iStock.com/Robert Way
July 1, 2024
Why Is Nike’s Innovation Engine Sputtering?
Shares of Nike Inc. crashed about 20% on Friday after the sportswear leader slashed guidance for its coming fiscal year as newer models weren’t enough to offset weakness in classic footwear franchises.
Sales are now projected to fall by mid-single digits in its fiscal year that ends May 31, 2025, including a high-single-digit drop in the first half. Wall Street analysts had expected a 1% increase for the year.
Among the reasons analysts have cited for Nike’s shortfall:
Overreliance on classics
Nike blamed its fourth-quarter sales miss and lower guidance largely on weakness in its largest lifestyle franchises: Air Force 1, Air Jordan 1, and Dunk. Efforts to reduce supplies in those styles are being accelerated to make room for new innovations. Inventories of the Pegasus running range are also being reduced to support the launch of Peg 41, which has seen strong reviews.
Nike’s CFO Matt Friend said on an analyst call, “The intentionality around managing these franchises is that newness is what’s moving the consumer, and we wanted to move to more newness.”
Overreliance on lifestyle offerings
Jay Sole, an analyst at UBS, estimated that lifestyle products have grown to about 60% of Nike’s business. Dividing sales more equally between lifestyle and performance products would help Nike “restore its image as a sports brand and make its top-line growth rate more sustainable for the long term,” he wrote in a note. Sole said the shift will “likely take a few years to occur” and Nike may lose share in the lifestyle component of its business.
Wholesale underexposure
Nike has been emphasizing DTC growth since 2020 to capitalize on direct engagement with consumers, with the strategy including exiting several wholesale accounts. Nike last year began re-entering or reinvigorating its wholesale partnerships with retailers including DSW, Macy’s, and Foot Locker after finding that wholesale partners help scale innovation and newness.
On its analyst call last week, Nike’s CEO John Donahoe said the brand has spent “a lot of time leaning in with our wholesale partners” over the last fiscal year. He added, “We’ve had several wholesale partner summits. We’re exposing our three-year product innovation pipeline to them, and feedback has been very strong.”
Competitor pressures
Nike is seen losing share to Adidas, New Balance, and Puma in lifestyle offerings; Hoka, On, and Brooks in run; and Lululemon, Vuori, and Alo Yoga in athleisure offerings. Some see Nike losing share to brands able to deliver a sharper viewpoint with a narrower focus.
TD Cowen analyst John Kernan wrote in a note, “Nike has become overexposed to mid-tier, fashion-based trends that are being disrupted by more premium-based brands such as Hoka, On, Lululemon, and other upstarts that are appealing to consumers. The concept of being all things to all consumers in the sector is effectively over, and Nike management needs to pivot.”
Discussion Questions
Why have Nike’s latest innovations faced challenges scaling?
Which of the reasons cited in the article likely has played the largest role in Nike’s sales struggles?
Poll
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Patricia Vekich Waldron
Contributing Editor, RetailWire; Founder and CEO, Vision First
Boran Cakir
Co-Founder & CEO, frnt
Jenn McMillen
Chief Accelerant at Incendio & Forbes Contributing Writer
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Nike has taken its eye off the ball, especially in more technical categories like running. It has elongated innovation cycles, put too much emphasis on fashion over things like materials technology, and has been too complacent about the rise of smaller brands. This isn’t just about the design of sneakers themselves; it also extends to marketing – an area where Nike used to shine, but now just glows. Other players are doing creative things around local marketing and engagement (take Lululemon’s local ambassador program as one example), whereas Nike seems inert. All of this has been exacerbated by a botched DTC program, which has made connecting with customers more difficult at a time when Nike needs to be listening more carefully. Nike management seems to acknowledge all of these issues but given the new fiscal year guidance they’re clearly not optimistic about remedying them anytime soon.
Nike has made a major mistake in its embrace of digital channels and it’s no surprise that those errors would have very long lasting implications. JP Castlin and James Hankins spoke about this issue at Cannes a few years ago — and now we see the results. In fact, just last week JP’s newsletter noted a class action lawsuit saying executives “misled investors about the success of its Consumer Direct effort, continually touting the strength of its business model and digital plan when in fact the DTC strategy was ‘unable to generate sustainable revenue growth’.”
Nike would likely prefer we focus on these other issues. But sales channels take a very long time to build and make healthy — they have a long road ahead.
Wholesale partners, go away! No wait, come back! We’re a brand for athletes! No, wait, we’re a brand for everyone! While Nike was busy trying to figure out what they are, smaller niche brands jumped in, stole share and won hearts. Serious runners love Hoka and On. Pilates and yoga enthusiasts love Alo and lululemon. When’s the last time you heard anyone say, “I love Nike!” or noticed a lot of Nike apparel at the gym? Alas, they’ve staked out a position in the middle and become the outfitter of the athleisure brunch set.
