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Why Nike’s DTC pivot didn’t pan out

 

Published December 22, 2023

By Julia Waldow

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Nike is making big changes a few years after it announced it would bet big on direct-to-consumer sales.

On Thursday, Nike announced it would cut up to $2 billion in costs over the next three years to “fuel future growth, accelerate innovation and speed and scale and drive greater long-term profitability.” Among other areas, Nike will aim to simplify its product assortment, increase its use of automation and streamline the organization.

The news comes as Nike emerges from a challenging second fiscal quarter.

While the brand’s overall revenue is up 1% year-over-year, Nike also slashed its sales outlook for the rest of the year, citing increased macro headwinds such as slowdowns in China and EMEA. At the same time, Nike’s average unit retail (AUR) grew across channels and its average order value (AOV) among members was up year-over-year, Nike chief financial officer Matt Friend said on an earnings call. “We believe we are turning the corner in driving more profitable and sustainable growth,” he added.

Nike is not alone in having to reshuffle operations in a challenging environment. In 2022, Adidas announced a cost-cutting plan to “safeguard” the company’s profitability, while Foot Locker halted its entry into Japan and sunset its Eastbay website, among other changes.

But, Nike’s switch-up is related to its DTC-centric strategy, Friend acknowledged on Thursday — throwing into question how effective such a move has been. While the strategy made sense a few years ago — given the brand’s strong brand and intention to control more of its business — an uncertain economy and weakened discretionary spending mean that Nike is once again turning to wholesale to grow business.

The initial DTC strategy

Under a shift announced in 2017, Nike significantly slashed a number of retail partners to better focus on DTC. These included Big 5 Sporting Goods, Dunham’s Sports, Urban Outfitters, Dillard’s and Zappos. Doing so, Friend said, “created new operating capabilities, added tens of millions of new members to our member base and delivered a return of more than $12 billion in incremental revenue.” That being said, he said, “we have also added complexity and inefficiency.”

“In this competitive environment, we need to accelerate our pace of innovation, elevate our marketplace experiences, maximize the impact of our storytelling and increase our speed and responsiveness, all in service of the consumer,” Friend said.

Nike initially zeroed in on DTC because it was confident that customers would buy directly from the brand if given the choice to do so — thereby allowing Nike to hold onto more profits. To build out this part of the business, Nike established five global store concepts (Nike Rise, Nike House of Innovation, Nike Live, Nike Style and Nike Unite) and four mobile apps (Nike, Nike Run Club, SNKRS and Nike Training Club). It also uploaded hundreds of training sessions to Netflix and launched an experience in Roblox.

For a while, the DTC strategy seemed to be working. Nike’s DTC revenue for its 2022 fiscal year totaled $18.7 billion, up 14% on a reported basis. But, as analysts told Modern Retail, the brand may have underestimated the power of wholesale — especially at a time in which shoppers are looking for the best deals possible and may be less loyal to a particular brand. In addition, over the course of the pandemic, other running shoe brands stepped in to woo Nike’s customers. The overall economy played a role, too, as many shoppers started buying fewer discretionary goods.

According to Tom Nikic, senior vice president of equity research at Wedbush Securities, Nike’s DTC focus may have been slightly misguided. “Having a bigger direct-to-consumer business is a positive,” he said. “I do think that having a closer connection with the consumer is important. But I think where they may have kind of misjudged the marketplace was that the consumer wants choice… [and] will still go to the multi-brand retailers.”

A difficult time for wholesale

Now, Nike is rethinking some of its wholesale partnerships — but it’s seeing some headwinds with this channel already.

Over the last year, Nike has slowly added more wholesale players back into the mix. In March, Foot Locker CEO Mary Dillon spoke of a “renewed” relationship with Nike, and in May, she said that Foot Locker and Nike teams had gathered in Portland “to plan our return to growth in our Nike business in 2024.” In October of this year, Nike re-entered its wholesale partnerships with DSW and Macy’s.

Despite these moves, Nike’s wholesale revenue for the past quarter — a period that included October — was down 2% year-over-year.

Nike had warned that this could happen. On Thursday’s call, Friend mentioned that Nike had alerted investors to “reduced wholesale selling” in the first half of the fiscal 2024 year. In other words, Nike was getting fewer orders from its existing partners who were worried about cutbacks in consumer spending. “Coming into this current calendar year… wholesale orders are weak at the moment,” Morningstar analyst David Swartz told Reuters in June.

According to Nikic, wholesale revenue reflects the amount of goods that gets shipped to retailers. “It doesn’t necessarily represent the actual sales of the product to the consumer,” he said.

“If the retailers want less product on their shelves and less stuff in their warehouses, then you’re going to see pressure on the top line,” Nikic said. “That’s what Nike is experiencing right now. And they’re not alone in seeing that.”

Earlier this year, for example, Steve Madden said it struggled as wholesalers trimmed orders to get a better grip on inventory. This past summer, Canada Goose, Under Armour, Fossil and VF Corp all reported drops in wholesale revenue.

Emerging brands such as On and Hoka, too, have made the landscape more competitive since the last time Nike had a presence in certain wholesale channels, Nikic said. Hoka’s sales rose 27.3% to $424 million for the quarter ending September 30, while On’s third-quarter net sales increased 46.5% year-over-year.

The plan going forward

This isn’t to say that Nike is abandoning DTC. In fact, in the past quarter, Nike’s revenue from its owned channels like its app, stores and website was $5.7 billion, up 6% year-over-year. However, as executives remarked on the call, inflation-wary consumers are still watching their money. While Nike’s store traffic grew, the company saw lower levels of digital traffic.

For all of its channels, Nike is using this reset period to reconfigure its product line. Over the past quarter, Nike saw strong sales from its Invincible, Vaporfly and Ultrafly running shoes, while its Mercurial, Phantom and Tiempo soccer cleats “grew double digits,” according to Friend. Going forward, Nike will accelerate rollouts in time with the Paris Olympics and beyond, Friend said.

“The second half of fiscal ’24 represents the start of a multi-year product innovation cycle that will introduce new franchises, concepts and platforms, elevating our full portfolio,” CEO John Donahoe said on Thursday’s call. But, he acknowledged, “while there’ll be some key moments in the second half, this new innovation cycle will take some time to fully ramp up given our size and scale.”

Wedbush’s Nikic says new products will likely give Nike a needed boost. Back in 2015 and 2016, when Nike struggled with competition from Adidas, it managed to regain momentum with innovative items like the Vapor Max and Air Max 270, Nikic said. “Having stuff that’s new and exciting and something that the consumer has never seen before, that’s kind of the best way to pull yourself up when you’ve been off your game.”

Overall, Jessica Ramírez, senior research analyst at Jane Hali & Associates, told Modern Retail that Nike’s overall reshuffling seems logical, especially considering that consumers might continue to pull back in 2024.

“When you’re going into a very volatile time where the consumer is spending less, you have to be quite strategic with the way you navigate forward until times get better,” she explained. On top of everything, sales in China are under pressure, she explained, and existing geopolitical issues in Europe and the Middle East are affecting companies’ bottom lines.

“For you to be cutting costs, running better operations, keeping your inventory in line, running strategic pricing, all of that makes sense,” she said.

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