나이키: 가치 파괴의 서사시

A month ago. June 28th, 2024. Nike Q2 24 financial results. 25bn of market cap lost in a day (70 in 9 months). 130 million shares exchanged in the stock market (13 times the avg number of daily transactions). The lowest share price since 2018, - 32% since the beginning of 2024.

It wasn’t a Wall Street session. It was the judgement day for Nike.

The story started on January 13th, 2020, when John Donahue became CEO of Nike, replacing Mark Parker. Together with Heidi O’Neill, who became President of Consumer, Product and Brand, he began immediately to plan the transformation of the company.

A few months later, after hist first tour around the Nike world, the CEO announced – via email – his decisions (using the formula “dear Nike colleagues, this is what you asked for…”):

1) Nike will eliminate categories from the organization (brand, product development and sales)

2) Nike will become a DTC led company, ending the wholesale leadership.

3) Nike will change its marketing model, centralizing it and making it data driven and digitally led.

To implement all of that, the CEO also announced a major reorganization of the company which took place in two waves from August 2020 until March 2021 (US first, the rest of the world after).

Things seemed to go well at the beginning. Due to the pandemic and the objective challenges of the traditional Brick & Mortar business, the business operated by Nike Direct (the business unit in charge of DTC) was flying and justifying the important strategic decisions of the CEO. Then, once normality came back, things slowly but regularly, quarter by quarter, showed that the separation line between being ambitious or being wrong was very thin.

Let’s go through the impact of the three key decisions, one by one.

Elimination of categories

The legend says that the decision was advised by McKinsey and embraced by the CEO and the President of Consumer, Product and Brand with great enthusiasm. Hard to know if this is true or not. Reasons behind it were mainly the duplication of certain operations in the matrix of Nike, the possibility to streamline the process and therefore optimize the cost of the organization and above all, the confidence that a data driven insight model (the famous “flywheel”) would have easily replaced the knowledge of the category led product and brand creation process. In 6 months, hundreds of colleagues were fired and together with them Nike lost a solid process and thousands of years of experience and expertise in running, football, basketball, fitness, training, sportwear, etc., built in decades of footwear leadership (and apparel too). Product engine became gender led: women, men, and kids (like Zara, GAP, H&M or any other generic fashion brand).

If today, we talk about lack of innovation and energy in product creation, well, we know exactly what originated all of that.

Categories were reintroduced in Nike with the reorg. announced by the CEO in December 2023, after the release of Q2 24 disappointing results. By the way, they are now called “Fields of Play”, name that Nike was using 20 years ago, and not “categories” because otherwise someone might think the CEO and the President of the Brand made a mistake…

End of Wholesale leadership

Before the beginning of FY21 (4 years ago), the CEO and the President of the Brand gave clear directions to their direct reports about the development and the composition of the new distribution construct by 2025: decline wholesale to become the second source of revenues; grow Nike Direct business heavily to transform it in the first and major source of company revenues; and lead with Nike.com.

End of discussion. “This is what we need to do. And this is what we will do”. For the first time in Nike history, long term vision wasn’t about sustainable growth anymore driven by Products, Brand and Marketplace leadership. It was about the supremacy of DTC, led by digital. Period.

At that moment, people couldn’t exactly understand the impact of it, and if it was confidence, overconfidence, megalomania, genius, madness or just a mistake.

The marginalization of the wholesale business was very easy to achieve. Nike just began to terminate hundreds of agreements with many local business partners or reduced the business they had with them (selling in less products, and/or diverting premium products to Nike Direct). And they did it globally, showing the middle finger to partners Nike had worked together for decades in any part of the globe and brutally downsizing the number of people working for the sales teams in local country teams.

More challenging was the growth of the “mono-brand” distribution and the digital one, especially at the pace requested by the CEO and the President of the Brand.

Clearly, one important support came from the brand investments. The marketing org. dramatically changed its demand creation model and pumped – over the years – billions of dollars into performance marketing/programmatic adv to buy (and the word “buy” is the proper one, otherwise I would have used “earn”) a fast-growing traffic to the ecommerce platform (we will talk about that later).

After a few quarters of good results (as I said, inflated by the long tail of the pandemic and the slow resurrection of the B&M business), things started to take unexpected directions. Among them:

a) Nike – that had been a wholesale business company since ever, working on a well- established “futures” system – did not have a clear knowledge and discipline to manage the shift operationally. Magically (well, not so magically), inventory started to blow up, as all the data driven predictions (the “flywheel” …) were simply inconclusive and the supply chain broke up. As announced by the quarterly earnings releases, the inventory level on May 31st, 2021, was 6.5bn $. On May 31st, 2022, it was 8.5bn $. On November 30th, 2022, it reached 10bn $. Nike didn’t know anymore what to produce, when to produce, where to ship. Action plans to solve the over-inventory issues planted the seed of margin erosion, as Nike started to discount more and more on its own channels – especially Nike.com (we will talk later about it).

