Nike's been struggling - can the $50B athletic footwear and apparel supplier turn it around?
In this segment of Business Breakdowns, Namaan Mian and Jenny Rae Le Roux explore Nike's business and what the iconic brand needs to do to get back to market dominance.
First, they cover key financials to know for Nike, before breaking down the company's business model. Next, they discuss metrics they would be managing to as consultants or members of the Nike board. Finally, they both share a hot take about the future of Nike.
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Transcription: Nike Business Breakdown
Welcome back to another episode of Business Breakdowns. I'm joined today by my colleague, Jenny Rae. My name is Namaan.
We are part of the leadership team here at Management Consulted. And we are really excited today to break down Nike, a company that has been in the news a lot lately due to declining financial performance and also a shakeup at the very top. Jenny Rae, how are you doing today?
I'm great, Namaan. My first question is, how many pieces of Nike gear are you wearing this morning?
You know what? I am wearing zero pieces of Nike gear this morning. I felt like it would make me biased as we were having this conversation. So I had to go put on my Adidas gear and some other brands, but I own more pieces of Nike gear than I would care to admit.
I figured that because you're usually in your jacket, so I thought the sweatshirt vibe was there specifically for the Nike shoutout. But whatever, we'll just acknowledge that. You'll see when I come to my metrics, so that's one of my key questions.
I'm also wearing zero. Actually, that wasn't intentional. I knew that we were filming this today, but I was not in athleisure today.
So anyhow, just trying to call you out. I didn't even get you. No burn.
Maybe if someone in Nike Marketing is listening to this and they like what we have to say, they can send us some swag and we'll wear it on the next episode.
Yeah. We'll wear it on the next episode when we do Adidas, right?
There you go. Well, let's get a quick high-level view of just where Nike the business is at today, and then we'll dive into the business model and we'll dive into the key metrics that both Jenny Rae and myself will be managing to if we were at the organization. First, let's just start with the financial footing that the company is on.
These numbers are for the fiscal year that ended May 31st, 2024. This is Nike's last full-year performance. Nike had annual revenues of a little bit over $51 billion.
Gross profit on the $51 billion in revenue was around $23 billion, and net income was around $5.7 billion. So about a 10% net margin on the annual revenue that Nike realized last fiscal year. Nike also has, as I'm sure all of our listeners know, a pretty large retail footprint on top of everything else that it does.
There are, at the end of the last fiscal year, Nike had 1,045 stores worldwide. Two thirds of those stores were actually outside of the US, and only about one third of those stores are in the US, which surprised me. And I'll talk more about that as I get into my metrics.
So that's where Nike as a business is as of the last fiscal year. Jenny Rae, can you talk to us a little bit about their business model?
Yeah, I love talking about Nike. First of all, my kids, one of the first brand conversations I ever had with my kids after sending them to a public charter school was when my sons came home in kindergarten, and he said, hey, Mom, Nike shoes make you fast. So, I was kind of delighted and terrified by the fact that they were getting brand influenced at the age of five.
But also, the kids these days call them Nikes, not Nikes. So, I don't know really how to handle that in my 1980s-born brain. But, you know, moving on to kind of key business model metrics, one of the things that I love about Nike when you look at the breakdown of their categories of revenue is that you kind of see the core things that they sell, right?
68% of the revenue coming from footwear, 28% coming from apparel, 4% coming from equipment, and then the remainder is just a marginal number at the end. These are all physical products, and one of the best ways that I know to develop a business model is to try to focus just on what you sell. Not how you sell it, not the channel that you sell it through, but what is it actually that people are buying?
And here for Nike, what they're buying is a physical product, which means that every time you are delivering a pair of shoes, you have a cost associated with the shoes and the box, and everything that goes into actually delivering that to an end customer. So this is a variable cost business. Nike is a little bit unusual, but I think there are red herrings in that unusual nature.
And we could talk just maybe really quickly here about the fact that Nike's former senior leader was, am I right? Was it John Donahoe? That's right.
Who was a former Bain guy, right? And not only that, but he came from eBay. You know, if I were a board member at a senior organization like this, thinking about who I want to hire, I wouldn't think about what the prestige was of the organization that they came from, or even where strategically we really wanted to go.
I would think about what kind of business they operated in and how they did. eBay, where he was previously, is a fixed cost business. eBay is a platform.
On eBay, the goal is to drive revenue. Nike is fundamentally, as a variable cost business, going to be operating to very different metrics. And I think you'll see in some of the stagnation that happened over Nike in the past few years, that Donoho took a tech lens, probably fine, but usually biased toward that fixed cost.
But more importantly, this kind of fixed cost leverage idea, and wasn't able to deliver on it inside this business. And so I think from a board perspective, from a hiring perspective, you have to recognize that somebody needs to have operated in a business that has this presence of variable cost dynamic. And so as we dive into some of the numbers, we'll see just to verify that, that the cost of sales for Mikey are by far their largest portion of the business.
