How Nike Adapted to COVID-19
Abstract: If you are an apparel retailer, a mass closure of wholesale partners, an economic recession, and a dismantling of the supply chain are your absolute worst nightmares. In the past nine months, Nike has weathered all three of these at once in the storm of COVID-19. Further, the athletics retailer suffered through a mandatory shutdown of global sports—sealing off their greatest advertising venue. The amalgamated result of this adversity is a fast growing inventory and a severely underperforming retail business. However, Nike still has several advantages over other firms: it has one of the strongest brand names, a booming digital arm, and a bolstered balance sheet.
With a weakened apparel market, Nike aims to use their advantages to ensure its continued dominance for the decade ahead. Chief Donahoe and Co. have developed a three-pronged plan of attack that will build on their strengths and consolidate their weaknesses by focusing on: first, the digital marketplace of the future; second, a new consumer construct; third, end-to-end technology. Although COVID-19 dealt a significant blow to Nike’s supply chain, the firm has recovered, rebalanced, and is now poised to handle fiscal 2021 and all the challenges that come with it.
Nike came into COVID-19 performing at a stellar clip, with high levels of product innovation and digital growth pushing the firm to new heights. In Q2 of FY 2020, total global revenues increased by 10% over the previous year and revenues from abroad grew by 18%.
This especially strong growth abroad reflected a concerted effort by Nike to dominate the markets of foreign urban centers as it does domestic cities. In addition, digital sales at the firm increased by 38% over the previous year.
Part of the growth in digital derived from a stellar Black Friday performance, which saw an increase of 70% in digital sales and 45% in the number of unique individuals purchasing Nike goods compared to Black Friday of 2018. With the growth in the low-cost digital realm, gross margin expanded by 20 basis points. In sum, Q2 produced strong growth for Nike in key categories like digital sales and foreign market share, positioning the firm for a dominant second half of FY 2020.
The company’s first exposure to the complications of coronavirus came during Q3 when it shuttered 75% of its stores in Greater China. During that same period, Nike experienced significant growth over the previous year for digital revenues in Greater China and APLA, bolstered by-products such as its NIKE Activity app, whose weekly usage grew 80% during quarantine.
Chief Donahoe learned from his firm’s early struggle with this disaster and developed a model to focus on three stages of the virus as it unfolded in other countries: first, recovery and reopening stores; second, stabilizing supply & demand; third, long term growth.
Although this model did not eliminate all losses for Nike, it does provide a good overview of how the firm approached the problems presented by COVID-19. It is through this model that this piece will explore the reaction of Nike to COVID-19, with greater emphasis being placed on supply & demand and long term growth.
Reopening Stores: Currently, 90% of Nike stores are open worldwide and nearly 100% are open in Greater China.
To understand the reopening of stores, however, it is first necessary to understand the effects of their closures. In short, Nike faced an inventory-increasing choke point where they had products coming in but could not sell enough due to direct-to-consumer retail and wholesale partner store closures. As previously mentioned, Nike shuttered many of its stores in Greater China, dropping revenues from that region 4% over the previous year.
In Q4 the firm closed 90% of stores in the EMEA and APLA regions for 8 weeks and demand from wholesale partners dropped 50%, leading to an increase in inventory of 31% over the previous year. The increase in inventory was reinforced by a drop in demand due to the recession and by fewer people needing new footwear (their largest revenue stream) since they worked from home.
Supply and Demand: To manage the inventory issue, Nike first trimmed the inflow of products for the holiday season by 30% so that they could achieve a full sell-through for their current supply.
Nike took a hit to its gross product margins because of order cancellation fees and a leftwards shift in their economies of scale, but they deemed these expenses necessary to balance product inflow throughout the fiscal year and cut their fat to prevent another inventory stockpile. The firm also closely tracked digital “foot traffic” patterns to adjust inventory distribution for online sales.
On the topic of shifting sales, Nike was already well positioned to tackle a transition from retail to online due to a program called CDO (Consumer Direct Offense) that the firm announced at the beginning of FY 2018.
This strategy was largely responsible for the previously mentioned 38% growth in digital during Q2. Nike implemented the program because they recognized that they were too dependent on third party sellers like wholesale retailers and Amazon. The firm decided that they could wield their immense brand power to sell directly to consumers.
The CDO took a triple threat approach, aiming to double: 1) Innovation in products, 2) Speed of the production cycle, and 3) Direct consumer interaction. The current CEO, John Donahoe, is the embodiment of this vision: as a former executive at eBay and Service Now, he has plenty of experience with online growth and sales. Thus, although the retail arm was dealt a heavy blow, their digital sales were already primed to take over a faltering retail sector.
Conclusion: FY 2020 was one of the most memorable for Nike in recent memory. Retail closures tested the CDO model and proved the merits of their new digital strategy, which in turn made way for digital growth and a new model to accelerate past success. Despite profit shortcomings this past year, Nike is as poised as ever to succeed and grow in our digitizing world.
Written by Deen Amanat
Edited by Alexander Fleiss, Andres Zavrosa, Xujia Ma, Pranshu Gupta, Calvin Ma, Michael Ding, Rohan Mehta & Gihyen Eom