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Nike at 50: The giant never lay flat

On June 8, 2022, Nike Running Club (NRC), a running app owned by Nike, issued a notice of suspension of service, announcing that it will stop service in mainland China from July 8, 2022.

Nike said that the suspension was due to business adjustments. This actually refers to Nike’s upcoming digital upgrade in the Chinese market. One day ago, on June 7, Nike China just announced that it will start the overall transformation of the digital ecosystem in July. The main strategies include Nike App software, membership services, the upgrade of the Chinese version of the SNKRS App and Nike.com, as well as increased investment in WeChat ecosystems such as mini programs, etc.

If there is no accident, many of the previous NRC functions should be integrated into the above digital projects, and consumers’ product experience around Nike will be more concentrated. Integrating scattered apps and services into an integrated platform, or even an “operating system-based application” that Chinese consumers are already familiar with, may be the digital path Nike has chosen.

But this is after all a multinational company has stopped an application service with more than 8 million registered users in the mainland market, especially at this delicate point-this is the third year that China has proposed a dynamic clearing and epidemic prevention policy and a double cycle of internal and external economy. The second year after a group of foreign brands experienced the “Xinjiang cotton” turmoil in China, is the eighth day that China’s core consumer city Shanghai has just resumed normal operations after two months of silence. Every move of an industry giant like Nike will undoubtedly lead to More attention.

If you put aside the discussion of various so-called “policy trends”, you will find that for a multinational company like Nike, which grew up in an open free market and global competition, the best way to understand its market strategy is to return to the business logic itself, that is : What does the Chinese market mean to it? How important is it?

The company’s financial report provides the most powerful data reference. In 2019, before the outbreak of the new crown epidemic, Greater China contributed an average of 17% of Nike’s revenue and up to 50% of earnings before interest and taxes (EBIT) per quarter; by 2021, although the profit contribution rate has shrunk to 41% , but the revenue contribution rate further increased to 20%.

In this market, Nike has also shown a strong ability to resist risks. 2021 is a year when the global consumer market is affected by the new crown epidemic and geopolitics, and the recovery status is divided. In the second quarter of that year—the first quarter after the BCI turmoil—Nike’s revenue in Greater China once shrank by 15% month-on-month. But a few months later, in the 2021 Double 11 promotion, data from Jiuqian Zhongtai showed that Nike’s sales on Tmall alone exceeded 2.2 billion yuan, and the single-platform industry market share calculated by sales also increased. Back to number one.

Of course, in the field of sports products to which Nike belongs, it is not easy for international brands to repair the Chinese market. Not to mention the increasingly powerful Anta and Li Ning, even the almost forgotten domestic brands such as Hongxing Erke can briefly participate in eroding the original market share of Nike and Adidas. On the quarterly earnings call in June 2021, Nike CEO John Donahoe even said that “Nike is a brand that ‘belongs’ to China and serves China”, which can rush to hot searches.

According to the data of Tmall platform, after the “rise” of domestic brands in 2021, their popularity has basically subsided by 2022, but the five major international brands (Nike, Adidas, FILA, Skechers and lululemon) are in The total market share at the beginning of 2022 has once again experienced a significant shrinkage – the blockade and control policies of first-tier cities and the poor supply chain affecting many parts of the country have a far greater impact than a single incident.

Nike, born on May 1, 1972, is 50 years old this year. Half a year ago, in mid-November 2021, the company’s share price hit an all-time high of $177.51, and its market value of more than $280 billion was higher than the combined market value of lululemon, Adidas, Anta, Li Ning, Puma and Under Armour over the same period.

In a recent research report, Aneesha Sherman, an analyst at Wall Street market analysis agency Bernstein, also pointed out that a strong brand like Nike has experienced the Internet bubble in 2000, the economic recession from 2008 to 2009, and the recession in 2020. After the new crown epidemic in 2018, the market share will further increase.