b) Consumers are not so elastic as some business leaders think or hope. And consumers are not so loyal as some business leaders think or hope. So, what happened? Simple. Many consumers - mainly occasional buyers - did not follow Nike (surprise, surprise) but continued shopping where they were shopping before the decision of the CEO and the President of the Brand. So, once they could not find Nike sneakers in “their” stores – because Nike wasn’t serving those stores any longer -, they simply opted for other brands.

c) This “unexpected” consumer behavior had also another consequence for Nike and the sporting-goods industry. Until late 2010s, Nike had been on a total offense mode (being #1 in every market, in every category, in every product BU, basically in every dimension), a sort of military occupation of the marketplace and a huge problem for competitors that did not know how to react under such a domination. The strategic focus was only one: win anywhere. The new strategy determined the end of the marketplace occupation. Nike opened unexpected spaces to competitors, small, medium, or large brands (with exception of the company based in Herzogenaurach, that – as they usually do - copied and pasted the Nike strategy and executed it in a milder format). The retailers that were abandoned or downsized by Nike started offering shelves and square meters to all the other brands in the arena. And suddenly, certain brands started gaining market share, attacking Nike especially in those specialized categories where the company founded by Phil Knight and Bill Bowerman was once leader (i.e., running, football, fitness, training and, in part, lifestyle).

d) The growing focus on e-commerce – together with the “unexpected” consumer behavior, the supply chain problems, and the lack of product innovation – gave an additional surprise to the Nike top management. One of the empiric laws of business says that online, the main lever of competition is “price” (as the organic consumer funnel is built on price comparison). The proverbial ability of Nike to leverage the power of the brand to sell sneakers at 200$ began to be threatened by the online appetite for discounts and the search for a definitive solution to the inventory issue. Gross margin – because of that – instead of growing due to the growth of DTC business, showed a rapid decline due to a never-ending promotional attitude on Nike.com (Black Friday was a day, then became a week, then became a month, then was attached to boxing day and to the end of the year sales. And more and more, end of season sale, mid-season sale, member sale, friends & family sale). Results? Gross margin of FY22, 46%. Gross margin of FY 23: 43.5%. 250bp of margin erosion in 4 quarters…

All unexpected, isn’t it? The CEO of Nike doesn’t come from the industry. So, probably he underestimated consumer behavior and the logic behind the marketplace mechanisms of the sport sneakers and apparel distribution. Or wasn’t aware of them. At the end, he is a poorly advised “data driven guy”, whatever it means. It is more difficult to understand why the President of the Consumer, Product and Brand, a veteran of the industry, one of the creators of the Women’s category in Nike, a professional with an immense knowledge of the company and the business, approved and endorsed all of this. Maybe, excess of confidence. Or pure and simple miscalculations… hard to know.

The truth is that together, John and Heidi created a cannibal ecosystem that ate brand equity, product equity, gross margin, market share, demand creation budget and consumer connectivity. In just three years…

Lead with Digital Marketing

Nike has been built for 50 years on a very simple foundation: brand, product, and marketplace. The DC Investment model, since Nike became a public company, has been always the same: invest at least one tenth of the revenues in demand creation and sports marketing. The brand model has been very simple as well: focus on innovation and inspiration, creativity and storytelling based on athletes-products synergy, leveraging the power of the emotions that sport can create, trying to inspire a growing number of athletes* (*if you have a body, you are an athlete) to play sport. That’s what made Nike the Nike we used to know, love, admire, professionally and emotionally.

What happened in 2020? Well, the brand team shifted from brand marketing to digital marketing and from brand enhancing to sales activation. All in. Because of that, the CMO of that time made a few epic moves:

a) shift from CREATE DEMAND to SERVE AND RETAIN DEMAND, that meant that most of the investment were directed to those who were already Nike consumers (or “members”).

b) massive growth of programmatic adv investment (as of 2021, to drive traffic to Nike.com, Nike started investing in programmatic adv and performance marketing the double or more of the share of resources usually invested in the other brand activities). For sure, the former CMO was ignoring the growing academic literature around the inefficiencies of investment in performance marketing/programmatic advertising, due to frauds, rising costs of mediators and declining consumer response to those activities. Things that were suggesting other large B2C companies - like Unilever and P&G - to reduce those kind of DC investments in the same exact period… Because of that, Nike invested a material amount of dollars (billions) into something that was less effective but easier to be measured vs something that was more effective but less easy to be measured. In conclusion: an impressive waste of money.

c) elevation of Brand Design and demotion of Brand Communication. Basically, style over breakthrough creativity. To feed the digital marketing ecosystem, one of the historic functions of the marketing team (brand communications) was “de facto” absorbed and marginalized by the brand design team, which took the leadership in marketing content production (together with the mar-tech “scientists”). Nike didn’t need brand creativity anymore, just a polished and never stopping supply chain of branded stuff.

