Nike Sells Directly but Emphasizes "Importance of Wholesalers" [Next.Jjin]

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] Do you remember when the global sportswear brand Nike announced in November 2019 that it would leave Amazon, the e-commerce giant, causing the distribution market to be turned upside down? It was about two years after unveiling its 'DTC (Direct To Customer) strategy,' which sells products directly to consumers through digital innovation. Nike has set a goal to have 60% of its total sales come through DTC by 2025 and has been investing heavily in digital infrastructure to achieve this.

However, this year, Nike has been emphasizing its relationships with wholesale distributors such as specialty footwear retailers. John Donahoe, Nike’s CEO, said during the earnings conference call last March, "Wholesale partners play a very, very important role. We will continue to build strategic partnerships with wholesale partners." Although Nike ended contracts with more than 50% of wholesale distributors over the past four years, it sent a somewhat conciliatory message that it intends to strengthen relationships with the remaining wholesale partners. What is going on?

Because of Consumers... Nike Opens Various Channels

First, let’s look at how Nike’s performance changed after adopting the DTC strategy. The share of direct sales in Nike’s performance expanded from 28% in fiscal year 2017 to 39% in fiscal year 2021. It has been growing rapidly, especially in the North American region. In terms of sales revenue, it rose from $9.082 billion (about 11.4 trillion KRW) to over $16.3 billion. During this period, Nike brand’s total sales increased by 31.2%, but direct sales revenue grew by more than 80%, showing an enormous growth rate. Meanwhile, sales growth through wholesale distributors remained at around 12%.

Nike's Sales Channel Share for Fiscal Year 2021

Despite focusing on direct sales, Nike’s mention of strengthening relationships with existing distribution partners seems to stem from recognizing the need for diverse channels. In an interview with global fashion magazine WWD on the 16th (local time), CEO Donahoe emphasized, "Now, 90% of the shopping experience starts on the phone. Even when entering a store, people are looking at their phones," highlighting the importance of providing consumers with the products they want at the time and in the way they want, allowing them to choose directly. Everyone has experienced wanting to try on sneakers in person even after seeing them on mobile or online, right? Many also order via mobile after trying on sneakers at specialty footwear stores. Ultimately, maintaining offline channels to some extent is necessary to meet consumer needs.

Considering this, Nike basically sells products through mobile applications (apps) or websites but focuses on enabling real experiences at both wholesale and retail distributors and linking these experiences. Last November, Nike announced a partnership linking its membership program with wholesale distributor Dick’s Sporting Goods. Consumers who join the membership can use it not only on mobile or websites but also at wholesale distributors like Dick’s. CEO Donahoe explained, "We are working with Dick’s to provide a very seamless experience."

BMO Capital Markets senior analyst Simeon Siegel described Nike’s strategic shift as part of a movement where brands that started with DTC are now seeking distributors, calling it the "de-DTC era." According to the U.S. economic media Business Insider, in a memo to investors last month, he expressed skepticism about the DTC strategy, noting that while Nike’s scale provides a long-term competitive advantage, profitability improvements from the shift to DTC have not yet been confirmed. Direct sales should reduce distribution costs and increase profit margins, but this has not been verified yet.

Is Adidas Filling Nike’s Void?

[Image source=Reuters Yonhap News]

Now, let’s look at the situation of wholesale distributors. Nike’s DTC strategy has brought significant changes to the sportswear industry and wholesale distribution. When Nike adopted the DTC strategy, wholesale distributors inevitably suffered performance hits. For example, Foot Locker, a representative specialty footwear retailer, had Nike accounting for 75% of its total sales until 2020, but it forecasted this would drop to 60% this February. Headquartered in Manhattan, New York, Foot Locker operates in nearly 30 countries. The market worried that Foot Locker’s performance would deteriorate significantly due to Nike’s absence.

As the situation unfolded, wholesale distributors began partnering with other sportswear brands. On the 5th, Foot Locker partnered with Nike’s biggest rival Adidas, planning to expand sales to $2 billion by 2025, about three times last year’s volume. Adidas expects to generate over 100 million euros (about 134.5 billion KRW) in sales this year alone through this partnership. Foot Locker is also collaborating with Puma, New Balance, Crocs, and others. As a result, Foot Locker projected on the 20th that this year’s performance would be at the higher end of its previously expected range.

Additionally, other sportswear companies like Puma and Reebok are filling the gap left by Nike by partnering with U.S. department store Macy’s. eMarketer emphasized the limitation of DTC, stating, "DTC can yield higher margins than going through wholesale distributors, but it limits the number of channels through which a brand can sell." This opens the door for emerging brands like On Running and Allbirds, as well as other existing brands, to capture market share.

[Image source=Yonhap News]

That said, Nike has not abandoned its DTC strategy. On the contrary, it plans to further strengthen its direct-to-consumer sales strategy. While maintaining necessary offline channels, Nike aims to leverage its industry-leading brand strength to attract more consumers who want to purchase directly via mobile and websites. CEO Donahoe stated that through the Customer Direct Acceleration (CDA) strategy, Nike is accelerating digital transformation and focusing on establishing appropriate channels to meet consumer demand. We will watch closely to see what changes Nike’s moves will bring to the market.

Editor's Note[Next.Jjin] is a column that means 'looking ahead to the real next of business,' delivering news about how major companies are preparing for the future. We will uncover and explain both major visible issues and small but important hidden issues in an easy-to-understand way.