Nike Innovation Challenges and Turnaround Strategy
Hello, I’m Marcus and welcome to Business Breakdown. In this edition, I analyze Nike’s recent product and cost challenges and rise of their more innovative competitors.
This is a series where I write about a current business problem, perform a root-cause and strategic analysis, and provide subsequent recommendations. I hope that through this blog, both you and I will be able to learn about different industries, business problems and how to use financial and market analysis to develop recommendations.
I would also love to hear your thoughts on these business issues, so please feel free to also suggest any additional perspectives. Anyhow, please enjoy and happy reading! Feel free to also follow me on Medium for future posts!
Context
In February 2024, Nike announced it would lay off more than 1,600 employees after experiencing flat sales and stalling growth. Nike’s stock has declined 24% over 2023, compared to a 19% gain in the S&P 500. This has been illustrated in the increasing pileup of inventory and the loss of market share to new and hungry competitors such as On and Hoka.
Despite its recent slumps, Nike still dominates its competitors with its sales growing 31% to $51 billion in 2023. However, its current issues must be addressed to sustain its market share and prevent further losses to its competitors.
Hypothesis
The rise of Nike’s competitors such as On and HOKA indicate that consumers are looking for more innovative products that offer a more competitive athletic edge. Additionally, current consumers are drawn less to Nike’s signature association with its branded athletes- however Nike still spends enormous budgets on locking down these partnerships (e.g. Caitlin Clark’s reported eight-figure contract for a signature shoe)
Nike should therefore refocus its innovation strategy on its core brand of creating products that improve athletic performance, instead of new aesthetic designs and ambitious technology and supply chain management investments.
Analysis
Firstly, I will analyse Nike’s recent investments and their effects, while comparing with the investments made by Nike’s largest and most innovative competitors.
Digitalisation Investments
Over John Donahue’s 4-year tenure as CEO of Nike, the company has adopted a digital-first objective, leveraging Donahue’s experiences of reinvigorating e-commerce platform eBay and growing cloud-computing giant ServiceNow.
Initially, during covid lockdowns in 2020, Nike experienced success with shifting more and more sales onto digital channels. Digital channels accounted for 30% of total sales, and Nike decided to drop many long-term brick-and-mortar sales partners and reduce their total distribution.
This however has resulted in strains to Nike’s supply-chain process, where the organisation itself takes on much more liability with handling and shipping its inventory direct to consumers. Also, without its distribution partners, Nike’s total inventory has hit the USD 9 billion mark and is up 54% in the last 3 years.
Nike has also invested significantly in other technology ventures, such as the startup Rtfkt which creates sneaker and collectible NFTs, and the migration onto a new Enterprise Resource Planning (ERP) system SAPS/4HANA. The new ERP system migration has cost billions and is currently not operational and still 3 years behind schedule.
Rise of Competitors
Nike’s woes have left a large opportunity for innovators such as On Running and HOKA to capitalise and gain market share through performance-focused value propositions. In 2023, growth significantly exceeded expectations at the beginning of the year, with a reported sales growth rate of 46.6% year-over-year. The HOKA brand net sales also increased 21.9% to $429.3 million compared to $352.1 million.
Driven by underlying technologies such as ‘CloudTec’ and ‘Active Foot Frame’ for On Running and Hoka respectively, the core product of running performance is prioritised before design and aesthetics. Tactical partnerships has also been a key success factor for these brands, with On Running for example supported by a lineup of talented young athletes such as tennis stars Ben Shelton and Iga Świątek. On Athletes such as the inspirational Hellen Obiri will also be representing the On Running brands at the upcoming 2024 Paris Olympics.
Therefore, despite its efforts to maintain its market share, Nike has lost its appeal to young athlete customers to more innovative and product-focused competitors.
Recommendations
Based on my analysis, I propose the following recommendations to Nike to redefine its product and innovation strategy.
Recommendation One: Leverage overwhelming capabilities and resources to enhance future products
Product development projects such as the ‘Athlete Imagined Revolution’ (AIR) could be key for Nike to capitalise on its unique R&D capabilities. Combining years of athlete data, AI, and rapid prototyping, Nike could scientifically dominate athlete performance for the foreseeable future. Nike should therefore drive increased funding towards these innovative products and accelerate their target completion dates.
Recommendation Two: Celebrate not only winning athletes, but also relatable ones
Over the recent years, Nike has inked major deals with the world’s best athletes as part of their sponsorship monopolisation strategy. However, Nike should also focus more investment earlier into young athletes with more relatable stories who inspire the next generation of young customers. This could not only establish a more loyal connection between Nike and its athletes, but will also require less resources than securing already-successful atheletes
Author’s Note
I sincerely hope you enjoyed this week’s edition of Business Breakdown, and please let me know your thoughts and perspectives! Also feel free to follow me for more business case analysis posts!
Disclaimer
Disclaimer: This analysis is only reflective of my personal view and does not constitute any investment or professional strategic advice for the mentioned parties.
Sources:
- Wall Street Journal
- HOKA official financials
- On Running official financials
- Consumergoods.com
