Nike – North America Recovery & China Momentum – 9
April 2021
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Specialist:
Title:
Daniel Gaynor (DG)
Former Lead, Global Brand, Corporate, Innovation & Executive Storytelling, Nike Narrative
Center of Excellence at Nike Inc
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Agenda:
1. China demand – sustainability and associated risks
2. Nike's (NYSE: NKE) North America recovery across footwear, apparel and equipment segments
3. Emerging consumer trends and innovation
4. Channel dynamics across e-commerce, wholesale and D2C
Contents
Q: Could you give an overview of the athletic footwear and apparel industry? What are some of the main
drivers? Who are some of the top competitors in the market?
3
Q: Could you give an overview of Nike’s business in the different categories it operates in, and how it breaks
down geographically? You touched on Europe and the US.
4
Q: What would you attribute to Nike’s intangible brand asset, being the market leader and double of Adidas,
and its ability to command a premium over the last few decades? How does Nike maintain its brand
leadership? You mentioned innovation.
5
Q: What is your outlook for Nike’s promotional activity as it recovers across the US?
Q: As fewer customers have access to these exclusive sneakers, is there a risk of Nike losing customers?
Q: How does creating content for consumers play into the ROI and marketing spend within the digital
landscape?
5
6
6
Q: Are there any pressing supply chain risks with this new D2C approach? You mentioned some bottlenecks.7
Q: As you know, Nike has experienced weakness in almost every geography besides China. What is driving
the demand in China?
Q: What are some of the main challenges associated with operating in China?
Q: How would you say the Chinese consumer differs from the American consumer?
Q: China is growing very fast. How sustainable is this growth, and how could Nike continue to capitalise on
this growth?
7
8
9
9
Q: Could you elaborate on Nike’s overall competitors? Who is it most fearful about? Where is it prioritising
most of its market attention to?
10
Q: What are some of the barriers to entry within some of the segments that Nike operates in? Would you say
they’re getting lower? Are they still very high compared to Nike, the role of scale and ability to continue to
innovate?
11
Q: What are some of Nike’s weaknesses, or what are some of its most pressing challenges or areas of focus
you think it could be doing a lot better in?
Q: What is your outlook for Nike and your best- and worst-case scenario over the next six months?
11
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Nike – North America Recovery & China Momentum
Transcription begins at 00:00:00 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview entitled Nike - North America Recovery & China
Momentum. I’m Nyree Hinton and I’ll be facilitating today’s Interview with Mr Daniel Gaynor, former Nike
Narrative, Centre of Excellence, Global Brands, Corporate Innovation and Executive Storytelling at Nike.
Daniel, before we get started with today’s Interview, please state I agree or I disagree to the following
statement: You understand the definition of material non-public information and agree not to disclose any
such information, or any other information which is confidential, during this Interview.
DG: I agree.
NH: Thank you, Daniel. Could you start by giving the audience an overview of your background in various
roles in sales in the industry?
DG: I worked at Nike World Headquarters out in Beaverton, Oregon, right outside of Portland, where I
worked on a brand-new team for the Global Geo, so working across the world for Nike. The team was called
the Nike Narrative team. I worked directly with almost every member of the executive team, from the CEO to
the CFO to the Head of Innovation to the Head of HR, to craft an overarching story for the brand that
extended into investor relations. Everything from earnings calls to the innovation summit to investor day, all
the way through big brand events, from Breaking2 to the launch of the Kaepernick campaign, so a good range
from the marketing side to the IR side. A pleasure to be here today.
[00:01:36]
Q: Could you give an overview of the athletic footwear and apparel industry? What are some of the main
drivers? Who are some of the top competitors in the market?
DG: In 2020, and the data is out there, the US had a decline in the athletic-footwear industry. I think it was in
the mid single digits across 2020. Of course, Europe suffered similar declines due to significant shut-downs in
the retail landscape, given that their lockdown not only was more significant than the US but also continued
longer. Meanwhile, China, of course, is rebounding. That’s the story across many industries. The bright spot
across all of these geos, whether it’s the US, Europe or China, is that there’s a growth in the average selling
price for footwear. Higher-priced items are leading the way. Think less Marshall’s and Target, and think more
higher-end sneakers that are retailing in the USD 150-200 range. In terms of retail, certainly, there’s a lot
that’s been said about the decline of retail in the US, certainly premium department stores. I think they were
down single digits for the year. Mid-tier department stores are where I would draw my attention to, those that
don’t have a differentiated retail footprint. They’ve declined by almost 20% in the footwear department.
