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Will Leaning Back on Wholesale Revive Nike’s Growth?
Nike Inc., which has been emphasizing direct-to-consumer (DTC) growth for a number of years, last week indicated it was refocusing back on wholesale following another disappointing quarter marked by weak demand.
The sportswear giant reported that profits for its third quarter, which ended Feb. 29, beat expectations, but Nike’s shares fell about 7% last Friday after it announced that guidance going forward is weak and that gross margins for the full year are predicted to grow less than analysts originally expected. For the first half of fiscal 2025, sales are expected to decrease by low single digits.
On an analyst call, President and CEO John Donahoe said that while its direct-to-consumer push, marked by its Consumer Direct Offense strategy launched in 2017, “has driven growth and direct connections with consumers, it’s been clear that we need to make some important adjustments.”
The adjustments include investing in wholesale to “help us elevate and grow the entire marketplace,” Donahoe said. “We recognize that our wholesale partners help us scale our innovation and newness in physical stores and connect our brands in the path of the consumer.”
CFO Matt Friend added on the call that the company would invest more in seasonal marketing campaigns and the presentation of Nike gear in stores to support new product launches. Friend said, “We don’t like the way our brand is showing up in wholesale, and we own that.”
Nike’s DTC push included ending sales to larger retailers like Dillard’s, Zappos, and Big 5 Sporting Goods while prioritizing relationships with premier accounts, including Dick’s Sporting Goods and Nordstrom in the U.S. Nike’s recent moves to repair wholesale partnerships with DSW, Macy’s, and Foot Locker were seen as a signal that the DTC focus was falling short of expectations.
Prior to the release of Nike’s recent earnings report, Wedbush analyst Tom Nikic wrote in a note that it’s becoming more apparent that Nike’s acceleration of its DTC push in 2020 was a “mistake.” He wrote, “They focused too much on WHERE they were selling and lost focus of WHAT they were selling. Furthermore, it allowed a host of competitors to come in and chip away at [Nike]’s dominance of the industry.”
Beyond investing in wholesale, Donahoe listed other steps Nike will be taking to elevate demand, such as renewing its focus on sport and prioritizing newness, including reducing supply on classics such as the Air Force 1 as well as inventories of the Pegasus running shoe ahead of a new update. A focus is being placed on “bolder and more distinctive” marketing, beginning with an “Air for Athletes” campaign at the summer Paris Olympics.
Nike has high hopes for a number of technologies to be launched around the Olympics. “We believe the Paris Olympics will serve as a catalyst for our brands, as we launch our newest Nike Air innovations for athletes,” Friend said during the analyst call.
Williams Trading analyst Sam Poser said that Nike can use its leverage to secure better placement at retail, but any wholesale shift also poses risks. He wrote in a note, “Using leverage is great if the product sells well, but is brand dilutive if the product does not perform.”
Discussion Questions
What lessons should Nike have learned about the benefits of wholesale retailing and the limits of DTC?
What else will be critical for Nike to revive consumer demand?
Poll
Loading …BrainTrust
Liza Amlani
Principal and Founder, Retail Strategy Group
Karen Wong
Co-Founder & CEO, TakuLabs Ltd.
One thing I think they learned is that …well, retail isn’t for sissies! Stores really do serve a purpose, whether it’s something as mundane as soaking up excess production (via inventories), bearing (at least some of) the cost of promoting the product, or (even) actually having someone standing there trying to sell something Who’d have guessed?
Leaning too heavily into DTC was largely a failure. As a big brand with a diverse range of customers, Nike needs to be where the shopper is. Closing too many doors reduced visibility and presence and it diluted share among occasional and casual buyers of the brand. However, distribution isn’t Nike’s only misstep: there is currently too little innovation, too little newness in the pipeline, and too little excitement in ranges. Nike needs to get back on the front foot if it is to defend its share against rapidly growing brands like On.
Like most outcomes, there are many possible causes. Handsight is 50/50 as they say. Who of us could have predicted that commercial rents would fall as far as they have in 2019? If anything Nike felt very much ahead of the curve, particularly as the pandemic took e-commerce to never before seen heights.
To answer the question, I would say that closing partnerships and outlets is very different from closing distribution channels. If anything today’s shoppers expect more channels, not less. You must be convenient to be found. Being found includes hedging with as many channels as you can with outlets that are rigorously tested and held accountable with data.
Are there limits to DTC? I would argue that it depends on the market you play in and your size. Nike is arguably too big and mainstream (vs. luxury) – there’s not enough market in this form of distribution.
But I would never count Nike out. They’ve been here before. Their willingness to publicly own up to their mistake is half the battle. If they can adapt quickly, I wouldn’t be surprised if they are the next comeback kid.
Like most things, it’s a balance. Nike is in a unique brand position with its massive market share in athletic footwear. Yes retail is challenging, and especially so in footwear with extended sizing. Focus on wholesale doesn’t necessarily mean a diminished focus on DTC. To do so more profitably, Nike likely needs to better manage it’s assortment across both wholesale and DTC, avoiding having sku proliferation in search of sales and revenue. Managing the inventory throughout the wholesale and DTC ecosystem is imperative to maintain margins and profitability.