Well said. At some point, it’s hard realize top line growth while making strategic shifts, and also making claims about being good at everything. Customers begin to doubt you.
Why Is Nike’s innovation engine sputtering? The answer until recently has been “because it can.” Mass adoption of Nike’s lifestyle franchise triad lulled the company into complacency. As Nike took its eye off the company’s performance portfolio, others eagerly encroached. Nike’s business model and distribution shifts have largely been portrayed as decisions Nike can make with impunity based on its considerable brand clout. Its wholesale partners would just have to deal with the fallout and hope Nike came to its senses in the future. Yet, the back and forth obviously hasn’t left Nike unscathed. It takes time to rebuild relationships, regain alignment and trust, and just get the kicks shipping again. Although Nike’s self-own is admirable, its next chapter will require a laser focus on innovation and a humble acknowledgment of the strides others have made in spaces it once owned.
Nike has been “jittering” for a decade, and have changed strategies so many times during that period. That is not helpful to the brand. China’s downturn hurt them as well.
but I have to throw in my usual caveat. The athletic shoe industry is very cyclical. One day you’re hot, (hi, Hoka) and the next day you’re not (bye Allbirds, and many others). It comes back around, but there’s nothing to be done about it, except to pick a course, stay that course, and don’t buy too much inventory too far in advance.
Your comments about the cycle are very insightful.
Nike opened the door and when the cut back/out many wholesalers, emphasized DTC, and Drop ship with many of the partners that remained before it was fully ready. Competitors, (some old and some new) quickly filled the gap. At best, their direction with over the last five years with parters and in the mid-tier segment has been wavering. at the core they lost sight of the PARTNERSHIP that is required between manufacture and retailer/wholesaler. That partnership is essential in growing new lines without entirely cannibalizing the old lines. Partnerships and successful strategies can not be turned off and back on like a light switch. I do not see the trend stabilizing for a few years from the time they set and socialize with their partners a clear direction forward. The high end signature releases and the sport specific footwear will continue to be a solid foundation for revenue.
Nike has remained omnipresent in the sneaker culture and athletic footwear arena. While Nike’s scale, dominance, and presence across retail and wholesale channels are commendable from a fashion and trend perspective, its innovation cycles, especially in the technical running categories, have yet to enable the company to keep up with its competitors. The company has long monopolized the attention and wallets of avid runners, but executives acknowledge that it lost ground in the critical running category.
Nike has shared that it is committed to doubling its efforts to regain a more authoritative grasp of the market. Run-club leaders say brands like Brooks, Hoka, and Asics have tapped into members’ willingness to try something new and innovative. This development and other forces have contributed to one of the most disappointing years for financial performance in the company’s storied history. Nike reported sales grew just 1% for the fiscal year that ended May 31.
Last December, the sneaker maker slashed its revenue outlook for the forthcoming fiscal year, citing weaker digital demand in the U.S. and stronger headwinds in its critical Europe-Mideast-Asia region. Nike also announced a $2 billion cost-cutting plan. In February, it laid off 2% of its employees and has been working to streamline and simplify some of its lines.
There are fundamental areas that Nike will need to improve as they mount their growth and transformation plans:
Seems the king of running has been caught flat footed and standing still? Fashion is not kind to those who trail behind? Glad to hear Nike is rebuilding its distribution partnership and listening to the market. Somehow that doesn’t sound very innovative either, just good business with a measure of humility.
In my opinion, Nike has become more a fashion company than an athletic shoe company, and this strategy, whether intended or not, might not be serving the brand well.
Nike also is very dependent on the current popularity of its celebrity spokespersons, which come and go, and lately they have had a couple of misses. – Db
It’s never a good idea to disrespect channel partners and think one can retain market leadership in such a competitive space. Nike has been riding its reputation without commensurate investment in innovation or communities. It will take some time to refocus and catch up.
The main reason I see for a lot, if not all, of these issues is ego. Nike is a powerful brand, but when you stop having a customer-centric mindset and take a step back, there is always someone else that is waiting to step forward. Other brands have done just that to eat away at market share and I don’t see them letting up. Nike needs to be more bold and hopefully has been a bit humbled by this trend.
Nike’s emphasis on Direct-to-Consumer caused it to focus too much on where it was selling rather than what it was selling. The brand has prioritised fashion, which has distanced it from the athletic community and diminished its identity… a contrast to the successful strategies of competitors like New Balance, Hoka, and On.
Additionally, Nike needs to introduce new franchises, as it has been a while since we’ve seen significant innovation from them. The Nike brand needs bold new product lines, it’s what they are known for.
Fashion is fickle. Trends and hot brands change. Nike has a long history of successfully navigating trends with relevant new products, top-tier sports endorsements, and an almost ubiquitous presence across every professional and collegiate sports league. That model for success hasn’t changed. What has changed is how adept the competition has been at executing their version of this formula. This has been exacerbated by Nike’s wavering in their relationships with retailers in favor of DTC. They’ve also lost or didn’t win key endorsements that would have been a slam dunk [sic] for them in the past.