Third point I would probably draw attention to is that there are a lot of insurgent brands these days, everybody
from Allbirds to Atoms Shoes. In the athletic-footwear department, the folks that Nike probably has an eye on
are Brooks, which is a long legacy running company, Hoka, which is the one with the really thick soles, a newer
entrant, and then the one that I would really draw attention is On running. They’re based out of Zurich,
Switzerland. The latest numbers I’ve heard from On is that they had an annual sales growth, on average, of
about 90%, maybe to 70% this year, but their brand doesn’t divulge its revenue. On is growing rapidly. They
have the Cloud technology in their soles. I think they have about 10,000 points of sale across, I think, over 60
countries. I would definitely draw attention to them as an insurgent brand. That said, Nike is the elephant in
the room, a market cap I think double that of Adidas still. Revenue, I think, is close to USD 15bn more than the
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second-tier Adidas. When I’ve talked to a few analysts or folks in the industry this year, everybody is pretty
bullish on athletic footwear and activewear growing at least in the low- to mid-single digits for 2021, which
would be above 2020 levels but definitely still below 2019. We expect a pretty strong summer outdoor spring
in terms of the activewear market.
[00:04:36]
Q: Could you give an overview of Nike’s business in the different categories it operates in, and how it
breaks down geographically? You touched on Europe and the US.
DG: Nike, I think, operates in more countries than the United Nations. I think, last quarter, China really led
the way. China revenue was up 50%. US revenue was down 10%, not only due to the shutdown but also the
shipping issues. Supply chain constraints in the US resulted in the US not being able to get product out for
three straight weeks, so that definitely impacted revenues in North America. Importantly for Nike, their direct
sales are up continuously. I think, last quarter, it was up 20%. Really, all of this is powered by the digital
revenue. I think, last quarter, they did 60% growth in digital revenue, so digital is really driving Nike’s DTC
business, which, of course, is not only expanding revenues. It’s really expanding margin as much as possible.
Nike, you’ve got to think about not only just the Nike brand. You have to think about Jordan and Converse,
which are the other brands they own. Jordan is dependent on exclusive retro drops. In other words, it’s the
1998 sneaker, not the 2021 sneaker, that’s really driving Jordan’s business, and they are increasingly
dependent on retro drops. They have to aggressively manage that in the marketplace, make sure that there’s a
scarcity of Jordan’s supply in terms of their shoes. Jordan still, though, has risen to become the fourth biggest
category at Nike.
Meanwhile, Converse, which is actually the creator of the world’s most widely available shoe, most widely
bought shoe, the Chuck Taylor, where they’ve sold over one billion of these Chuck Taylors, they’re really
struggling to expand into new models. The Chuck Taylor was the official athletic shoe of the Allied Forces
training for World War II, and it basically hasn’t innovated since. While they’re partnering with all sorts of
influencers to make it relevant to gen Z, they’ve announced the new Renew collection, which is their first-ever
shoe collection made from factory waste or recycled plastic bottles, they are really not rebounding in terms of
sales except for in emerging markets, places like South Africa or Brazil, but not a huge driver. In terms of geos
for Nike, North America continues to be a powerhouse but its revenue has declined. In Q3 it declined 11%.
Europe, similar story. China just continues to have, I’m sure as everybody expected, an amazing track record. I
think it’s had two consecutive USD 2bn quarters. I can talk about China later, but Single’s Day and Chinese
New Year are really driving pretty strong.
Three other key points there. Own channels for Nike is where the business is heading, and I’ll talk a little bit
about the Consumer Direct Offense, but Nike’s direct business is growing at a 50% clip consistently, digital
growth growing at a 60% clip. Nike-owned stores are expanding revenue, and they’re moving increasingly
away from wholesale. In terms of top footwear, Nike is nine of the top 10, in terms of the top 10 selling
athletic-footwear shoes in 2020. Some of those are not necessarily always a high-price model. If you think
about something like the Nike Tanjun, that’s more of an affordable shoe, in the USD 40-50 price range. What’s
interesting is that, for Nike, innovation drives growth. Some of those in the top 10 include the Air Max 270 or
the Air VaporMax Plus. These are shoes that qualify as innovative product. In fact, anything Air is made in the
US, to protect its IP. That’s strong news for Nike, and that basically leads towards higher-margin products.
There are two pillar ways that Nike thinks about higher-margin products, profitably or promotionally.
Profitably, look at the Nike Adapt. The self-tying shoe is listed at USD 400. When they’re able to move that
kind of product, the margin is quite extensive, especially when they do it through their own channel and
constrict the supply to wholesalers. Then, sometimes, that backfires, and promotionally, I think the Nike
Adapt, that same shoe listed for USD 400, was marked down to USD 295, so it’s a more than 25% markdown.
Then, finally, categories. Sportswear, which is basically style products, has been the biggest driver for Nike.
Nike definitely thinks of itself internally as creating innovative footwear and gear for top-performing athletes.
Nevertheless, Nike is increasingly a fashion company. That’s not only true in the products they’re creating and
the way that they’re dimensionalising athletic innovations for streetwear, but streetwear is actually the biggest
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revenue driver. That’s something you’ll notice. Running continues to be its second-biggest category. Jordan in
training, which are, again, slightly still more in the sportswear style world, continue to drive. I would also
point out that basketball, which used to be a major, major driver for Nike, is probably more of a trendsetter
than it is a revenue driver. I think performance basketball sales are still only 3% of all athletic footwear sold,
and those shoes, which can retail in the USD 250-300 range, think the LeBron 18, those declined by 25%
across the industry this year. Not a lot folks buying those expensive basketball shoes.