It is so refreshing to see a CEO take a mea culpa. That is the first step to adjusting strategy.
That being said, it should also be recognized when your massive market-leading business is 50% larger than #2, it is hard to fend off intrusion by newcomers. The market itself is not only massive but also a high-growth business. The sneaker market is expected to increase by 50% by 2030.
The market is also open to increasing segmentation. Before the 1970s, sneakers were for basketball, tennis, and a little more. Today, sneakers can be worn with everything, even tuxedos, weddings, and the Red Carpet.
To answer today’s question regarding Nike and wholesale, they will use their power and brand to utilize brick-and-mortar participation to their substantial benefit, as described in today’s discussion.
It was a smart strategy for Nike to return to its wholesale retail partners after its unsuccessful attempt to rely more heavily on DTC. I recently spoke with some of Nike’s retailers and they are delighted that Nike products are back on their shelves. Nike’s DTC move was not good for Nike, retailers or consumers. It was and expensive lesson learned.
Brand ubiquity is the new exclusivity. Keeping a brand locked up in narrowly-defined channels is no longer the standard, even for mega-brands like Nike. Even though wholesale relationships technically reduce the amount of control Nike has in certain environments, they also keep the brand “out there.” To grow, Nike must continue to drive awareness and affinity with consumers who may not have access to its flagship stores or the desire to hit the Nike site.
Memo to everyone in retail. Nike just proved, once and for all and in giant capital neon letters, the paramount importance of great execution in physical retail stores. Great product with great story telling providing great sensory experiences for the customer. They proved the importance of the right partners, not necessarily more partners. Their focus on WHERE was not wrong, they just drew the line at the wrong place. The bad apples reflected poorly on the whole physical retail segment.
I found it unfortunate that Nike chose to speak in terms of “leverage”. The big, dominant brand wants to use its muscle. Yeah, got it. How about talking in terms of “partnerships”…??? Leverage might be easy to overestimate, like when they thought they had the leverage to pull out of physical retail. Emerging brands might not have the same (muscular) leverage, but maybe they have a very different kind of leverage…newness, freshness, the energy and novelty of youth. Nike might want to be careful about how they view and exercise their “leverage”. Is it really what they think it is?
For any brand, including Nike, there needs to be a balance of wholesale and retail. Finding the right balance requires testing and a deep understanding of where your customers are. In this case, many customers are still shopping wholesale. Which is ok.
It’s critical to develop product assortments that reflect the customer and these assortments must be distinct. Giving customers a reason to shop wholesale vs. DTC and reflecting market wants/needs is imperative. It was important for Nike to scale back wholesale in 2017 because the market was saturated with accounts, price points and products. Scaling back was the right move. Nike is correct to increase wholesale now that it can have more control on what product assortments are relevant for each one of their accounts and their own stores.
Nike and its wholesale and retail partners are revitalizing their collaboration model. A diversification strategy is necessary for Nike to reignite its business and compensate for its DTC strategies’ shortfalls.
As Nike reduced their wholesale retail distribution model in 2021-22, Footlocker and other wholesale retail partners wisely diversified their assortments. They increased the penetration of PUMA Group, Adidas, and other competitors within its stores. In addition, beyond the sneaker culture categories, Footlocker now has more lifestyle-driven assortments that meet the needs of its diversified customer segments.
Nike’s strategy of driving a more exclusive customer experience by taking greater ownership of the brand, distribution channels, marketing, and social media digital strategies while emphasizing the importance of its DTC stores has worked to some extent. However, diminished customer demands, supply chain disruptions, and continued inflationary pressure have impacted Nike’s performance and profitability.
This has led to an overabundance of Nike products in the market, and subsequently, Nike has had to reevaluate its distribution strategies. Increasing the number of Nike products in the Footlocker and other Wholesale retail partners is a win-win strategy for both sides. Footlocker and other wholesale retail partners will benefit significantly by having more of the hottest sneaker brands in the market in their stores. At the same time, Nike extends its scale beyond their selling channels.
While there is a natural ebb and flow of popularity between Brands, Nike over the past years has made a concerted effort to shrink its brick-and-mortar footprint and grow its DTC. This was set in motion not only by reducing the absolute number of retailer stores, but more so, restricting the distribution of the most popular shoes to even fewer of the Retailers who were still allowed to sell Nike. Could it be that maintaining Brand dominance requires an extended physical presence and broader distribution.
I never understood (and agreed) with Nike’s decision to eliminate some of their retail channels. I applaud them for trying to “right the ship” and opening back up their wholesale channels to retailers.
I worked w a Nike for over a decade. DTC is growing but one of Nike’s maxims is The consumer decides. Now, all channels must make a seamless execution of the customer buying where and when they feel comfortable with an improved customer journey to convert. Nike has departed from innovation and relies heavily on retro models. Shorting the market and hoping demand exceeds supply isn’t working on all fronts. More distribution is needed in areas stronger than urban. Entry and mid-level needs to succeed along w what Nike does best….emotional, impactful advertising without being too political. There is no finish line….unless your resting on past success.