How Nike Adapted to COVID-19

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How Nike Adapted to COVID-19

· Apparel,Consumer,Consumer Trends,Automation,Coronavirus

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.

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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.

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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.

The other effect of store closures was that Nike had to transition to a digital-first company. Although the firm achieved tremendous growth in its digital arm, that transition presented its own set of problems, which compounded the issue of Nike’s need to sell their inventory. Thus, because of store closures, Nike faced two challenges: a growing inventory and shifting their sales from retail-based to online-based. The firm managed these issues with several creative supply & demand policies.

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.

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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.

While the first two parts of the CDO plan were instrumental in the pre-COVID success of the program, the third branch has had the limelight for the past nine months. Since Nike had already been heavily investing in direct-to-consumer sales, they were quickly able to double capacity in distribution centers to account for more online orders.

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In addition to adjusting their supply chain to accommodate online orders, Nike also launched several initiatives to boost demand for their digital products. For example, Nike offered their app NTC Premium (on-demand workout videos) for free to US consumers for 90 days. The company also zeroed in on the worker at home who now has extra time on their hands to work out, launching campaigns to get people to stay at home and exercise. With these policies, Nike achieved 75% over year growth in digital sales, boosting them up to 30% of total revenue.

Despite their great advances in digital, the firm still suffered a loss of $754 million in Q4, cutting their FY 2020 profits by 27% (mostly due to retail losses). However, due to their supply & demand reactions, Nike still performed better relative to its main competitor, Adidas, on top of many others. Furthermore, Nike now has its retail divisions open again and sits on top of $12 billion in liquidity ($6 billion in unsecured notes issued in Q4 with low IR) with a strong credit rating and restructured cash flow, which will allow it to pursue long-term growth while its competition flounders.

Long-Term Growth: The CDO strategy had digital sales up to 30% of total revenue for Nike. Chief Donahoe aims to reach 50% with a new program that his firm calls CDA (Consumer Direct Acceleration), which will build upon CDO by building a digital marketplace, creating a new consumer construct, and creating end-to-end technology.

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The digital marketplace is essentially a continuation of the CDO, in which we saw the release of apps like SNKRS and Shock Drop that built hype around new and exclusive shoe releases. In Q3, some shoes were dropped exclusively online. The digital marketplace also requires high levels of product innovation and quick supply chains, other holdovers from the CDO. Recently, Nike has unveiled the VaporMax, Nike React, new sustainable shoes, self-tying shoes, the Pegasus 37, and the Air Max 2090. Quick production and consistent innovation at Nike have not been affected by this pandemic. With a reduction in orders from 50% of the wholesalers during COVID, Nike has realized that they need to rely on themselves to move products more than ever, and the digital marketplace is a fantastic step in that direction.

The new consumer construct will shift the division of Nike products from performance wear versus sportswear to divisions of “Men’s, Women’s, and Kids’ “ to streamline purchases from consumers and encourage them to shop across lifestyle and performance brands. This change reflects the data-tracking efforts of Nike to come up with the most efficient business models, and also takes advantage of the “athleisure” trend where people wear performance clothes as if they were lifestyle clothes. The consumer construct also involves shifting around executive-level roles involved in direct-to-consumer and cutting jobs to optimize the operational model.

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Finally, end-to-end technology will unify investments in data and analytics, demand sensing, insight gathering, and inventory management to accelerate Nike’s digital transformation. A perfect example of end-to-end tech is the company’s plan to open small mono-brand stores (think a store full of just Jordan Brand or just Converse) with the ability to function as distribution centers and retail fronts. Another example is the further development of their economic models to track demand at even more minuscule levels. Technologies like these are the final step in the firm’s move from retail-first to digital-first.

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.

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Written by Deen Amanat
Edited by Alexander Fleiss, Andres Zavrosa, Xujia Ma, Pranshu Gupta, Calvin Ma, Michael Ding, Rohan Mehta & Gihyen Eom

Sources:

Nike FY 2020 4th Quarter Earnings Results: FY20 Q4 Combined NIKE Press Release & Schedules - FINAL 

Nike FY 2020 4th Quarter Conference Call: Q219 Earnings Transcript

Nike FY 2020 3rd Quarter Earnings Results: NIKE, INC. REPORTS FISCAL 2020 THIRD QUARTER RESULTS

Nike FY 2020 3rd Quarter Conference Call: Q219 Earnings Transcript

Nike FY 2020 2nd Quarter Earnings Results: NIKE, INC. REPORTS FISCAL 2020 SECOND QUARTER RESULTS

Nike FY 2020 2nd Quarter Conference Call: Q219 Earnings Transcript