The good news for Nike is that it won’t take much time to tweak their business model and return to dominance. The brand is still iconic, and their products are highly relevant. Focusing on their selling channels, showing some love to their retail partners, and doubling down on professional athletes would be my advice.
The sneaker world has witnessed a remarkable transformation in the perception. They have transcended the utilitarian to become a symbol of cultural expression and fashion-forward identity. The more the category relies on fashion, the more swings will be experienced in sales.
But let’s not feel too bad for Nike. Their worldwide market share is almost three times that of Adidas’s next closest rival. This hiccup is not to be ignored. The projected growth rate is twice the population growth. It’s astounding for markets so mature.
If Nike’s latest trends resulted from hubris, their forecasts tell me they have shaken that away. The new brands have had an impact, but the question is, do they have Nike’s staying power and resources?
When Nike backed off from some of their wholesale distribution, they made perhaps the biggest blunder they could have made. They gave the competition exposure and eyeballs. They gave the competition oxygen. Oxygen fuels fires, and the competition was very happy to burn brightly in the eyes of retailers and consumers everywhere. Retailers always want to evolve and offer their customers new and emerging products, but may be reluctant to edit existing assortments to make room for new offerings. Nike made that way too easy. They ceded ground that will be very difficult to earn back.
Brands and product development in this category tend to be cyclical. One year, neon-bright sneakers are the hot trend, followed by monochromatic all-black or all-white. And it’s funny to watch an “old man’s brand” like New Balance (meaning it’s targeted to me) become trendy again.
This is the world that Nike created and lives in today. While the brand can easily recover with the right product and distribution strategies, it’s baffling that this happened in the first place. After all, once upon a time Nike was synonymous with running before the company became fixated on basketball shoes; it needs to return to the days when it was the brand with performance authority across multiple sports.
Even MIT is getting in the game. https://www.technologyreview.com/2024/06/25/1093520/supershoes-running-kenya-carbon-plate-shoes/
Nike’s latest innovations have faced scaling challenges I believe is due to an overreliance on classic footwear lines. While these styles are beloved staples, the market’s shift towards newness and innovation has left Nike trying to catch up. There are undoubtedly loyal brand enthusiasts, but more and more consumers are prioritizing environmental sustainability in their purchases. Companies like Adidas and Puma have addressed these concerns with sustainable products and practices. For instance, Adidas has its Parley for the Oceans collaboration, producing shoes from recycled ocean plastic, while Puma is committed to using more sustainable materials. Nike’s recent struggles highlight the need to balance classic and innovative products while also addressing the growing demand for sustainability. Combining this approach with stronger wholesale partnerships will be crucial for Nike to navigate its current challenges and regain market momentum.
This is a great demonstration of two key principles in retail: 1) you have to continue to innovate and stay ahead/on trend ongoingly 2) wholesale is extremely important. It’s not enough to have the best assortment for a few years, you have to always deliver there. And with regard to wholesale, it’s undeniable how crucial reach is because consumers aren’t going DTC enough to drive necessary volume.
Nike struggling in its quest to dominate both the athletic shoe industry and the high-growth athletic leisure markets suggests their product focus and brand could be stretched too thin. Leisure brands are nipping at their heels by innovating and executing in meaningful ways, and in creating legions of devoted customers. And customers can see a competitive contrast of execution in-store, and on the street.
Nike’s brand perception hopes could be at odds with corporate visions in Beaverton. They may have landed in the middle, seen as good at many things to many people, but not great at any of them. Unless they want to stay in that position, re-evaluation of resources and focus is in order.
Giants can fall. But I wouldn’t count NIKE out. They are an amazing brand, but once you get to be that big, you don’t move as fast. New ideas in every area of the business take longer. There’s nothing wrong with their brand. And there are plenty of reasons for their setback, including completion, lack of focus, and the economy. They need to get scrappy, like the old days with their founder and CEO, Phil Knight. What made them successful? Do more of that!
I agree. Nike is struggling, but it remains the far and away leader in sportswear and sneakers. Its market share is head and shoulders above rivals.
First, whenever there is over reliance on any one part of your portfolio to drive sales, it means you’re not innovating enough. This is what we see now with Nike but I’d be surprised if brand managers didn’t see it coming. When Nike reduced their retail partnerships, they effectively minimized voices to challenge their strategies, ideas and innovation. It’s very hard to build a brand without partners but what is coming to light for Nike is that it’s also very hard to sustain a brand without partners. Retailers are retailers for a reason. Manufacturers need them inasmuch as they need manufacturers.
Second, it feels like Nike has lost its spirit. Who are they inspiring, motivating, encouraging? Who are they partnering with to change the world? The reason to believe is sometimes harder to get across in lifestyle vs performance–which is their legacy. It’s time to get back to what makes Nike, Nike. A brand cannot be bigger or better than it’s roots.