"From Nike to Hoka"... Trend Completely Changed Due to Direct Sales Strategy Failure [Business & Issues]

Nike Stock Falls Below $70
Intensified Competition Due to Failed Direct Sales Strategy
Domestic Suppliers Also Experience Increased Stock Volatility

[Image source=Getty Images Yonhap News]

The world's largest sports brand, Nike, continues to experience its worst-ever stock price plunge due to poor performance and deteriorating outlook. The direct-to-consumer (D2C) strategy, which was prominently promoted during the COVID-19 pandemic, ironically opened up opportunities for emerging brands like On Running and Hoka to dominate retail stores, accelerating the pace of trend shifts. Domestic companies supplying shoes and apparel to Nike through original equipment manufacturing (OEM) have also been swept up in concerns over worsening performance.

As Nike's product lines disappeared from sports brand retail shelves, the company belatedly revised its sales strategy and announced plans to overhaul its main product lineup. However, in an environment of fierce competition with emerging brands, regaining its former monopolistic position has become difficult. There are even concerns that poor performance could continue into the second half of next year.

Nike's Stock Price Struggles to Rebound... Falls to the $70 Range

According to CNBC, Nike's stock price closed at $75.37 on the 28th of last month (local time), down 19.98% from the previous day, and has since remained around the $70 level. This nearly 20% plunge is the first of its kind in 44 years since Nike's listing in 1980. The stock price has struggled to recover since, falling nearly 30% from $106.55 at the beginning of the year.

The worst-ever stock price plunge is due to poor earnings. Nike's revenue for the fourth quarter of fiscal year 2024 (March-May 2024) was $12.6 billion, down 1.7% from the same period last year. For the entire fiscal year 2024 (June 2023-May 2024), revenue increased by only 1% to $51.36 billion. Excluding the COVID-19 period, this marks the lowest annual revenue growth rate in 14 years.

There is a pessimistic outlook that short-term performance improvement will be difficult. Nike expects its revenue for the first quarter of fiscal year 2025 (June-August 2024) to decline by about 10% year-over-year. This is more severe than the 3.2% decline forecast by market research firm LSEG. It also anticipates that total revenue for fiscal year 2025 (June 2024-May 2025) will turn downward.

Lost Touch with Consumers Due to Direct Sales Strategy During COVID-19... Proliferation of Competitors

[Image source=Reuters Yonhap News]

The main cause of this comprehensive crisis is Nike's failure of the D2C strategy initiated during the COVID-19 pandemic in 2020. Nike judged that consumers found it difficult to visit department stores or retail outlets directly due to mobility restrictions in major consumer regions such as the U.S., China, and Europe, and thus terminated contracts with major retailers. Instead, it pursued a D2C strategy by increasing direct sales channels both online and offline.

It even terminated contracts with major online shopping mall Amazon and began expanding its own online store. According to this strategy, the proportion of partners in Nike's total sales plummeted from over 85% to 58% in 2022.

However, this strategy ironically gave competitors like Adidas and New Balance opportunities to expand further into retail stores and helped launch emerging brands such as On Running and Hoka. Nike products, which became harder to find in major online and offline stores, gradually distanced themselves from consumers. Analysts suggest that Nike's significant struggles in the footwear segment, which is highly sensitive to trends, are due to the failure of the D2C strategy.

The Wall Street Journal (WSJ) pointed out, "One company has noticeably disappeared from the running shoe market, and that is Nike," adding, "Nike, which long monopolized customer attention, has become difficult to find in retail stores, and as the business focus shifted to limited-edition sneakers with a very narrow customer base, competitors surged in, causing damage."

U.S. economic media Forbes also cited market analysts, stating, "Global internet search volume for Nike products has decreased by more than 10% since July last year. It is failing to attract customer interest," and warned, "The loss of market dominance and the significantly increased number of competitors will slow the recovery of competitiveness in the sportswear and footwear sectors."

Nike plans to drive a performance rebound centered on the 2024 Paris Olympics scheduled for the 26th. The goal is to significantly increase sales through restoring relationships with major retailers and changing the main product lineup.

Domestic Suppliers Also Affected... Increased Stock Volatility for Hojeon Silup and Kukdong

Due to Nike's poor performance and worsening outlook, stock price volatility has increased among domestic companies that mainly supply products to Nike through OEM. Since a significant portion of their sales depends on producing Nike apparel and footwear, Nike's sales slump directly leads to deteriorating performance and investor sentiment.

Among domestic listed companies supplying apparel, footwear, and leather to Nike are Baeksan and Kukdong. Their stock prices fell sharply around Nike's earnings announcement on the 28th of last month. For example, Kukdong, an apparel supplier, saw its stock price drop 34.6% from 793 won at the beginning of the year to 518 won on the 28th. Baeksan, which supplies polyurethane (PU) synthetic leather to sports brands including Nike and Adidas, rose 52.5% from 10,730 won at the beginning of the year to 16,370 won on the 27th due to expectations of a running shoe market recovery, but then fell back to the 14,000 won range after the 28th.

Experts warn that the uncertainty of Nike's performance rebound and sluggish demand in China could have prolonged effects. Kang Jae-gu, a researcher at Hanwha Investment & Securities, said, "Nike's sales in the Greater China region have plummeted due to decreased customer traffic in offline stores, and sales in other regions such as the Middle East have also weakened," adding, "Nike lowered its annual guidance without presenting clear countermeasures, which has further increased market participants' anxiety. There is a possibility that sales decline will continue in the second half of the year."