Indeed, to understand a company like Nike that has gone through multiple economic cycles, we should base ourselves on a longer time dimension and a larger perspective.

In the second half of 2021, in the supply chain departments of companies such as Nike, Adidas, lululemon or Gap, Vietnam should be a keyword that is repeatedly mentioned.

At present, more than 50% of Nike’s footwear products and about 1/3 of its apparel products are produced in Vietnam. In July 2021, the new crown epidemic broke out again in Vietnam, and the capital Ho Chi Minh City entered the second round of large-scale closure and control. The time for many foundries to shut down needs to be calculated on a weekly or even monthly basis.

The pressure on the production side was directly mentioned in Nike’s earnings conference. In September of that year, Nike announced that its production rhythm in Vietnam had been delayed by 10 weeks compared to the original plan, and about 130 million pairs of sports shoes were affected. Recovery will take longer. That means Nike will miss out on a lot of revenue in the remaining rounds of the U.S. shopping season that year.

At that time, poor international logistics was also a big problem for Nike. Since the beginning of 2021, Nike has suffered from container shortages and congestion at U.S. ports; by September of that year, it took Nike 80 days to ship products from Asia to North America, about double the rate before the pandemic. In order to offset the rise in logistics costs and ensure profit margins, Nike even raised the prices of some products in the second half of the year.

In fact, until the beginning of 2022, Nike’s logistics problems have not been well resolved. A trendy shoe store called Sneakersnstuff once told the Wall Street Journal that orders they placed with Nike were sometimes delayed for months, which prevented many important new products from going on sale.

Back to the production side. Historically, Nike has extensive experience managing foundries in Asia. In the early days of the company’s establishment, Nike took a fancy to Japan’s mature production experience and established its first production line in Japan. Designed in the United States and produced in Japan, Nike quickly opened up the American market. In 1975, Nike moved the production line to South Korea and Taiwan, China, where labor costs were relatively low, and continued to move to Fujian and Guangdong in China, Indonesia and Thailand in the 1980s. For more than 20 years since then, China has been the most important producer of Nike.

In 2005, Fengtai Group and Baocheng Group, two large footwear OEMs cooperating with Nike, announced that they would gradually transfer their production capacity in China to factories in Vietnam, and would further increase investment in Vietnam. Around 2010, Vietnam replaced China for the first time as the largest producer of Nike footwear.

Another important production partner of Nike in China is the listed company Shenzhou International. Judging from Shenzhou International’s income in recent years, the foundry fees paid by Nike to it have increased significantly. However, most of the orders went not to Shenzhou International’s Ningbo factory, but to its production bases in Vietnam and Cambodia — Cambodia surpassed Thailand to become Nike’s third-largest apparel producer in 2019.

At the end of 2021, Vietnamese Prime Minister Pham Minh Trinh and Nike Chief Sustainability Officer Noel Kinder met at the 26th United Nations Climate Conference. The latter said that with Vietnam’s proper control of the new crown epidemic and the reopening of factories, Nike will continue to expand investment and production in Vietnam.

“Business Week” once said in a 1997 report that the placement and departure of Nike’s foundries will have a significant economic impact on the host country: “When choosing a factory site, Nike will pay attention to cheap labor, and will also Focus on regime stability. These countries tend to have decent infrastructure, pro-business governments, free trade regimes. And when Nike decides to leave, the prosperity it brings often doesn’t end, these countries continue to High-end manufacturing and democratized development.”

DTC (Directly To Consumer), this is a word that flashes magic for all international retail giants (including Nike). The relatively simple explanation of DTC is actually “direct sales” as opposed to the distribution system: opening stores by yourself, hiring store staff, selling products directly to consumers, and gaining more detailed market insights.

Data source: Nike financial report

In 2017, Nike launched a new long-term brand strategy “Consumer Direct Offense”, the core of which is to use digitalization and DTC to strengthen consumer connections and create a better personalized user experience. Of course, for Nike itself, self-operated profit margins are higher, which can turn into better numbers on the financial report.