The only things that could maybe trip us up here are that they do have physical stores. Doesn't necessarily mean at all that it's a fixed cost business instead of a variable cost business. It's still a variable cost business.
But that can trip people up when they're thinking about Walmart or other places that have a fixed footprint as well, Costco or other firms that we have or will profile. And in addition, they have these relationships with major media personalities. They have, you know, the brand sponsorships and partnerships with some of the influencers in the athletic space.
And because of that, because of the athletes that wear Nike gear, because of teams that are Nike teams, it could seem like because of the outlay of cash that goes directly at a flat rate without any variable expenses associated with it, without any cost of sales being attributed to that. That it looks like this very fixed cost business. But we'll see at the baseline that it's really not.
And that will, for me, drive a lot of the operating metrics. Speaking of metrics, Namaan. Yeah, that's great.
So with that context, now let me talk to you about the three metrics that I would be paying attention to if I was on the board of Nike or in a senior operational role at the company. The first thing that I'd be looking at very, very specifically would be sales per footwear category. And the way that I would think about footwear if I was at Nike would be legacy footwear versus new footwear.
So I think a lot of people, when they look at Nike, they're like, okay, what are your sales per category? And I wanted to go a level deeper. So you just mentioned that footwear is 68% of Nike's revenue.
But one thing that a lot of people don't realize is that footwear has actually been taking up a bigger share of the overall revenue pie for Nike since 2018. So what's happening at Nike is that the business has grown more dependent on footwear over time, not less. And so if we are growing more dependent on footwear to drive growth, to drive EBITDA, et cetera, then I would really want to do a deep dive into what's happening inside of that category specifically.
And I would segment it as legacy versus new. So one of the things that I see when I see Nike is I see a legacy brand that has lost its cool factor. And so one of the things that I would be doing if I was at Nike is I would be thinking about how to reduce the supply of my legacy shoes, right?
My Jordan brand shoes, my Air Force 1s, et cetera. It's like some of these brands that have been around for decades. How can I reduce supply of those brands to like re-ignite that scarcity factor that used to kind of be at play with Nike?
I have a pair of Air Force 1s that I bought years ago that are still in the box because I know that they are like fairly rare shoes. But I don't see that same positioning taking place now inside of Nike's legacy brands the way that they used to be positioned. And so, number one, can I drive scarcity among my legacy brands?
And then number two, can I start to drive demand for newer models to start to take share back from upstart competitors that we're seeing in this space? And one of the reasons I'd be paying attention to this is during the first quarter of this fiscal year, so the quarter that just ended here just a few weeks ago, sales for legacy franchises at Nike declined more than the overall business. So, just a proof point here that those really kind of huge revenue drivers for Nike are stagnating.
Like, if you look at online sales for Air Force 1s, for Dunks, for Air Jordans, they were down nearly 50 percent. Right? And the company expects kind of just the Jordan brain alone to be down double digits for the entirety of the next fiscal year.
And so, I'd be taking a look at my mix between legacy footwear and new footwear and trying to figure out how can I reignite growth and legacy while also looking to drive additional volume in new brands, new models, etc. So, that would be the first thing I'd be paying attention to because it is two-thirds of my revenue. The second thing that I'd be paying attention to if I was at Nike would actually be the wholesale channel.
And so, this is something that Donohoe famously spurned during his tenure as CEO at Nike. The linchpin of his strategy was, we are going to go direct to consumer. And I think that the underlying thesis was sound.
He wanted to control the customer experience from end to end, and he wanted to cut the middleman out to deliver lower prices for the consumer and higher profitability for Nike. And that worked really well during COVID when people could not or would not go to stores. But what's happened since the end of the pandemic is that we have seen a re-ignition in retail foot traffic.
And when people buy shoes, when people buy clothes, a lot of people still like to go feel them, touch them, try them on, before they are just going to buy a pair, buy it, buy whatever. And so as I'm the new CEO or part of the new leadership team at Nike, I'd be looking at my wholesale channel. Specifically, I'd be looking at wholesale revenue and be looking at wholesale growth.
So we need our wholesale partners to order more inventory. One of the things that's been happening at the footlockers of the world is they are seeing demand declining for Nike products. They're seeing the writing on the wall in terms of these legacy brands we just talked about, and they're ordering less inventory as a result.
And in turn, what that's doing is that's contributing to lower foot traffic that those brands are seeing, that those partners are seeing. It's contributing to lower sales because there's less inventory. And you're seeing this in wholesale revenue last quarter being down 8% year over year at Nike.