[00:10:31]
Q: What would you attribute to Nike’s intangible brand asset, being the market leader and double of Adidas,
and its ability to command a premium over the last few decades? How does Nike maintain its brand
leadership? You mentioned innovation.
DG: I’m going to give you three answers on that, innovation, penetration and membership, so just to hit those
quickly. Nike invests more in R&D to create innovative product platforms than any other athletic brand. That’s
driven mainly be something called the Nike Sports Performance Center. You’ll see that Nike just built a brand-
new sports performance measurement facility. It’s the world’s leading athletic-research institution in the
world. If Nike was to release all of its studies and data on athletic performance, it would be the single biggest
contribution to the field of science in athletic performance, period. They have an incredible amount of insight
and IP on athletic performance, and that drives innovation. You saw, with the Consumer Direct Offense, one
pillar of it was the double the cadence of innovation, and that’s fuelled by insights on athletic performance.
Whether that’s a ZoomX platform or the VaporMax platform, these are basically shoe platforms that can be
dimensionalised not only for performance, for faster running and higher jumping, but also for style. They can
also worn at Paris Fashion Week.
Innovation fuelled by athletic insight is huge. Penetration is another one. Nike has a major moat in terms of
brand loyalty on a global scale, and the way that it’s pursuing its business in China, it drives towards my third
point, which is all focused on membership and localisation. With membership, they’re able to collect more
feet-on-the-ground, grassroots consumer insight, which allows them to create more locally relevant product
assortments. In other words, there are stores in LA and stores in Shanghai that create their product
assortments in retail by the traffic that they’re seeing under digital channels, whether that’s dot-com, the app,
or Snkrs. We’re taking this local insight and we’re applying it on a global scale. It’s basically creating a
personalised approach across both retail and digital, and when you extend that into the membership services
aspect, Nike members are getting much more relevant product suggestions and assortments. In some stores in
China, for example, this has led to 90% of the Nike members that enter to buy some product. Driving margin
with membership, with creating localisation, driving affinity for the brand with great penetration across the
retail footprint and their partner stores, although they’re reducing, and then, finally, using athletic insights to
drive new, innovative product at a faster cadence, all those things are creating great affinity for the brand.
[00:13:57]
Q: What is your outlook for Nike’s promotional activity as it recovers across the US?
DG: It’s a good question. You can’t talk about promotional activity without talking about resellers, so okay if I
dig into that?
NH: Sure thing.
DG: One of the things we’ve seen this year is resellers are on the rise. You’ve heard about StockX and Goat and
all these other channels, even eBay. In fact, Nike’s GM of North America just stepped down. Very publicly, her
son was a major reseller, and that was considered a conflict of interest. These resellers, while not a main focus
of business for Nike, have a huge impact on promotional activity. What Nike is doing is it’s trying to create
exclusivity in the marketplace by withholding a large quantity of it’s what is called its highest-heat products. In
Private and confidential 5
other words, when it comes out with a new retro Jordan colour way, or it comes out with a new, innovative
product like the Air Max 270, it’s making sure that the vast majority of that supply is available directly through
its own channels.
Then, it’s also reducing wholesale channels, which would be the main place to drive promotional activity, other
than Nike factory stores, but those qualify as direct. The long-story-short of it is that the resellers are making
sure that the sell-through of the product actually goes way, way up. Nike’s exclusive product has a way higher
sell-through rate because the resellers are competing with the wholesalers. Even though we’re zooming in, I
think Nike is reducing its wholesale partners from 3,000 to 40, they now have emerging competitions from a
19 year-old who’s on StockX. That results in less promotional activity for Nike, because they’re able to clear
out revenue at not only a much faster pace but much higher margin. I actually would look for Nike to not do as
much promotional activity, (1) because it’s managing its inventory better, but (2) because its supply chain is
selling through products much faster, given that the wholesalers have an emerging competitor from the
reseller market.
[00:16:18]
Q: As fewer customers have access to these exclusive sneakers, is there a risk of Nike losing customers?
DG: It’s a good question. I think, just to restate it, if I can’t get access to the product, does my affinity for the
brand drop? That is not necessarily a concern, from what I saw working with executives at Nike, mainly
because that is how they drive such immense demand. Kanye West has a shoe called the Red October that
Nike released when he was working with Nike, and now, of course, he’s at Adidas. Nike still has the ability to
release that shoe, and is often demanded to. It’s sort of like the equivalent of Zach Snyder’s Justice League. It’s
this urban legend. When is it going to come out? It has incredible demand among fans. What basically has
happened, though, is that, if Nike is able to manage the supply and the inventory of high-heat product, and
they’re able to ensure that there are channels through which consumers can get them instead of big bulk-
buying resellers, such as using bots on the Snkrs app, that Nike’s consumer actually is growing more hungry
for high-heat product and not less.
