Why Nike is Facing Its Worst Performance in Years

Summary

Nike, once a dominant force in the shoe market with a 38% market share, is facing its worst performance since the 1990s, with Q1 sales falling and a plan to cut costs by $2 billion, including layoffs. The company's shift to a direct-to-consumer model under new CEO John Donaho has backfired, leading to excess inventory and a 14% drop in share price. As competitors gain ground, Nike is reevaluating its strategy, focusing on innovation in performance running to reclaim its market share, while also navigating supply chain issues and the return to brick-and-mortar retail.

Takeaways

• 👟 Nike dominates the shoe market with a 38% market share but faces its worst performance since the late 1990s.
• 📉 Sales fell in Q1 of this year, prompting Nike to lay off 2% of its workforce and plan to cut $2 billion in costs.
• 🆕 The rise of newer brands and the growth of long-time rivals pose challenges to Nike's market position.
• 🔄 A management shakeup in 2020 saw John Donaho replace Mark Parker as CEO, marking a new era for Nike.
• 💡 Donaho's tech background influenced Nike's focus on the 'Consumer Direct Acceleration' strategy, emphasizing direct-to-consumer channels.
• 🛒 Nike's digital platforms saw significant growth, especially during the pandemic, with digital sales reaching 30% of total sales by May 2020.
• 🛑 Nike's aggressive shift to DTC channels resulted in cutting ties with a third of its sales partners, impacting its wholesale revenue.
• 📈 Despite initial success, Nike's DTC strategy faltered as consumers returned to brick-and-mortar stores post-lockdown.
• 🔍 Nike faced a significant inventory surplus, with nearly $9.7 billion in stock, leading to a 14% drop in share price.
• 🔄 The company is now re-engaging with wholesale partners to distribute products more effectively.
• 🏃 Nike's innovation focus is crucial, especially in performance running, where it needs to maintain its competitive edge.
• 🔄 Nike is planning a multi-year innovation cycle with new footwear and apparel to excite consumers and drive growth.

Q & A

What is the current market share of Nike in the shoe industry?

Nike currently owns 38% of the total market share in the shoe industry.

Why did Nike announce layoffs in February?

Nike announced layoffs to cut costs by $2 billion, as they were facing their worst performance since the late 1990s with falling sales in Q1 of the current year.

Who replaced Mark Parker as the CEO of Nike, and what was his background prior to joining Nike?

John Donaho replaced Mark Parker as the CEO of Nike. Donaho's background was primarily in the tech industry, with significant experience leading tech companies.

What was the impact of Nike's shift to a direct-to-consumer (DTC) business model?

The shift to DTC channels initially led to growth in e-commerce, with the Nike sneaker app doubling its number of monthly active users and sales on the app accounting for about 20% of Nike's digital business by the end of fiscal year 2019.

How did Nike's decision to focus on DTC channels affect its wholesale partners?

Nike severed about a third of its relationships with sales partners and cut back on the merchandise sold to remaining clients, which was a significant shift from the $25 billion in revenue that wholesale brought in for Nike in 2019.

What challenges did Nike face after the pandemic lockdowns were lifted?

After lockdowns were lifted, consumers started returning to brick and mortar stores, causing a change in the course of Nike's direct sales. Additionally, Nike faced a significant supply chain issue, resulting in an inventory tsunami amounting to nearly $9.7 billion.

What strategy did Nike adopt to manage its high inventory levels?

Nike attempted to protect its brand value by selling many of its products through widespread discounting, not just on their own platforms but also through wholesale channels where there was a strong demand for Nike products.

How has Nike's approach to product innovation and scarcity impacted its market position?

Nike's innovative culture and scarcity model, particularly with products like the Jordan line, have helped extend the time span of product lines and maintain a strong market position. However, the company has struggled to meet demand in some cases, leaving profit on the table.

What is Nike's strategy to address the competitive pressure in the sports lifestyle section?

Nike recognizes the need to innovate and has refocused on performance running, which is one of its legacy categories. The company is also planning a multi-year innovation cycle with continuous product releases to excite consumers.

How has Nike's revenue growth been during John Donaho's tenure as CEO?

During John Donaho's time as CEO, from 2021 to 2023, Nike saw a revenue growth of about 15%, despite facing challenges and market fluctuations.

What potential catalysts could help Nike regain its momentum in the market?

Nike could benefit from endorsement deals, partnerships like the one with the German national soccer team, and events like the Olympics, which can serve as opportunities to introduce new products and gain free advertising.