And so your wholesale revenue is down 8%, but your direct and online sales are down double digits in terms of revenue. And so I'd want to fix wholesale first because it seems like it's the lowest hanging fruit, as opposed to my direct or my online channels. The third thing that I'd be looking at if I was at Nike would be geographical diversification.
So I think with the new leadership team and CEO in place, you're going to hear a lot if you're an investor or if you follow the business about revenue diversification. And I actually care less about that, and I'll talk about that later. What I do care a lot about is geographical diversification.
And so if you look at the global footwear market, you're seeing between now and 2031, you're going to see about a 5% compound annual growth rate in that global footwear market, which we've already determined is the primary driver of Nike's revenue.
But at the same time, if you look at the US footwear market, growth is stagnating, which means that overall growth in the market is coming from everywhere else besides the US. And so if I'm Nike, one of the things I'd be looking at is how I can drive future growth in non-U.S. markets. And I'd be developing products for those markets. I'd be developing brand partnerships and relationships with athletes in Europe and Asia, et cetera.
And doubling down on non-U.S. markets as you see those markets growing at a much faster clip in the US. Those are my three metrics, Jenny Rae, how about you?
Namaan, I kind of expected you to go a little bit more sports nerd on me. But as per usual, you are very well researched. I thought about this a little bit more blind.
So you really dove into some of the numbers. I just was like, hey, at the high level, what are the three things I think about? I'm going to start with the one that I think is actually the most different from what you talked about, not in conflict, but a unique perspective.
And this came from a recent conversation that I had. I'm a big believer that great CEOs get out and talk to people and experience with the customer's experience. And I went into a Kohl's recently.
I was on a trip. I had completely forgotten all of my workout clothes, so I was in the market for a rash purchase of workout clothes. And I walked into a Kohl's, which was the closest, you know, kind of mass market store to my hotel, and walked in the door, and there was a Nike section right in the door.
I was like, this is great. You know, Nike's right there. There were probably eight SKUs inside there, and none of them were what I would call outfits.
So, as a woman purchaser, when I walk into a Target, what I see are outfits merchandise together. I see a sports bra and pants and socks and shoes, all put in the same place. Now, all of the shoes are in one place, but the goal you can see of the merchandiser is to try to get me to buy four items that all go together, not one.
What Nike had was like a rack of pants, and then they had a separate rack of some other items. And I was really shocked by how little what I would consider to be a Nike legacy option would have been, which would have been like an all pink sweatsuit for Nike was actually presented there in the store. So I called my first item, going back to the first question I asked you at the top of the pod, the share of outfit wallet.
So basically, like out of someone's athleisure or athletic clothes, what percentage is Nike of those? And my best guess would be that on a per customer basis, they have been losing share over time. To the Lululemon's, you know, Allbirds might grab some shoe share from them, but there are sectors that have been losing share inside that market.
And I think that Nike's biggest opportunity is to increase its share of outfit. Merchandising outfits entirely together, not having people buy individual items, and then making sure that the shoes and the outfits are a piece of that kind of category that are working together. The second one that I identified here was SKU selection versus basket size.
While I agree with you that I think that some limitations on sideline items might really make sense, I think that if you limit the SKUs to 20 SKUs in a store, you have less likelihood to meet metric number one, which is walking out with an entire Nike outfit. And so unless you're merchandising the whole outfit together, you know, if they only have a few of the SKUs in store, I walked out with one pair of Nike pants and then multiple items of different other brands because there wasn't enough there for me to purchase. So in terms of Nike utilizing its leverage with wholesale partners, but also online, right?
Recommendation algorithms and in addition, like focusing on replacement rates of your athletes or clothes. I feel like there's opportunity for seasonality, for style that are really missing from the SKU selection. What I'm not saying is that they should blow out SKUs entirely.
I'm actually saying that the SKUs should be tailored and limited, but I felt like the SKU selection was so limited that it kind of had gone too far the other direction. The third for me is the contribution margin per category. Now, this is the one that I think probably led Donahoe down the wrong pathway.
So let me just talk about why I would manage it differently than I think he did. Contribution margin per category is usually going to lead you to say, how do I juice my margins in this category? I think he did it on the cost side.
So I think he thought about it of, how can I cut out the middleman, reduce the cost of delivery to my customer, and capture more of the margin as we go. My husband and I bought a winery a couple of months ago. Namaan, you've tasted the wine, you've been there.
The foot traffic at the winery is low. There's no way that we can survive as a winery just based on foot traffic there. And I think that Nike made a bet that…
And the argument, by the way, for foot track of a winery is like, we capture all the margin. The same argument that I think Donahoe made. The problem is that we need to grow revenue, we need to grow revenue fast, and we need to grow revenue in a way that's diversified based on consumer shopping behavior.
And so what I would prefer to see is a price increase on segments of categories. So you have like basic Nike, right? Which is your blacks and your grays.