It’s not growing despondent because it can’t access it. A good example of this is the Snkrs app. The Nike app
membership in the last year grew, I think, 90%. Particularly, the Snkrs app, which is where you access those
high-heat product drops, last quarter jumped 60% in terms of an increase in monthly engaged users, users
who are on there a couple days a month. Snkrs is one place where they’re adding editorial content. They’re
adding livestream content. Nike actually built a livestream studio just for Snkrs in China. The storytelling of
the product, even if you can’t physically access it, is growing so immensely that it just continues to drive an
insatiable appetite for high-heat product.
[00:18:53]
Q: How does creating content for consumers play into the ROI and marketing spend within the digital
landscape?
DG: One of the things that we did under the Consumer Direct Offense was shrink down the amount of
channels and the amount of categories that Nike has. You probably that Nike now went from, I forget, I think
it’s a dozen categories, like golf or basketball or football or its own individual category. Today, Nike is just
down to just three categories, men’s, women’s and kids. That allows much deeper focus in terms of how the
marketing teams think, because we now understand that the general Nike consumer doesn’t think in terms of
stores. It thinks in terms of all phases of life, from the street to the club to the gym, and Nike can serve all
phases of your life without thinking of you as a golf athlete, or as a tennis athlete or as a football athlete. That’s
important in terms of how you calculate marketing spend. I think, in Q2 this year, Nike generated as many
brand impressions as there are people on the planet. I think it was over seven billion brand impressions across
social platforms, because aligned to the constriction of categories, Nike has also constricted the amount of
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social channels that it has.
You’ll see that Nike Women has a social-channel strategy that encompasses products across all sport
categories. Then, you would have Nike Golf Women, Nike Tennis Women. Now it’s just Nike Women, so it’s a
lot tighter. You have a bunch of select category accounts. The second thing is that they’ve definitely invested in
content. As you might have seen, Jordan brand has its own TV show where they bring in commentators on
social issues. Snkrs, as I mentioned, has invested in the live-streaming capability. They did their first ever live-
stream product drop, which was the Air Jordan 4 PSG for the Paris Soccer team. That live-streaming capability
has resulted in 100% sell-through. What I would say is fewer accounts in terms of social, deeper brand
impressions, because they’re no longer thinking segmented by sport, they’re thinking segmented by gender or
kid. Then, finally, investing in content that isn’t specifically about product specs but about bigger societal and
cultural issues. All of that has resulted in huge brand impressions, for example, even ads. YouTube’s number
one ad in March was the Nike ad, so great content there, as well.
[00:21:46]
Q: Are there any pressing supply chain risks with this new D2C approach? You mentioned some bottlenecks.
DG: On the supply chain, first of all, Nike has reduced its wholesale accounts from 30,000 partners to 40
partners. It’s a major drop, and that’s part of the expansion of a strategy I worked on in 2017 called the
Consumer Direct Offense. The 2021 update to that is called the Consumer Direct Acceleration, and what you’re
going to see is even more movement from undifferentiated retail into a smaller number of partners or Nike’s
own stores, so that Nike can, across the board, offer that seamless, premium experience. That premium
experience, for example, means Nike staff even if you’re in a Dick’s Sporting Good, Nike’s own section in a
partner store, and then, of course, the Nike stores or on the Nike apps, really premium experiences. That has
an impact on supply chain. Not only do you have fewer partners that you need to get product to, but more
importantly, you’re able to control the supply of product overall.
For example, there was a great story about a tiny sports store in Montana called Norman’s sports, tiny store,
but it’s a microcosm of the move. They’re totally undifferentiated, they’ve got every type of shoe on their
shelves, and Nike just restricted that store from getting its Jordan license. They kept selling Nike shoes, but
they’re not going to sell Jordan shoes there. That shows you that, from the supply chain perspective, and this is
just a microcosm, but Jordan, which relies on exclusivity more than the average Nike product, has to be
constricted in terms of its supply. In terms of supply chain, they’re managing inventory much tighter. As I
mentioned, they’re leveraging digital insights, to ensure that the assortments that go to different marketplaces
are localised. No need to sell a bunch of retro skate shoes in Shanghai if that’s not what the consumer is
looking for, which, of course, increases sell-through. Of course, Nike, like all companies, dealt with some
macro issues this year, notably the port congestion that delayed its US supply by three weeks. Certainly, the
Suez Canal issue will have an impact, but in general, because they’re getting far more local, they’re able to
manage their supply and, of course, generate sell-through, which reduces their supply chain constraints.
[00:24:25]
Q: As you know, Nike has experienced weakness in almost every geography besides China. What is driving the
demand in China?
