companies : How a series of blunders led Nike to be beaten by younger rivals

companies : How a series of blunders led Nike to be beaten by younger rivals
companies : How a series of blunders led Nike to be beaten by younger rivals

Tuesday 9 July 2024 10:46 PM

newsonline - These should be good times for Nike.

This is an Olympics year, providing a global showcase for its products, while the sports pages are filled daily with any number of stars - among them Jude Bellingham, Emma Raducanu and, next week, Scottie Scheffler and Rory McIlroy - pictured wearing its garb.

And yet the business is in the doldrums.

'It does seem like a hopeless situation'

Nike shares, which have fallen by 59% from the highs they hit at the end of 2021, currently languish at levels last seen when the world went into lockdown in March 2020.

The latest results, published just under a fortnight ago on 27 June, were hugely disappointing and prompted a rash of downgrades from Wall Street analysts. The following day saw Nike shares lose a fifth of their value in their worst one-day showing since it came to the stock market in 1980.

As Jim Cramer, the influential investment pundit, told his CNBC audience on Monday: "Can Nike still be saved? It does seem like a hopeless situation."


Nike's dramatic recognition of trouble

Today, in a dramatic recognition that the business is in trouble, Nike has come up with a response.

Bloomberg is reporting that the company has rehired Tom Peddie, a Nike veteran of 30 years, who retired in 2020.

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Image: A Nike store in Glasgow, Scotland

It said Mr Peddie, who most recently served as vice president and general manager of Nike's North America business, has been brought back to oversee retail partnerships as the company seeks to rebuild relationships with retailers, such as Foot Locker, after taking some of its products away from it in order to focus on its own stores and digital channels.

It quoted an internal memo to colleagues from Craig Williams, Nike's president of geographies and marketplace, as saying: "As we continue to focus and improve capabilities in our wholesale business, I am confident that Tom will bring both vision and bold leadership to accelerate the marketplace strategy."

Huge blunders - which helped rivals

The move recognises that Nike blundered hugely in redirecting its products from third party retailers to its own stores and websites, a key strategy of John Donahoe, Nike's chief executive since January 2020.

Mr Donahue, a former chief executive of the e-commerce website eBay and the cloud computing group ServiceNow, assumed consumers would permanently switch to online shopping after COVID-enforced lockdowns.

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Yet the move simply freed up shelf and floorspace for third party retailers to stock products made by younger rivals, including the trendy British sportswear brand Castore, the French running shoe brand Hoka and the Swiss brand On Running as well as more established rivals such as New Balance.

Previously, rivals like these would not have been able to get a foothold in the market, due to the superior advertising and marketing firepower of Nike and its German rival Adidas. Now, thanks to social media, start-ups like Castore - which was valued at nearly £1bn at its most recent fund-raising in November last year - has been able to make more of a splash.

Nor has the direct-to-consumer strategy even worked. Nike's latest results, covering the three months to the end of May, revealed that sales in its direct-to-consumer division fell by 8% to $5.1bn.

Another costly mistake

Switching produce away from third party retailers was not the only mistake Nike has made under Mr Donahoe.

Restructuring to save costs, moving away from divisions that covered individual sports like basketball to men's, women's and children's sales categories, weakened its relationships with - and understanding of - those sports.

There has also been a sense that Nike has become overdependent on a handful of products - a mistake Adidas made in 2018 with its Stan Smith and Superstar brands - and that it has weakened the exclusivity of some of its best brands, such as Air Force 1s, Air Jordan 1s and Dunks, by making them too ubiquitous.

Nike now faces having to reduce supplies to restore a premium quality to those names. Converse sales during the most recent quarter were down 18% due to weakness in both North America and Europe.

Some investors also worry that younger consumers will not have the connection with superstars like Michael Jordan - whose last game was in April 2003 - that previous generations did.

As Mr Cramer put it: "So many of Nike's former strengths seem to have turned into weaknesses."

Investors also wonder whether Mr Donahoe, having spent much of his career in the tech sector, really has the appropriate background and experience to lead a business like Nike.

A Nike trainer. Pic: iStock
Image: File pic: iStock

For now, Mr Donahoe has the backing of Phil Knight, Nike's co-founder, chairman emeritus and still the company's biggest single shareholder.

Mr Knight, who has known Mr Donahoe for more than 30 years, issued a statement after the recent results in which he said: "I have seen Nike's plans for the future and wholeheartedly believe in them. I am optimistic in Nike's future and John Donahoe has my unwavering confidence and full support."

What next?

Apart from cutting inventory in oversupplied brands like Air Force 1 and pivoting back towards third party retailers - something from which Adidas has benefited with the boom in popularity of its Sambas brand - those plans are likely to include more innovation.

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It will also involve a renewed focus on its core product and heritage as a supplier of what were generally regarded as technically the best shoes for runners. There will also have to a push towards price-conscious consumers who have been somewhat abandoned by Nike in recent years.

This is why the appointment of Mr Peddie is of critical importance. It is all part of Nike trying to reconnect with its retail partners and, through them, to its consumers.

The problem for Mr Donahoe is that these changes are unlikely to show up in Nikes sales until the middle of next year.

By then, Wall Street's patience may have been exhausted.

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