Outlines

00:00

📉 Nike's Market Struggles and Strategic Shifts

Nike, traditionally the dominant force in the shoe market with a 38% market share, has encountered a significant downturn in Q1 of the current year. This downturn is the worst performance the company has seen since the late 1990s. In response to falling sales, Nike announced a workforce reduction of 2% and a cost-cutting plan aiming to save $2 billion. The company's challenges have opened a window of opportunity for smaller brands and rivals who have been gaining ground. Nike's missteps in recent years have led to a buildup of inventory, reaching a historical high of nearly $9.7 billion by the latter half of 2022, causing a 14% drop in share price. The company's aggressive shift towards direct-to-consumer (DTC) channels, severing ties with a third of its sales partners, has backfired as consumers returned to brick-and-mortar stores post-lockdowns. Nike's attempt to manage its inventory through discounting has not been entirely successful, and the company is now re-evaluating its strategy, recognizing the importance of wholesale partners.

05:01

🛍️ Nike's Product Strategy and Market Position

Despite its recent challenges, Nike is focusing on innovation to maintain its brand identity, especially in performance running, a category where it has a legacy. The company is attempting to address the vulnerability in its sports lifestyle section, where competitors like Adidas and New Balance are making inroads with popular models. Nike's strategy includes releasing top-selling products like the Pegasus and Air Force Ones, but the fashion industry's fickleness and increased competitive pressure have led to weakening sales. Retailers are discounting Nike sneakers at a higher rate than before, and the company's reliance on established shoe models is not yielding success. Nike is also looking to extend product lines through scarcity and is focusing on continuous innovation, with a new lineup of footwear and apparel products aimed at kicking off a multi-year innovation cycle. Although expecting only a 1% revenue growth for fiscal 2024, Nike remains unmatched within the footwear industry, with sales growth of about 15% between 2021 and 2023. The company's size allows it to make significant moves without severe repercussions, and it continues to secure high-profile endorsement deals and partnerships, such as with Caitlyn Clark and the German national soccer team, potentially leveraging the Olympics for new product introductions and visibility.

Keywords

💡Market Share

Market share refers to the percentage of an industry's total sales that a company controls. In the context of the video, Nike's 38% market share indicates its dominance in the shoe industry. This is a key factor in understanding the company's position within the market and its influence on consumer choices.

💡Workforce Layoffs

Workforce layoffs involve the termination of employment for a group of employees, often as a cost-cutting measure. The video mentions that Nike announced layoffs of 2% of its workforce as part of a broader plan to cut costs by $2 billion, reflecting the company's response to financial challenges and its strategy for organizational restructuring.

💡Consumer Direct Acceleration

Consumer Direct Acceleration is a business strategy that emphasizes direct-to-consumer (DTC) sales channels over traditional retail or wholesale distribution. The video discusses how Nike shifted its focus to DTC, which initially led to growth in e-commerce but later resulted in overemphasis on this channel, causing issues when consumer behavior shifted post-pandemic.

💡Digital Presence

Digital presence refers to the online visibility and engagement of a brand or company through its websites, apps, and social media platforms. The script highlights Nike's investment in its digital presence, including the development of apps and a global store concept, aiming to drive customers to its DTC channels and increase sales margins.

💡Inventory Management

Inventory management is the process of overseeing the flow of goods and information, from the point of origin to the point of consumption. The video describes how Nike faced an 'inventory tsunami' with nearly $9.7 billion worth of unsold products, which led to a significant drop in share price and the need for a strategic reevaluation of its DTC approach.

💡Wholesale Partners

Wholesale partners are businesses that purchase products from manufacturers and then sell them to retailers. The script notes that Nike severed ties with a third of its sales partners during its DTC push, but later sought to rekindle relationships with these partners when it became clear that the DTC strategy alone was not sufficient.

💡Pricing Power

Pricing power is the ability of a company to set prices for its products without losing significant market share. The video suggests that Nike has strong pricing power, largely due to its strategic marketplace management, which allows it to maintain profitability and brand value even when it resorts to discounting.

💡Product Innovation

Product innovation refers to the process of developing new products or significantly improving existing ones. The script emphasizes Nike's focus on innovation, particularly in its performance running category, as a way to maintain its competitive edge and respond to shifts in consumer demand and the rise of new competitors.

💡Marketplace Management

Marketplace management involves the strategic planning and execution of sales and distribution across various channels. The video describes how Nike's detailed approach to marketplace management, including decisions on where to release specific products, contributes to its ability to hit revenue goals and maintain market dominance.

💡Performance Running

Performance running refers to the category of athletic shoes designed for running, emphasizing performance, comfort, and durability. The script mentions that Nike's origin story is rooted in running shoes, and its recent missteps in this category have allowed competitors to encroach on its market share.

💡Multi-Year Innovation Cycle

A multi-year innovation cycle is a long-term strategy for the continuous development and introduction of new products or technologies. The video concludes with Nike's announcement of a new lineup of products aimed at kicking off such a cycle, indicating the company's commitment to sustained innovation to excite consumers and maintain its industry leadership.