DG: First, China is far more open. That’s something that’s pretty solid. I think, in terms of Nike specifically,
Nike holds a years-long lead over Chinese brands in R&D. It has a deep network of relationships in the sports
world. It sponsors several of China’s domestic sport leagues. It works really closely with a lot of Nike’s most
famous athletes, I think, through the national soccer team, the basketball team, the track and field, all teams
that they sponsor to create much stickier relationships with its customers. What’s true in the US is also true in
China, that the way that any sports brand grows is by aligning itself with signature athletes and by creating
exclusive supply for its product. That said, I think look to Li-Ning as the strongest Chinese challenger to Nike.
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Li-Ning’s market value, I think, is USD 7bn, so it’s a drop in the bucket compared to Nike’s USD 36bn, but
that’s still pretty impressive for a company that was only founded in 1989. Li-Ning also gives you a sense of
where Nike has to go in China in order to be more competitive. They not only have signed signature athletes,
like Dwyane Wade from Miami Heat or CJ McCollum of the Portland Trailblazers, right in Nike’s backyard,
but they’ve also created a more competitive basketball sneaker that’s being worn, so it’s just not just a style
proposition. They’re even sponsoring and getting involved in the e-sports world.
Nike definitely, in order to stay competitive in China, has to continue to sponsor and partner with top athletes.
They’ve got to continue to expand into new worlds like the e-sports world, and it’s got to make sure that its
pioneering innovations are available in the Chinese marketplace. The key differentiator, I think, for Nike in
China, is that the seamless digital, physical experience that Nike is trying the create is most advanced in China.
That’s where Nike is really building the future. These consumers are completely indifferent as to whether they
buy it here in the store or they have it shipped it at home, or they buy it online and pick it up in the store, so
Nike is really trying to accelerate the seamless physical-digital experience. A good example of that is Single’s
Day. On Single’s Day, Nike got more than four million new Chinese members to join its app, and then, in
certain retail stores, the rate of conversion, so shoppers that walk in that then become Nike members, is in the
70-90% range. In some of those locations, 90% of those members actually buy something when they go into
the store. That seamless digital-physical experience, partnering with a lead athlete and expanding into new
definitions of what sports means, like e-sports, are all ways that Nike is going to maintain its moat in China.
[00:27:40]
Q: What are some of the main challenges associated with operating in China?
DG: It’s a good question. One of the big challenges is that Nike has to navigate a delicate balance, between
preserving its values in its brands while also ensuring that it has access to a fantastic marketplace. I’m sure
everybody here saw how Nike joined the call, I think alongside brands like H&M, Tommy Hilfiger, Adidas, to
avoid using cotton produced in Xinjiangg, a Chinese region where there’s repression against ethnic minorities.
Nike’s latest statement was that they did ongoing due diligence of their own, and found no evidence of
suppression of those minorities. Nonetheless, Nike didn’t want to make a big statement about this. It simply
doesn’t directly source cotton or raw materials from that region.
Simultaneously, Nike is an incredibly purpose-driven company. This year, they announced, in combination
with Converse, Jordan and Michael Jordan himself, a combined USD 140m over 10 years to support economic
empowerment and education and social-justice organisations for black Americans. Then, globally, they just
announced the 2020 impact report, which set really aggressive what they call purpose targets for 2025,
whether it’s using 100% renewable energy in the US, expanding their human rights and supply chain efforts
across their footprint in China, reducing their freshwater use for textile buying and finishing, which has a big
impact on Chinese factories. Then, most importantly, and through sustainability, diverting 99% of their
manufacturing waste from landfill and into a recyclable, sustainable supply chain. That’s going to be a tough
thing to navigate. It’s a social drive, but nonetheless, in terms of the future of manufacturing, Nike tries to use
China as the embodiment of how it lives its vales from a manufacturing and supply chain standpoint.
NH: It’s interesting that you mention Nike was also on a call with H&M. It seems like H&M received the
majority of the backlash. How did Nike avoid the same fate as H&M, and all of the struggles it’s having from a
consumer-facing standpoint in China?
DG: I think it’s probably more of an H&M answer than a Nike answer. H&M, of course, as you saw, had the
big issues with the factories in Bangladesh, so this H&M’s first supply chain-related issue. Simultaneously,
Nike has quite quietly reduced its manufacturing footprint quite considerably. They invested a brand-new
advanced factory based out of Mexico, to get it into North America. They’ve also reduced the number of factory
partners that they’re working with, I don’t have the direct numbers, or I can’t reveal the direct numbers on
that, so as a result, they’re able to have better quality control over the supply chain. With regards to the H&M
issue, it was actually less a supply chain issue than it was a statement of political issues. It was about saying,
“We’re going to avoid using common from a certain region in China,” vs a factory issue in China.
