Is Nike Better Positioned to Bear the Brunt of China Tariffs Than Its Peers?

It might seem as though every year is a good year for Nike, but 2019 could be a game changer.

UBS analyst Jay Sole said this could be the year when the Swoosh truly separates itself from the pack thanks to its unwavering commitment to supply chain investments.

For instance, in August, Nike tapped 28 New York City creators to develop their own line of footwear for the brand for an initiative it called “NYC by You.” For their part in the project, each artist took advantage of Nike’s world-class supply chain to design and order new collections in limited quantities, showcasing the power of the athletic brand’s growing personalization capabilities. Sole said this is a major sign that the brand is making significant progress in its long-term goal of “personalization at scale.”

“They’ve been very good at making one shoe 20,000 times,” he told Sourcing Journal. “The idea was to get one really popular shoe in mass production, get great efficiency of scale on the cost of the shoe. And that’s how you can make a lot of money. But they want to turn that upside down and say, ‘How do we learn how to make 20,000 different shoes, one time?’”

Even when faced with a major setback — like when the brand’s agreement with Flex factories to produce footwear out of Guadalajara, Mexico, fell through in January — Nike remained unfazed, Sole said. With a significant increase in tariffs now a reality for footwear producers in China, Nike appears more aware than other firms that its ability to work around duties and shift production to other regions will be paramount to its future success.

“It seemed like they had hit some roadblocks in some of their efforts to automate their supply chain, to move more to local manufacturing. They had this relationship with Flex and it seemed to end abruptly,” Sole explained. “The implication was that maybe they’re going to have to rely on some of their Asian manufacturing partners, maybe some of the things they thought were possible aren’t possible. But it seems Nike is continuing to move forward.”

The principal reason Nike is able to pull victory from the jaws of defeat, he explained, is due to its massive clout and virtually unrivaled access to resources and capital. For example, Sole explained that Nike produces around 20% of its product in China while many of its peers are be lucky to produce 20% anywhere else in the world.

“Nike, because of their scale, can put more resources to bear than really any company by a factor of ten-fold,” Sole said. “So, when you see some of the things that Nike is doing — you go to their headquarters in Oregon and you see the advanced product creation center, you see the investments at DreamWorks, the investments they’ve made over the past five years — those are things other companies can’t even do.”

Nike’s pricing data also shows that the brand runs a tight ship when it comes to discounts, consistently beating the competition in both the frequency and depth of its discounts, according to the UBS report. Nike was the only brand among Adidas, Under Armour and Puma to post a year-over-year price increase in the U.S. during July.

The secret to this success, Sole said, is the steady improvement Nike has made in key areas throughout the year. New product, punctuated by innovative releases such as the Nike Joyride and the evolution of its self-lacing technology has helped to drive interest in the brand while pushing footwear technology forward. The brand’s work in the field of apparel technology, most notably the Nike Fit system announced in May, has also put it in a position to be a leader in fit technology.

While sizing remains one of the most contentious issues for digital footwear retailers, a significant advancement here may end up putting the brand at the head of the pack for yet another cycle. However, Sole predicts the brand’s supply chain improvements — specifically Nike’s Express Lane production model and its new subscription box program, the Adventure Club — will be the advancements that keep the brand afloat for a long time.

Still, if Nike wants to repeat its North American success in China and other Asian countries, it will have its work cut out. Despite its status as one of the most prolific WeChat-marketing brands in China, UBS data shows that Nike still lags behind local brands like Anta, Fila and Li Ning in several categories, including online interactions and actual revenue.

Editor’s Note: This story was reported by FN sister magazine Sourcing Journal. For more, visit Sourcingjournal.com.

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