In fiscal 2021, Nike’s revenue from DTC channels has reached $16.4 billion, accounting for about 40% of the company’s overall revenue. The market generally predicts that by 2025, this proportion will further increase to 60%. Among them, the Greater China region benefits from infrastructure such as Tmall and Mini Programs that are conducive to brand direct sales. DTC accounts for about 46% of revenue, which is higher than the global market.

The results are outstanding, but Nike has put a lot of effort into it. In the past 4 years, the company has reduced the proportion of cooperative dealers by more than 50%, and the losses of dealers in the North American market are particularly heavy. Nike COO Eric Sprunk once explained the relationship between DTC and distributors. Foot Locker (one of Nike’s North American distributors) placed an order with Nike. This is just a “demand signal”; today, consumer demand is the final The “demand signal” Nike needs to hear directly from consumers.

In line with the DTC strategy, Nike has also tried a variety of new store concepts and forms in recent years. Taking the Chinese market as an example, the top four retail concept stores (House of Innovation, Nike Rise, NikeLive and Nike Unite) at the top of Nike’s direct store system have been gathered here, and the radiation scope of Nike’s self-operated stores has also been refined to cities, Neighborhoods, communities, and the “her economy.” According to official data, Nike has opened 18 new concept stores in 10 cities in China.

Although Nike is gradually shifting its focus to its own retail, the distribution model is still the main source of its revenue. Previously, Nike announced a new model of cooperation with dealers. When purchasing Nike products at some dealers, you can also get the same treatment as a member of directly-operated stores. “We’re investing in distributors to improve the consumer experience so consumers get a consistent, high-quality experience no matter where they shop,” Matt Friend said.

What kind of dealer is worthy of Nike’s investment? An official example is the cooperation with SocialStatus, a well-known trend buyer in the United States. The two sides not only released a number of co-branded products, but also conducted live broadcasts on Nike’s own trendy sneaker App SNKRS.

A more modest example appears in Nike’s Greater China region. In January 2022, Topsports, one of Nike’s most important distributors in China, announced a strategic cooperation with Nike. The two parties will implement the concept of “scaled Nike retail” in the Chinese market, which is simply to open a store. For example, Nike’s second domestic NikeRise flagship store opened in Beijing in early 2022 is the result of its cooperation with Taobo.

Data source: Shenzhou International Annual Report

Taobo was originally a sports brand distribution department under the “Shoe King” Belle. In April 2017, after the consortium led by Hillhouse Capital completed the privatization acquisition of Belle for HK$53.1 billion (approximately RMB 45.8 billion), it separately split the business line of Taobo and promoted Taobo in 2019. Return to Hong Kong stock market in October.

The history of cooperation between Taobo and Nike can be traced back to 1999. By 2004, Taobo was Nike’s largest retail partner in China in terms of purchase amount, and the cooperation between the two parties has long surpassed the relationship between brands and general distributors . Another fact that can be seen as corroboration is that Topsports divides the various brands it distributes into two categories, and there are actually only two brands among the “main customers” that contribute about 85% of revenue: Nike and Adidas.

Concentrating on betting on these two major international brands has put pressure on Taobo’s performance in 2021, with revenue and net profit both declining by more than 11% year-on-year. However, Taobo is also transforming itself with a strategy similar to DTC.

At present, Taobo has formed a large-scale membership system, covering almost all digital scenarios such as e-commerce, WeChat community, mini-programs, live broadcast, App, and public account matrix. According to the financial report, the number of its members has exceeded 55.5 million; in the first quarter of 2022, 96.4% of the in-store sales will be contributed by Taobo members.

In the process that brands are pursuing DTC, what should traditional distributors do and what kind of cooperative relationship should they seek with brands? The examples of Taobo and Nike are worth long-term observation.