And then you have premium Nike, and it's very clearly differentiated, and it's like a 30, 40 point price bump between the two of those. And the goal is that you're trying to get people to both fill their share of outfit with some of the base pieces, and also like adopt some of the flare pieces. You're trying to get somebody who is an influencer wearing a bright pink Nike suit again, so that somebody notices it, sees that the whole piece works together, recognizes that it's Nike, and purchases all of that.
But specifically, I would focus on the price premium category of that, not the cost side. So on the contribution margins, right, bringing back those select Air Jordan, small supply, you've got to be at the store in the first day with a line out the door in order to get them, price bumps, and really driving your supply management and thinking through that every step of the way. Those are my three, Namaan.
Let's move to hot takes.
I've got a couple of spicy takes for you, Jenny Rae. I think my first one, I love it when we have honest disagreements, because I think my first one is just rooted in the fact that we're seeing the business a little bit differently. So the second biggest driver in terms of revenue for Nike is apparel.
And when you were talking about share of outfit wallet, I think really what you were talking about is like apparel plus shoes, and I think one mistake that Nike could make under its new leadership is trying to diversify revenue at the expense of regaining its lead in footwear. And so when you look at apparel, it's a higher competition, lower margin business, and it really only makes up between 25 to 30 percent of Nike's overall revenue. So if the decision is, right, if the decision is we can do both, then great.
But if you have to sacrifice innovation or R&D in the footwear category to try and gain a greater share of wallet and apparel, I think that's a strategic mistake. And I'm going to be really interested to see what the new leadership team decides because they do have finite resources available to them, but some of the cash burn that Nike's been experiencing over the last year. So first hot take, if I have to make a decision, I double down on footwear even at the expense of apparel.
Second, I think longer term, you're going to see Nike double down on the Apple model, and I think you're going to see Nike continue to vertically integrate through a rapid build out of Nike stores. So Nike sees that demand is back for the retail experience. And I don't think that their desire to control the end-to-end customer experience has changed.
And I think one of the ways that you charge and demand a higher price, is you position yourself again as a premium brand, providing a premium experience. And one of the ways that you can do that is by updating the experience that people have in your own retail outlets. So, expect to see newer, updated Nike stores in a neighborhood near you soon.
I love it. Namaan, just on that point, I remember when I lived in Atlanta and worked for Bain, there was a Nike store at the mall right across from where our office was. And one thing that they did was a weekly run.
You could like log in, do a weekly run based in the store. So, my hot take is, by the way, I did focus a lot on things like share of wallet. But part of that comes from the like, I've never owned a pair of Nike shoes and I can't, I was trying to think through why Nike had never gotten me to buy a pair of Nike shoes.
Is it because people are brand loyal from an earlier point in their decision or is it something else? And I feel like part of my lack of decision to buy brand shoes leads to a lack of apparel decisioning, not the other way around. So, I agree with you.
I don't think that apparel should be the focus of the business. It has to be shoes. It has to be shoes. And if they lose that, Nike just doesn't be… It's just not Nike anymore. So, a refocus on ads based on shoes, right?
A refocus on specific Nike shoes based on categories, teams, affinities. Like, I think there's major opportunity inside the shoe space. But my hot take is that experiences are coming back, probably through the store channel, creating that collective experience of being a Nike person.
And I had a higher propensity when I was running from a Nike store with people at Nike to try on Nike products. Like, they had me as a captive member of an active participant experiential community. And yet, they never took advantage of that to actually sit me down and be like, look, can you…
Like, they didn't have like test shoes, for example, to have me do a run. I think if Nike had gotten me in one run in a pair of Nike shoes that I loved, I may have become a Nike customer for life. So I think you might see a breakout of some of those types of experiential modeling if they really understand that they're a shoe company that are based in the stores.
So we'll look forward to see what this new…
Yeah, I think what you're saying is, Nike needs to become the brand for runners again. And if they can do that, they can charge the premium price that we've been talking about.
That's exactly right. I think they've ceded position to Adidas, which has been my shoe of choice, because I tried them on. I like the support.
I don't think that Nike shoes wouldn't get me. I just have never sat down to try on a pair. They've never given me a good enough reason to do that.
Then they kind of had ASICs come in, positioning themselves as the shoe for runners. And they take share in that. And then you miss out, I think, on the broader brand ecosystem when you're not leading with shoes.
Well, Namaan, I think what we have to do is make sure that if y'all are listening to the pod and if you have a different perspective on Nike, if you have different experience with Nike than we do, certainly we can come to this with questions that are based on biases without looking at the data. The goal of this is just to be like, look, inside a case interview or if you are having a business conversation inside a Nike interview, how do you get smart on some of the facts? How do you think from a position which is both aligned with what they are thinking through and also a little bit contrarian?
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