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Certainly, Nike has had its own challenges, the alleged sweatshop days, but today, Nike holds its factory
partners to its own proprietary standards, that are higher than they are mandated by any international
organisation. Currently, Nike is convening several different industry coalitions, including with academic
partners, to get all the brands that share factories, because Nike doesn’t own any factory individually, Nike
doesn’t have any factory just to itself, to make sure that all of these brands are holding themselves to higher
human rights standards. Both on the human rights side and on the supply chain side, like cotton, Nike has
done a good job just navigating the issue by bringing in other partners to share, rather than making
statements on its own.
[00:31:56]
Q: How would you say the Chinese consumer differs from the American consumer?
DG: I think there are two key ways that the Chinese consumer differs from the American consumer. I think,
first, it’s digital savviness and an emphasis on membership. As I mentioned, that seamless physical-digital
experience is most advanced in China, but the Chinese consumer is also most fluent in navigating that
experience. Still, America is a mall culture, and while Nike is marching towards 50% digital revenue one day,
right now, the US still does have a very strong retail footprint. That digital-physical seamless experience is
something that definitely has attractiveness to the Chinese consumer, and Nike is capitalising on it. The
second thing is that there are certain select groups of athletes in Nike’s roster. I think Nike sponsors around
15,000 different athletes, but there’s a small sub-set of them that truly are becoming global superstars,
particularly in China. Rather than think about the Chinese consumer as somewhat different from the US
consumer, I would encourage you to think about, “Who are the individuals who embody what the future of
Nike looks like for the most influential global consumer?” because that’s how Nike thinks.
Part of the Consumer Direct Offense is that there are 12 key cities around the world that represent the nodes or
the centres of influence, and Nike expects 80% of its revenues over the next couple of years to be driven just by
these 12 key cities. The athletes that they use to penetrate these key cities include folks like Naomi Osaka,
who’s Asian-American. She has won four Grand Slams in tennis. She’s only 23. Kylian Mbappe, the player for
Paris, he’s the youngest footballer to score 25 Champions League goals. You think about basketball players.
Certainly, Kobe Bryant is massive in China, but on the heels are Kevin Durant, who is insanely popular there,
Giannis, who is a global superstar, as an African-European and American star, and then other folks like Zion
Williamson and Luka Doncic. The way that Nike is penetrating the Chinese market is by capitalising on
centres of influence, that include not only cities in China but also global superstars that are centres of
influence unto themselves, and capitalising on that digital-physical divide that Nike is building the future of in
China exclusively, and Chinese consumers are most equipped to navigate.
[00:34:49]
Q: China is growing very fast. How sustainable is this growth, and how could Nike continue to capitalise on
this growth?
DG: Nike, in China, obviously has grown really quickly, I think around 50%. I think Q3 was 40 something
percent growth in China. Chinese New year, digital demand doubled vs 2019, so over two years, it’s literally
grown that substantially. Nike’s growth in China is largely driven, I think, in three key areas. First, it’s
capitalising on what I call special events, and they capitalise on special events in digital. Think about the
Chinese New Year, which I just mentioned, which doubled digital demand for Nike. Single’s Day, yet again,
Nike was the number one sports brand and had the highest store demand, the highest traffic on the Chinese
site Tmall. Single’s Day for Nike alone drove USD 500m in digital demand, not through wholesalers. That’s the
DTC business. That’s the first thing, I think, special events led through the digital. The second angle that Nike
has in China is the power of local launches. When Nike is able to either localise products, which I’ll talk about
in a second, or create the launch of an exclusive product in China, it gives the Chinese consumer a sense that
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Nike is increasingly building the future of sport in Shanghai, Beijing or Hong Kong, and not as much in New
York or LA.
A good example of this is the LeBron 18, which is one of Nike’s signature shoes, LeBron James’ shoe that he
wears on the court in different colour ways every single night. That was introduced in September through an
integrated live-stream with Tencent in China, so that drove a much deeper connection to the feeling of local
hoops culture in China vs an imported Western angle. Then, the final thing which I point attention to is
something called the Express Lane. This is not so much a consumer-facing initiative as it is a manufacturing
one, but the Express Lane is scaling most quickly in China, which allows Nike to localise product and then also
have the speed and the agility. If they’re selling through certain products, certain colour ways, certain units
much faster, they can speed it to the market to increase fulfilment and boost sell-through. Two examples of
that this year were how Express Lane in China created the Dunk Low and the women’s Dunk Disrupt, which
both capitalised on the Chinese New Year. That certainly allows Nike to quickly create, update, and fulfil
product in response to consumer demand. It can fulfil that product in a matter of weeks vs what used to take a
matter of months.
NH: Is this what you would attribute to the incredibly high margins in China compared to the US? What are
some other factors that may be playing into these high margins?
DG: I would give the high margins another three points. I guess this is how I think. First, DTC. DTC is all
about margins. When Nike sells a shoe through Dick’s Sporting Goods, it has to sell two of them in order to
make the exact same amount of money as if it sells one shoe through its own store. If you can do that through
your own website, your own app consistently, Nike’s margin expansion on DTC product is just profound.