Highlights

Nike's market share dominance with 38% and its recent challenges with falling sales in Q1.

Nike's announcement of laying off 2% of its workforce to cut $2 billion in costs.

The rise of small brands and rivals gaining ground on Nike's market position.

John Donaho's appointment as CEO and his tech background's influence on Nike's strategy.

The shift towards a consumer direct acceleration strategy and its initial success.

The impact of the pandemic on Nike's e-commerce growth and strategic position.

Nike's aggressive move towards DTC channels and the severing of retail partnerships.

The growth of Nike's digital platforms to 160 million users and 30% of sales through digital channels.

The failure to reach the 50% digital sales goal and the return of consumers to brick and mortar stores.

Nike's inventory crisis with a 14% drop in share price due to overstock.

The rekindling of wholesale partnerships to manage inventory and reach consumers.

Nike's pricing power and detailed marketplace management approach.

The decision to churn out top-selling products like the Pegasus and Air Force Ones.

The fashion industry's fickleness and the pressure on Nike from fluctuating consumer demand.

The scarcity model and the extension of product lines like the Jordan brand.

Nike's focus on innovation, especially in performance running, and its legacy.

The competition from brands like Hoka and Brooks in the $1 to $150 price range.

Nike's vulnerability in the sports lifestyle section and the impact of Adidas.

Nike's commitment to a multi-year innovation cycle and continuous product development.

Despite a projected 1% revenue growth, Nike remains unmatched within the footwear industry.

Nike's recent strategic moves in endorsement deals and partnerships.

The potential impact of the Olympics on Nike's visibility and product introductions.

