Nike’s Shift from Retailers
Think about how company income statements usually work: You start with revenue, subtract cost of goods sold to get gross profit, subtract operating expenses to get operating profit, and then subtract taxes, interest, amortization, and depreciation to get net profit. The gross profit is the profit after subtracting all production costs for the items that were sold. This number gives a manager a measure of profitability accounting for the company’s leverage because fixed costs for the goods sold is included in the costs of goods sold calculation. Gross profit can be used in making financial decisions regarding financial structure, however, gross profit does not indicate how well each product contributes to covering fixed costs. When trying to find how an individual product or service is performing, a manager can use contribution margin to ascertain whether a product is worth the fixed costs being used to produce it. Contribution margin will show the profit for the sale of an individual item calculated by taking the net sales and subtracting the variable product costs and variable period expense. The net of the contribution margin is now the money that can be used to ‘contribute’ towards covering fixed costs. If there is still money left over after paying for fixed costs, then you know that the individual product or is profitable.
Nike has dealt with the rising competition in the global sportswear apparel market seeing flat growth in the last two years, especially in the footwear segment. Nike recently made a change to move away from selling to wholesale distributors and towards selling directly to customers through its website and new partner, Amazon. Jamie Merriman, an analyst at AB Bernstein, estimated gross margins in Nike’s DTC business are 62 percent, compared with 38 percent in its wholesale business (https://www.reuters.com/article/us-nike-stocks/nike-at-two-year-high-as-analysts-tout-margin-benefits-of-direct-sales-idUSKBN1F82E1). Nike executives emphasized the company’s ongoing plans to sell more goods digitally and directly to consumers, a shift from its longstanding model of selling through sporting-goods stores and other traditional retailers. As revenue per unit increase dramatically by cutting out the middleman while variable costs per unit are increased only slightly because of selling and transportation costs, Nike is seeing higher contribution margins per unit of product. Nike saw its stock soar in late 2017 because of the partnership with Amazon and direct sales through its own website. Devoting resources to building its direct sales pipeline should will actually increase its variable costs because of transportation, but the additional revenue from selling directly to customers will outweigh these variable costs and ultimately increase contribution margin per unit. As long as Nike can consistently fulfill its online orders on-time and maintain its supplier relationship with Amazon, it will stay afloat in the changing consumer landscape (https://www.wsj.com/articles/nike-tells-investors-it-will-shift-away-from-mediocre-retailers-1508967034).
It is very interesting to read about the shift in business model that Nike has undergone. The change from selling to wholesale distributors to selling directly to the customers definitely increases their contribution margin. Since they can cut out the variable cost per unit that the wholesalers may take from each product , and their revenue remains constant, there is a substantial increase to their contribution margin. However, there will be a slight increase to their shipping and handling component of their variable costs, as a whole their contribution margin will increase drastically. I would be curious to see how this shift changes their fixed costs. Since they are selling more shoes and apparel directly to the customers, Nike needs to warehouse more equipment themselves. Nike can no longer sell a large chunk of merchandise to a company such as Sports Authority and tell that company to warehouse their inventory. If Nike plans on maintaining the same volume of quantity sold, they are going to have to store more equipment in their own facilities, which could lead to Nike needing to invest in more storage space. I would be interested to see if their fixed costs in the past year have increased and by how much, in order to make this pivot in their strategy. This could lead to their current years net income decreasing due to the purchase of these fixed assets, however their variable costs should decrease, since their margins have increased drastically, as Dalton had said. In the long run, if Nike can maintain or grow their volume of units sold, should lead to a drastic increase in profits.
I think an interesting part of Nike’s decision is not only to sell more directly themselves, but also to partner with Amazon. From what we’ve talked about in class, the way companies operate is the key to how successful they are. The decision to focus on cost, quality, time, etc. is a crucial one because it will affect how consumers view the product and, ultimately, their decision to sell the product. Normally companies can only focus on one aspect to do it well, but the goal of most companies is to do multiple aspects well. Those that are able to do so are successful, but often companies that try to do too much end up failing on all of them.
It seems that in the past Nike has chosen to focus on quality products that consumers want to buy. Once Nike products were placed in retail stores, the quality was enough to get consumers to buy Nike. However, companies like Amazon show that it is possible to compete on quality, time, and flexibility strategies, and do all of them well. In response, companies like Nike have to reprioritize in order to compete.
I think it is smart for Nike to partner with Amazon instead of trying to fight Amazon. Internet retailers like Amazon are already killing the brick and mortar retailers that Nike is currently partnered with. Instead of trying to fight the inevitable, Nike is jumping ship before it too goes down with traditional retailers. This decision will allow Nike to continue to sell quality products, while utilizing the timing and flexibility strategies that Amazon already does so well. I think it will be interesting to see if Nike gets more sales through its own website, or through Amazon. My guess would be Amazon because it is increasingly becoming the most common way to shop online.
I agree with Jordan, I think in the past when purchasing shoes, the Nike brand and quality were two of the most prominent order winners. With the big names associated with the brand, as a kid, everyone owned Nikes, and you would very much be in the minority if you didn’t. However, Isabella makes a good point in her comment, that Adidas does seem to be making a resurgence, especially in the “casual” footwear department. Nonetheless, I think Nike’s partnership with Amazon, along with the move away from retail stores is the smart play. As the stock market showed when the deal was announced, partnering with Amazon really only has positive effects for a company’s sales. So even with Adidas pulling some sales away from Nike, convenience, I believe, will ultimately be the most significant order winner, and with this partnership, I think we will see a rise in revenues in the coming years as traditional retailers are pushed out of the market by Amazon.
