uses Apple as a model, then it needs a full-blown omnichannel strategy including both e-commerce and a bigger network of its own-brand stores. And even the Apple ecosystem allows for its products to be sold by other retailers (like Best Buy or the cellular carriers) when those outlets make sense for the brand.
I personally would be disappointed. I am a Nike fan. I buy their products whenever they meet my needs. But if they are not on Zappos, they no longer are an option for me.
Today’s Zappos (for apparel) and Amazon are not competitors. They are malls.
If I go to the mall to buy a new pair of sneakers I have a choice of various stores and brands. Nike would be my first choice and if I stop at their store or a store that carries their brand, there is a high probability they make a sale. But if Nike closes their store to open another miles away, and eliminates other stores from carrying their brand, they lose the sale.
Nike is a great and powerful global brand, but they are not more powerful than the alternatives. And they won’t bring new customers into their sphere if they reject where those potential new customers do their shopping. The Adidas, Puma and other buyers will never have the urge to try Nike if Nike isn’t there.
I see this as a super logical move – considering they’re already two years ahead of their strategy, well, that’s a clear sign this is the right direction. Second to that, severing relations with wholesalers means Nike can control the narrative better. Which also means they can collect insights from their consumer base without the data being diluted through Zappos (or Amazon, for that matter, who will own all the data). I 100 percent see Nike emerging stronger than it was before the pandemic, mostly because they can begin to control their own data and grow the company better. But also because (with this data) they can provide better customer experiences and a stronger brand positioning.
There is no doubt that the move to a strategy of more direct-to-consumer will boost profit margin percentage, but it comes with some risk. Personally I don’t buy shoes online because I want to try them on and compare them to other options. Reducing the retail stores may cause some non-loyal Nike shoppers to switch to other brands that are available in the stores they shop.
And, how do you get the previous Adidas, Converse, Puma, Tiger, Aisics, Vans, New Balance, users to even try Nike?
Although a general push towards direct-to-consumer makes sense, brands should not forget why the vast majority of purchases are still made in retail stores: many customers want a one-on-one relationship with someone who will help them meet their needs and help them solve their issues when they arise. If direct-to-consumer solutions fail to offer a good solution for this fundamental need for human contacts, they will fail over the long run.
This has been in the planning for some time. Nike has been shifting to DTC through both stores and online. 68 percent of business goes through wholesale right now, and it’s been trending down every year. Clearly DTC offers higher margins and more control. Ironically all of its competitors, e.g. Adidas, etc. already have higher DTC as a percentage of sales. For a company like Nike, the pandemic will be a blip on their radar as will smaller distributors. Nike will remain as strong as they were before the pandemic or will bounce back rapidly.
Hot today — maybe not tomorrow? Nike may find itself with less distribution than they think can sustain their growth. DTC, especially with sized products, needs brick-and-mortar as a compliment. Zappos doesn’t provide that capability. Nike prefers to be in “better retailing” so I suspect they will keep to the specialty and better brand stores, and try to keep the online business to themselves. As of the moment (well pre-COVID-19) they can’t fulfill all the demand in the physical channel, so pruning makes sense today.
I think strong brands are (obviously) best positioned to go direct to consumers. The real question is, can brands simultaneously stay strong and significantly — at least initially — limit their distribution? For a boutique or luxury brand the answer seems to be yes. For the largest part of Nike’s target market, I’m not so sure.
Nike as a global brand has the power to do this. Take control of the situation and determine where you want your brand to be. Get it out of places where it doesn’t make sense from a brand perspective (i.e. Dillard’s). Nike will most definitely emerge out of this a stronger company.
Nike directly communicated this strategy to the Street a few years ago and clearly the pandemic has accelerated this as it has with other aspects of brands’ retail efforts specific to digital acceleration. The financial aspects, control of the customer experience (what happened to the Nike branded store inside of Amazon?) and the direct customer addressability and visibility (i.e., tracking) make this a wise move.
With 30 years in DTC, I can’t imagine a worse move for Nike.
Here’s the fundamental truth: the number of doors matters tremendously when it comes to power of communication to drive sales — even when those doors are online sales doors.
Nike’s ad dollars are spread to the general population. Restricting online sales to their own DTC store restricts the potential return on their ad dollar by a severe amount.
Experience with DTC has been that for every single unit sold directly to a consumer, 15 to 20 are sold through the channels. Why would Nike rush to give that up? Are they working to theory?
Stay focused: the number of doors matters.
Nike certainly appears to be bucking the retail trend of being available when and where your customer wants to buy and moving more and more towards a DTC model. As a brand Nike, like Apple for example, knows its core customers will follow them wherever they go and many of those loyal customers have started shopping at Nike stores and Nike digital channels. These are the same loyal shoppers that have joined Nike’s membership program. The question is, where will new customers and the occasional Nike shopper go to buy Nike products? Dropping lower-tier retailers like Belk and Dillard’s, which are in decline anyway, makes sense as they do not convey the Nike brand image. Dropping Zappos is clearly a move to consolidate digital channels to Nike’s own storefront, but this is riskier. It does, however, eliminate a discount channel that reduces Nike’s margin. So while there is some risk in these changes, Nike has been moving in this direction for some time. They do have a history of inconsistency in directional focus so it wouldn’t surprise me to see them modify this plan if customers do not follow them! Overall, yes, Nike will emerge from the pandemic a stronger brand given the continued emphasis on health and wellness and desire for more and more people to engage in athletic activity, especially as our cravings for professional sports haven’t been met ideally!
Nike has been signaling this move for years. They began by limiting what sporting goods retailers could sell 10+ years ago and culminated in a move they made last year with their acquisition of Celect, a Boston-based data science and demand sensing solution. This technology allows them to go direct to consumer in the most cost effective manner while denying competitive retailers the opportunity to deploy this game changing software. They aim to disintermediate retailers and strengthen their position as the market leader.
Nike has asked three questions relating to the strength of its brand. To make this shift, there are a few other questions to ask. Do we have the robust back-end systems to know where all inventory is at any point in time? Do we have delivery systems in place to get product to consumers in a timely manner? Do we have a strong customer representative system in place to handle questions, complaints, and returns? Do we have a good system for consumers to determine the correct shoe size without trying on the product? Strength of brand alone will not determine success.
At the risk of getting dinged, I think Nike is missing some opportunities to open new doors. For their devoted customers, yes, great idea and throw some additional specials their way. But what about the new person who has not ever owned a Nike before and perhaps is not ready to spend a few more bucks? Having the chance to try on shoes side by side can make the difference before you take the plunge. How big is that missed opportunity? I don’t know, but what is the cost of playing? And that’s my 2 cents.