d) explosion of the centrally driven production of marketing contents to serve all the digital owned channels and significant reduction of locally driven contents and brand building contents. On top of that, massive downsize of local marketing/creative teams and local investments, as DC was supposed to fuel e-commerce and digital commerce, not local markets.

e) creation of the “membership” madness. Suddenly, Nike marketing became a ubiquitous conversation platform for “members” only and loyalty became the key driver of any brand initiative plan (it seems the madness has been mitigated over the last 12 months…)

Obviously, the former CMO had decided to ignore “How Brands Grow” by Byron Sharp, Professor of Marketing Science, Director of the Ehrenberg-Bass Institute, University of South Australia. Otherwise, he would have known that: 1) if you focus on existing consumers, you won’t grow. Eventually, your business will shrink (as it is “surprisingly” happening right now). 2) Loyalty is not a growth driver. 3) Loyalty is a function of penetration. If you grow market penetration and market share, you grow loyalty (and usually revenues). 4) If you try to grow only loyalty (and LTV) of existing consumers (spending an enormous amount of money and time to get something that is very difficult and expensive to achieve), you don’t grow penetration and market share (and therefore revenues). As simple as that…

He made “Nike.com” the center of everything and diverted focus and dollars to it. Due to all of that, Nike hasn’t made a history making brand campaign since 2018, as the Brand organization had to become a huge sales activation machine. An example? The infamous “editorial strategy” – you can see the effects of it if you visit its archive, the Nike channel on YouTube or any Nike account on Instagram – generated a regurgitation of thousands of micro-useless-insignificant contents, costly and mostly ineffective, all produced to feed the bulimic digital ecosystem, aimed to drive traffic to a platform that converts a tiny (and when I say tiny, I mean really tiny…) fraction of consumers who arrive there and disappoints (or ignores) all the others

Conclusion

As Matt Powell – one of the most qualified experts and authorities of the Sporting Goods Industry - said, this is the history of a self-inflicted damage. What happened on June 28th at Wall Street is just the result of what was decided four years ago. And for sure, this is not even the last episode. We don’t know what would have happened if certain decisions had not been made and implemented. And we don’t even know why those decisions were made. What we know is what we saw. And what we saw is an epic saga of value destruction, harming Nike’s brand mental and physical availability, in just 3 years, made by a team of executives led by John Donahue and Heidi O’Neill.

However, there is still hope.

At the end, this is mainly a Wall Street “crisis”. Investors are disappointed and mad at the company leaders who have wasted an unbelievable amount of financial value for nothing in return and destroyed the reputation of Nike as growth company.

At the same time, a huge number of consumers is still there, thinking that “the swoosh” is somewhat cool. Nike is still one of the most famous and popular brands in the world. Nike is still the market leader of its industry. Nike still makes $5bn of earnings before interests and taxes every year ($5.7bn in FY24) and doesn’t have a dollar of debt. Nike has a history of unbelievable comebacks.

But…

It will take years (and a lot of investments – I mean, it won’t be a free ride) to:

- re-establish the lost leadership in product creation (they lost the competence, not only the focus).

- re-gain the ability to influence and drive the marketplace, occupied now by new, agile, and profitable brands (without considering that many wholesale partners are angry at Nike after being abandoned and in some cases marginalized and/or insulted).

- detox the “swoosh” from the performance marketing addictive abuse.

- become again a beacon brand (many brilliant marketers were “kindly” invited to leave over the last 4 years, those left are masters of sales activations, local teams have been canceled or downsized, the “brand magic” competence is gone and needs to be rebuilt… and it won’t happen in a quarter).

In 2008, year of the Olympic Games in Beijing, as part of the brand campaign for the Olympics, Nike enchanted the planet with the “Human Race”, a massive global event and campaign, from LA to Rio, from Rome to Seoul, from Tokyo to Istanbul, from Paris to London, that made the world run. In 2024, year of the Olympic Games in Paris, as part of the brand campaign for the Olympics, Nike EMEA has just launched “Defy the Distance: Nike Running Challenge”, a sort of digital activation to let consumers win a 20% discount on full price products if they run 5k. Easy to understand why – while the potential of brand greatness is all there – it is going to be a very long (and expensive) journey to achieve it again…

The CEO and the President of Consumer, Product and Brand – against all odds - are still serving the company, working on an action plan to find solutions to the problems they created. And that can be an issue, if not “the” issue.

In my humble opinion, the two executives are more a problem than an opportunity in the quest to find the lost glory. Not necessarily for their ability. Mainly for their credibility in the eyes of Wall Street, the marketplace and – especially – the Nike people, the army of once passionate and inspired employees, that today – after three reorganizations in 7 years – struggle to believe the “new” narrative of their mistaken leaders.

At the end, dear CEO and dear President of Consumer, Brand and Product, winning isn't for everyone.

Massimo Giunco

CMO/Brand Strategist/Human Being