This development at Nike creates an interesting question for the future of brick and mortar retailers. According to the link below Nike’s direct to consumer sales represent 28% of sales but 70% of the growth that the company has experienced in the last year. As the company moves more towards the direct to consumer model it may be interesting to consider how this impacts the retailers who previously sold Nike products. If other producers begin to adopt a similar strategy a lack of quality products in retail stores could develop. Many analysts have predicted the likely downfall of retailers but developments like this could expedite the process.
In a previous class, we covered a similar situation in the case of Circuit City. The company limited the products it would sell and as a result was not as able to meet the needs of customers. In this particular case it was the decision of the company but if retailers were forced out of carrying popular brands they would potentially face a similar fate.
http://www.foxbusiness.com/markets/2017/09/19/under-covers-nikes-high-growth-direct-to-consumer-business.html
I agree with Jordan that Nike is being very strategic in shifting their focus to the digital world as opposed to trying to ride out their current flat rate growth. This change should help get them back on track for now but I think there is a bigger issue at hand than the brick and mortar stores. Retailers aren’t necessarily the ones to blame considering Adidas is selling out at all of the big US vendors such as Footlocker and FinishLine. Instead of solely blaming the jump to e-commerce as the problem Nike should take a closer look at their process structure, mainly customer involvement. The biggest disruptor eating into Nike’s sales at the moment is their largest competitor, Adidas. I personally have seen a shift in the type of styles that are trending in the footwear industry thanks to popular influencers and celebrities. At one point Nike used to be on top but now even I find myself venturing to the Adidas section and purchasing their products instead. Adidas is doing a fantastic job at catering to the more comfort/casual wear customers are currently looking to buy. Nike has not quite caught on yet and hasn’t been able to shift itself from performance shoes such as running and basketball sneakers. Maybe a good idea for them would be to focus more on customer involvement so they can gain valuable feedback and insight on the current trends and make the necessary changes.
What I really considered interesting in this discussion about Nike moving away from brick and mortar retailers towards online retailers is what it says about the customers interested in Nike shoes. Nike really differentiated itself from other shoe manufacturers when it developed a production system for its shoes allowing for mass customization. NIKEiD is an online system allowing for customers to design their own shoe and actually have their designs become reality. In the article I linked below the idea of mass customization is examined further. History was made when Henry Ford began mass production of the Model T. It seemed to be the end of an era of unique craftsmanship, but it seems the desire for uniqueness, but with the benefit of mass production is coming back. New technologies like 3D printing are allowing mass customization to become an increasing reality for more than just shoes. I wonder if Nike is simply one of the early adopters of this increasing desire for uniqueness from customers and that their shift towards online retailers is simply a reflection of this. It seems consumer values have been shifting and Nike is rising to meet and satisfy these values and desires.
http://www.industryweek.com/technology/have-it-your-way-manufacturing-age-mass-customization
When you are discussing Nike or any other athletic shoe and clothing store like Adidas, New Balance, and many others, there are two main factors that you must consider that create a larger contribution margin and produces the most profit for the company. First, the production of the clothing, both where the production occurs and the price it cost to make it. Nike especially has experienced a lot of backlash with this specific topic as in the late 1900’s news broke out regarding the working conditions in Thailand and the Philippines for workers in Nike factories. With the most influential issues occurring in the Philippines, due to a government system that support larger companies, and not the citizens of their own company. Nike began initiatives that support proper working conditions globally, and hired spokesmen and lawyers to attempt to trick the public into believing the injustice never occurred, but for many years during this time period, the “just do it” logo that inspired millions was tarnished. On the subject of that logo brings the second factor, which is the face of the company, including the sponsors, and all advertisement world-wide. The athletic cloth industry is all about how you can differentiate , yourself from the competition, and through sponsors like Michael Jordon. Tiger woods, Lebron James, and Roger Federer, adults and adolescence around the world were inspired by their favorite athletes, and in some cases hero’s, to where the Nike logo. The biggest issue with this topic is if the athletes have a scandal of sorts, and their public image is tarnished, that resembles bad on Nike, and vice-versa, if the company has a bad image with how their factories operate, and the athletes leave, Nike could fall out of relevance before they can do anything about it.
It is very understandable that Nike and its shareholders have seen tremendous success since selling directly to customers and partnering with retail giant Amazon. There is no question that online retail is becoming more and more popular in today’s environment, and Amazon is leading the charge. Therefore, I find that Nike’s recent success is catalyzed by Amazon’s growth and expansion, rather than new product innovation and technology within Nike itself.
In the past year or so, consumers have been impressed and attracted to developments in the shoes that Adidas has produced; I have never seen so many pairs of Adidas shoes on people walking the streets and my friends. Obviously, this trend and new consumer behavior is directly impactful to Nike’s sales and success; Adidas is taking over some of Nike’s market share. Also, the new shoe provider Allbirds has captured the attention of consumers, especially on the campus of the University of Richmond. Not only are individuals and students drawn to Allbirds’ comfort, price, appearance, and washability, but they are also attracted to the online retail of the new company. Allbirds are headquartered in San Francisco, but one will not be able to find a pair of Allbirds to try on and purchase in a retail store in California. In addition, one will not be able to find Allbirds in any store across the United States. This is the case, because the company only sells its shoes online on its website. Since the shipment of their product is quick and efficient, I and many others have been attracted to this website. Rather than having to take time to go to a brick and mortar retail store, I can quickly jump onto the internet and order a pair of Allbirds. Now with Nike’s partnership with Amazon, and their extremely fast speed of delivery, the same is true for Nike shoes.
I believe that the future is extremely bright for Amazon and online retail: people do not want to take the time to go to the physical store. This includes for shoes and clothing, but also for groceries (Amazon recently purchased Whole Foods). Therefore, due to this new partnership and smart business decision by Nike, Nike will continue to succeed by riding the growth and power of Amazon.