How Nike’s Direct-to-Consumer Plan Is Crushing the Competition

In June 2017, Nike outlined a new strategy to drive growth into the coming decade, which it called Consumer Direct Offense. The pillars of the plan included focusing on key cities, ramping up its innovation pipeline, editing its product catalog while offering a deeper selection of its best-performing styles and enhancing its digital efforts with mobile as the primary channel.

Today, it’s clear the brand has more than made good on its goals: Its stock has risen more than 73% since then, reaching all-time highs this week on the back of impressive earnings. Its revenues, too, soared to $10.7 billion in the first quarter, with digital up a staggering 42%.

“The key to expanding our competitive edge continues to be our total commitment to the consumer through the consumer-direct offense,” Nike CEO Mark Parker said on a call with investors and analysts Tuesday. “We’re focused. We’re investing in our brand in key markets and we’re accelerating in the high growth dimensions of our business. And that’s especially important in the volatile macroeconomic and geopolitical environment that we see today.”

The approach has meant that Nike has intentionally choked off its business with what it calls “undifferentiated multi-brand wholesale” partners while doubling down on direct retail and key accounts such as Foot Locker, JD.com, Amazon and Zalando in what Parker called “a tale of two cities.”

This is bad news for so-called mediocre retailers who were once able to rely on a heavyweight like Nike for top-selling product. These companies now have to compete with the Portland-based giant’s well-financed direct channels for consumer dollars.

It’s great news, though, for the “differentiated” retail partners who made the cut, because Nike said this segment saw high single-digit growth during the first quarter. Foot Locker, for instance, last month became the first third-party retailer to integrate the Nike app into one of its stores, allowing shoppers to scan products to pull up inventory and product information, win free merchandise and get access to exclusive releases. Nike, for its part, is also investing heavily in its app, growing the platform by almost triple digits in the quarter — and this is before it goes live in China over the holiday season.

“The company continues to take share by delivering more compelling innovation at a faster pace than competitors and continuing to enhance customer engagement via digital platforms,” Susquehanna International Group LLP analysts led by Sam Poser wrote in a Wednesday note. “Nike’s increasing digital prowess, scaling of new and existing product platforms, as well as increasing speed-to-market capabilities are leading to improved full-price sell-through across the globe.”

Here, as Poser suggests, Nike is besting its rivals: Under Armour has said in several recent earnings calls that its direct-to-consumer business has been weaker than expected, with North America sales slipping 3.2% last quarter on falling traffic in stores. And while Adidas’ investments in its direct-to-consumer business are paying off, resulting in double-digit growth in 2018, Nike is seeing even larger gains.

Cowen analyst John Kernan also pointed to Nike’s recent personalization-driven M&A activity. “Transformational growth and investments are extending Nike’s competitive advantage, particularly with its acquisition of retail predictive analytics and demand-sensing company Celect in Q1,” he wrote. “Nike’s technology investments and acquisitions in the data science field will support Nike’s ability to read and react to digital demand signals and increase full-price selling.”

“With the acquisition of Celect, Nike greatly accelerates our digital advantage by adding a platform developed by world-class data scientists,” Nike COO Eric Sprunk said in a statement announcing the deal. “As demand for our product grows, we must be insight-driven, data-optimized and hyper-focused on consumer behavior. This is how we serve consumers more personally at scale.”

Scale is important for a behemoth like Nike, which now has a market cap of nearly $144 billion; in comparison, Adidas has a market cap of $53 billion while Under Armour’s is at $8.5 billion. It will become even more essential as it seeks to grow across markets, which it is had done successfully this year: Its sales in China were up 27% in the first quarter, while its North America business grew 4%. While its focus on connecting directly with the consumer is already leading to improved margins, Nike seems to understand that its real value may be in forging deeper loyalties over time.

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