That’s, hopefully for Nike, going to be one of the key tenants of its business. Margin expansion in China,
because it’s a more digitally savvy consumer, no doubt in-debts its worth to the DTC model. DTC drives more
margin, so that’s huge. The second thing I said is localisation, so that product assortment that’s being
informed by digital traffic but appearing in a retail footprint, really important in terms of driving sell-through.
Finally, it’s also creating new shoes that are adaptations of innovation platforms but are localised to the
marketplace. A good example of that is how Express Lane, which I just mentioned, created something called
the LunarCharge. The LunarCharge was a shoe that was cobbled together from different design elements they
saw trending through their digital data. They were able to add a new stylist top to an existing sole, and the
time to market was 4x shorter than usual, allowing them to capitalise on that competitive advantage. That all
drives margin.
[00:39:53]
Q: Could you elaborate on Nike’s overall competitors? Who is it most fearful about? Where is it prioritising
most of its market attention to?
DG: Certainly, the top brands are Adidas and Under Armour. That said, what is very interesting in the
athletic-footwear market, and Nike certainly abides by this, is that innovation drives growth. Innovation drives
growth, can’t say that enough. When they look at who the most likely athletic brands are to create a consistent
cadence of innovation, certainly Adidas, with its Boost platform, had a really good run, but they haven’t had as
much of a cadence in innovation, and Nike’s business is certainly growing much faster than Adidas. Similarly,
Nike has got nine of the top 10 best selling shoes. The only one that isn’t theirs is the Adidas NMD R1, so that’s
a pretty big moat. Second, Nike is investing in areas of technology, when it comes to innovation, that they
know their competitors cannot replicate. The best example of this are not only the ZoomX proprietary
cushioning platform, which they’ve created with a chemical company, but even more notably, Air. We all know
that Nike Air, that’s proprietary technology that only Nike can create. No other footwear company has the
ability to infringe on their patents that they have with Nike Air, and that’s the only shoe technology that’s
actually created in the US. It’s created at a facility called Air MI or Air Manufacturing Innovation, which is one
of the only dedicated US shoe facilities that Nike has. When it creates those air bags that go in the 270 or the
Pegasus or the Vaporfly, that’s coming out of the US and that’s a huge moat.
In terms of competition, just to be candid, in conversations with Nike leadership and Nike executives,
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competition is really not the motivating force for Nike. It’s really about expanding penetration in high-growth
markets. Certainly, think about China or even think about digital as its own marketplace. Nike is much more
focused on broader geo or sales channels than they are any individual competitor. That said, if I had to point
out an insurgent competitor that was a little off the wall, going back to On shoes, On shoes, the Swiss brand,
has that Cloud cushioning technology that has performed really well in the outdoor and trail running market,
which is not very big. They’re quickly moving into Nike’s biggest space, which is, of course, sportswear or style
and fashion products. A great example of that is that they signed away Roger Federer, the GOAT of tennis,
from Nike, to be On shoes’ number one endorser, and a Swiss tennis player doesn’t hurt aligning with a Swiss
brand. Nike thinks less about competition. It’s not something that’s discussed internally. They are competing
over certain athletes like Federer, and certain channels like digital, and then also certain geos like China, but
in general, right now, Nike has got a pretty solid moat around the top-selling footwear and, of course, the
revenue associated with being a leader.
[00:43:31]
Q: What are some of the barriers to entry within some of the segments that Nike operates in? Would you say
they’re getting lower? Are they still very high compared to Nike, the role of scale and ability to continue to
innovate?
DG: I think Nike is reducing its barriers of entry, not just by thinking about investing in new channels like
digital. It’s also relying on a strategy that is all about focus. To zoom back, to answer your question, in 2017,
Nike wanted a new strategy, which I had a part in, called the Consumer Direct Offense. It was a new
organisational model that basically said the idea is to get personal with consumers at a global scale, personal at
scale. Scale matters quite a bit for Nike, and the strength of the brand allows them to personalise different
dimensions of what Nike stands for, depending on where you live, depending on what sport you play. Think
about the fact that they’re dropping the Nike Maternity Collection this year, which is not a natural extension
for the brand in 2010 terms but, today, was one of the top sell-through items. They sold through the Nike
maternity collection immediately. To reduce barriers to entry, they’ve, as part of that strategy, improved
efficiency by reducing the amount of geos they have from six to four. Today, it’s now just North America,
EMEA, Greater China and APLA, Asia-Pacific and Latin America.
Then, the other area of focus is, as I mentioned, the key cities. They’re down from a dozen categories in terms
of sports to just three categories, men’s, women’s and kids. Those categories come to life especially in the 12
key cities, which extend across just 10 countries. New York to London, Barcelona to Mexico City, Beijing to
Seoul, and those represent about 80% of Nike’s projected growth. The other area of focus strategically, to
reduce barriers to entry, is that they’re focused on doubling the cadence of innovation, so new innovative
platforms that can have multiple iterations, like Air VaporMax or Nike React or ZoomX. They’re doubling
speed, as I mentioned, with the Express Lane, to create product in literally half the time. Shoes used to take 18
months to go from drawing board to store shelf. It’s now literally half that, and with Express Lane, they can
update new assortments, new colours, in a matter of weeks. Finally, the biggest way to navigate barriers to
expansion is direct. Nike has a brand-new direct organisation that unifies the retail side of the business with
the digital side of the business, and that allows Nike to not only drive margin but leverage digital data for its
retail footprint.