The history of Nike Running Club itself can be traced back directly to Nike+, Nike’s earliest digital product. In May 2006, Nike launched this service customized for iPod, users can view a series of running data such as their pace and distance in real time. Since then, Nike has released the Nike SportBand running wristband as well as the Nike App to connect users more efficiently.

After Nike formally established the digital sports department in 2010, a number of digital means including membership system, sports services, and e-commerce platform were put on the agenda, and the functions of Nike+ and traditional websites began to be dismantled, reorganized and upgraded. With the 13-year CEO Mark Parker stepping down in 2019 and the new CEO John Donahoe from Silicon Valley, Nike has sent a strong signal to the entire industry: align with the technology industry and resolutely transform digitally.

That is to say, the closing of NRC in the Chinese market in July is essentially a step for Nike to implement the above-mentioned digital strategy. The NTC WeChat applet, which carries both NRC and NTC (Nike Training Center) App functions, will be launched in August 2021; the newly launched “Nike Activity Experience” applet has the same personal customization, offline experience and Event reservation function; as for the corporate WeChat of Nike stores, it will be equipped with online live broadcast function – everything shows that the direction of Nike’s digital strategy in China is to be more localized.

Since 2016, Nike has also taken the initiative to acquire digital design company Virgin Mega, consumer data analysis companies Zodiac and Invertex, and predictive analysis company Celect to strengthen digital capabilities. Nike says data helps the company better capture trends, manage design, production and delivery, and respond to changing market demands. For example, several of its retro running shoes Presto Mid Utility, Flyknit Racer and Lunar Charge, etc., relying on the understanding of consumer data, can be put into the market in only 1/4 of the original preparation time.

Data source: Nike financial report

Data source: based on public information

Data source: NFTGo

Previously, Dong Wei, general manager of Nike Greater China, said in an interview that many projects in Nike’s digitalization process originated in China and were used in China as well as in the global market. In the Chinese market, Nike’s digital strategy does have some localized differences, such as the official WeChat mini-program and the Tmall flagship store currently directly managed by the Nike team. Whether it is the differentiation of the service direction or the continuous upgrading and optimization, the final result is to hope that users will recognize the brand and community more, and finally buy a few things with the Nike trademark.

All of this can of course happen in the virtual world as well. In mid-December 2021, Nike announced that it had entered the 3D sandbox creative community Roblox and built a virtual world called NIK EL AND. In Nike’s official promotional video, NIKELAND has a strong cartoon sense, but sports venues are readily available, including of course a Nike store with a huge logo. In addition to “shopping” in the store and dressing up with various Nike products, users can also play various sports mini-games and even design new games by themselves.

Nike, which stepped into the “metaverse” for the first time, also planned follow-up updates for NIKELAND, such as adding star athlete characters or brand goods, and even simulating international events such as the World Cup or Super Bowl. All in all, hope you have fun and remember Nike.

In response to this test, Sam Poser, an analyst at Williams Trading, commented: “NIKELAND is not only a way to introduce Nike to children, but also a testing ground for observing the effects of new products. If the brand knows that a group of children are wearing it in NIKELAND , then it will be launched in the real world.” In other words, NIKELAND’s development strategy is consistent with the digitalization that Nike is good at.

In early December 2021, Nike also acquired RTFKT, a virtual sneaker platform. A few months later, RTFKT x NikeDunk Genesis CryptoKicks, the first NFT products based on Ethereum, designed with the classic shoe Dunk as the prototype, were quickly released. The average price on the first day of sale reached 3.8 ETH, equivalent to 73,000 yuan. Of course, the average transaction price of these glittering NFT sneakers once fell below 1 ETH as trading activity declined.

Considering that Nike has countless classic sneaker products for reference, as well as a digital analysis foundation, and even the ability to lead the collection industry, NFT sneakers may indeed become a new business line for Nike in the future. At present, the lightning logo of RTFKT has been It can be tied with Nike’s three classic logos, Swoosh (tick mark), Jumpman (trapeze) and Converse.

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