Transcripts

Nike we all know it dominates the shoe

market the company owns 38% of the total

market share and it's outpaced

competitors for years but with sales

falling in q1 this year Nike is facing

its worst performance since the late

1990s and this past February Nike

announced that it will lay off 2% of its

Workforce as part of its plan to cut $2

billion in costs so many challenges in

he has to face right now today there in

my opinion has never been a better time

to be a small brand while newer brands

have been gaining ground and longtime

Rivals have seen their sales soore

Nike's shoes are continuing to stack up

on clearance racks the pressure is on

and Nike is trying to recover from The

crucial missteps it took in recent years

and pick back up in the areas it used to

own in now that the company is Shifting

priorities Nike might be getting the

Boost it

needs let's first take a step back and I

identify one of the biggest factors that

led to Nike's current state during a

management shakeup in early 2020 Nike

bid ad du to veteran CEO Mark Parker who

started at Nike as a footwear designer

in 1979 under his 16-year leadership

Parker led the company through some of

its biggest wins but when Nike announced

John Dono would replace him as the

company's fourth ever CEO the company

entered a new era donoho's background

was quite different from Parker's a lot

of his experience came from leading tech

companies he and other New Management

members played a big part in advancing

Nike's consumer direct acceleration

strategy in 2017 this prompted Nike to

drastically shift focus in its business

model including a big emphasis on direct

to Consumer channels you see back in

2019 Nike saw a lot of growth in

e-commerce by the end of that fiscal

year its sneakers app doubled its number

of monthly active users and sales on the

app accounted for roughly 20% of Nike's

digital business which put Nike in a

good strategic position when the

pandemic hit and e-commerce became key

for many company survival at this point

donaho doubled down on the company's

ongoing initiatives and in one earnings

call donaho said the consumer today is

digitally grounded and simply will not

revert

back but if this year has taught us

anything it's that betting on yourself

might not always be the right

move Nike invested heavily in developing

its digital presence including Global

store concept apps and four mobile apps

all in hopes for customers to move to

Nike's DTC channels the shoes are much

much more margin rich as selling via DTC

this shift away from retail was an

aggressive move for context wholesale

brought in revenue of $25 billion for

Nike in 2019 so this was a huge decision

but ultimately Nike severed a third of

its relationships with sales partners

and cut back on the amount of

merchandise it sold to remaining clients

at least at the start things were

looking good membership to Nike's

digital platforms grew to 160 million

users and by May 2020 digital channels

accounted for 30% of Nike's sales which

was about 3 years ahead of schedule but

that's as far as it got Nike never

reached that 50% goal that donaho

initially anticipated once lockdowns

lifted consumers started to go back to

Brick and Mortar stores and that's when

Nike's direct sale started to see a

change in course to add to the matter

Nike was one of the many companies that

faced significant supp fly chain

headwinds during the pandemic come the

latter half of 2022 several seasons

worth of products finally arrived at

Nike's warehouses and the company was

suddenly hit by an inventory tsunami

amounting to nearly $9.7 billion this

marked the company's highest inventory

level in history and resulted in a 14%

drop in share price it became more and

more evident that Nike overshot its DTC

potential and needed to rest

strategize they pushed way too hard and

fast on trying to grow their own DTC

business at the expense of their

wholesale Partners stock managing its

own inventory Nike attempted to protect

its brand value by selling many of its

products through widespread discounting

but not just on their own at the time

there was a strong demand for Nike

products from wholesale channels I think

they've come to a realization that they

need those Partners to bring products to

Consumers where they can't reach them

otherwise so Nike like the sari X came

crawling back to some of its wholesale

partners and while all these companies

welcomed Nike back with open arms this

rekindling of sorts wasn't a fix all

solution Nike definitely deprioritized

some of their opening price point

Footwear during the pandemic and during

this push to DTC it's starting to come

back I I would not tell you that they're

back anywhere close to where they had

been still Nike generally has strong

pricing power which is largely due to

how much thought the company puts into

managing the marketplace I think most

brands use a much more Channel

segmentation which is a much more blunt

instrument n I think takes a much more

detailed approach and says all the way

down to the doorfront this is where

we're going to put the product for this

particular release to hit Revenue goals

Nike decided to churn out some of its

top selling

products like these the Pegasus and the

Air Force Ones but not quickly enough

because

fashion is a Fickle industry and sales

are weakening due to fluctuations in

consumer demand and competitive pressure

in fact retailers are continuing to

slash prices on Nike sneakers at a rate

that's nearly double the amount two

years ago the Nike looks really tired at

retail living on a new color way of an

old established shoe is not a formula

for Success Matt goes on to say that the

turnover rate for fashion shoes is

shorter than 5 years but Brands can

extend the time span of a product line

through scarcity the lore of a product

if you will the Jordan line for instance

is a multi-billion dollar brand that was

built on this model Nike releases often

sold out within seconds for example in

2021 Demand on the sneakers app grew by

70% compared to the year before Nike

only met 7% of that demand meaning it

was leaving profit on the table so the

company tried to meet more of the demand

but this turned out to be a double-edged

sword in making the product more widely

available the hype behind its product

simmered and now Nike announced that it

too will go back to its OG approach and

pull back on some of its big franchises

but really these limited Supply shoes

are coveted by sneaker heads and they

only make up a small portion of Nike's

total consumers I I think Nike's

greatest emphasis right now is on the

Innovation side the company's brand

identity is so connected to its

innovative culture especially in one of

Nike's Legacy categories performance

running think of Phil Knight the

co-founder of Nike who sold these shoes

out of the trunk of his car Nike's

origin story was rooted in running shoes

when Nike dropped the ball on this front

it provided space for competitors to

start eating at its market share so

while they have some Innovation at the

very top end of the market that sort of

real sweet spot of1 to $150 where Hoka

on Brooks as6 are all winning many

consumers shifted their interest to

newer brands that boast unique techy

designs like those thick foamy insoles

from Hoka or on- running's patented

cushioning system I do not see Nike's

number one sheer position uh in Jeopardy

where company can currently tap into

Nike's vulnerability is in the sports

lifestyle section think of the new

balance 990s or Adidas SAS or gazel that

everyone seems to have these days that's

where I would expect Adidas to have its

greatest impact on Nike if they are able

to grab some share from them and Nike

recognizes that back in September donaho

reiterated that the company is focused

and mobilized to address areas where we

need to raise our game remember this is

the company that has created some of the

most Cutting Edge pieces of shoe

technology the Air Max bubble Nike

flynit and even those shoes that could

tie themselves the big issue though is

that this product takes months and

months and months to bring to Market so

while it's absolutely the right thing to

do it's not a quick fix in a recent

statement Nike announced a new lineup of

Footwear and apparel products to kick

off a multi-year Innovation cycle it's

got to come season after season after

season it's not just one product or one

platform it's going to be continuous

products that according to them will

bring the Innovation performance style

and comfort consumers will be excited

about for years to come even though Nike

expects Revenue to grow just 1% for

fiscal 2024 the company is still

unmatched within the Footwear industry

during donoho's time at the helm sales

have grown just between 2021 and 2023

Nike saw a revenue growth of about 15%

Nike is massively dominant um four times

the size of Adidas meaning Nike can make

big swings without taking too much

damage Nike is so big today they can do

whatever they want just take a look at

how it's recently handled its

endorsement deals after losing Tiger

Woods a partnership that lasted for more

than 27 years Nike didn't just sit idly

by it went hard outbidding competitors

and Landing a deal with Caitlyn Clark

Nike also signed the German national

soccer team to a kit partnership that

ended a 70-year run with Adidas the

Olympics also is a potential Catalyst

for Nike although it generally hasn't

been a visceral driver in Footwear where

the Olympics have been important over

the years is when brands have new

products to introduce free advertising

if you will and while it hasn't been

Nike's year or years really many experts

still aren't betting against them