[00:46:31]
Q: What are some of Nike’s weaknesses, or what are some of its most pressing challenges or areas of focus you
think it could be doing a lot better in?
DG: Right now, obviously, Nike has done well. Their stock, I think, was a year ago at 60. Today, it’s around
140, so good belief in the market. Analyst consensus is around 170, so they’ve got really strong support from
the market in terms of their strategy. Certainly, there are tiny little areas I would perhaps draw attention to.
First, differentiated retail. As I mentioned, Nike went from 3,000 wholesale partners to just around 40. If
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those retail partners are not able to consistently innovate what the future of retail looks like, if you’re a Foot
Locker or you’re a JD Sports, or you’re a Dick’s Sporting Goods, that could be an area of concern, because the
majority of Nike’s business remains retail. We’ve talked a lot about the growth, but Nike’s vision from digital
across owned, operated and partnered is 50% of revenues in the long term. Even their big-time vision is that
50% is retail, and if retail partners do not consistently update the retail experience, bring in new digital and
retention aspects, it’s not going to be successful.
That’s one area of interest. The other area I would call attention to in terms of weakness is the Jordan brand.
The Jordan brand is now growing, but it continues to need to diversify from being about one gender, men, and
one sport, basketball. For Jordan, they’ve really got to invest in broad-based growth. We’re talking digital
channels, international expansion, moving from shoes into apparel and then also into women’s. Jordan also
needs to be able to pivot from focus mostly on exclusive retro drops, the Jordan 1 coming out in a baby-blue
colour way, and moving more towards advanced innovative product. For example, the stuff that Russell
Westbrook wears when he’s doing poster dunks on the court. We’re seeing some good success in terms of
Jordan. The Air Jordan 11 Jubilee colour way, it was one of the most successful footwear launches for the
brand ever, brought in about USD 175m in revenue, so that’s great.
The final thing I would mention is that, when it comes to gen Z, Nike needs to continue to remain relevant.
Analysts talk all the time about gen Z having this less-is-more approach towards apparel and footwear
purchasing, so they’re going to buy less, maybe they’re going to buy some channels that aren’t corporate,
they’re going to buy it from more of a StockX. Versatile and practical products with gen Z are going to win over
single-use goods. Just a basketball shoe just for the basketball court is not as appealing to Gen-Z as something
that’s more versatile. For gen Z, the localisation, in terms of making sure that your product in Boston feels like
it reflects the Celtics or the Red Socks or some sort of local vibe, that’s something that is really going to matter
for the gen Z consumer. Certainly, this is being brought to life through the jerseys that Nike is sponsoring for
both the MLB and the NBA. In both of those leagues, there’s now something called the city addition, where
they create a brand-new, very cutting-edge, off-colour way vibe. Think about the Golden State Warriors
wearing the jerseys that are evocative of the street signs in Oakland. That’s very much an embodiment of the
gen Z localised style proposition, for more versatile wear that extends from the gym to the street to the club.
All of these are areas that Nike is focused on but, to your question, has not yet necessarily capitalised on just
yet.
[00:50:41]
Q: What is your outlook for Nike and your best- and worst-case scenario over the next six months?
DG: Certainly, I worked at Nike and know the leadership. I feel very, very confident in that leadership team at
Nike. You’ve got the COO, Andy Campion, who was the CFO, came from Disney, really, really intelligent
operator, and has done a great job managing inventory and supply chain issues alongside CFO Matthew
Friend, particularly in light of, for example, shipping disruptions this year. I feel pretty good about the
management team there. Similarly, the CEO, John Donahoe, has done a fantastic job continuing to accelerate
the digital disruption of Nike’s business, and focus more on higher-margin channels such as DTC, Snkrs, the
Nike app, and then, of course, increasing retention through apps like the Nike Run Club or the Nike Training
Club. I see China continuing to be a great growth engine, continuing to be the digital leader in that seamless
physical-digital retail experience, but then also being more willing to help assist Nike’s strategy in expanding
DTC, because of their digital fluency. I see that being a great area of focus and good success.
The other area, which is a little bit harder to predict but, nonetheless, I think could be really relevant for Nike,
is its focus on purpose. Nike just announced a huge impact report. It set 25 different goals and if it’s true, what
we all read, that purpose-driven consumers are increasingly likely to support businesses that have strong
impact target, Nike should be able to capitalise. According to Edelman’s Trust Barometer this year, only
corporations, only companies, are viewed by the majority of the US as the institutions that uphold ethical
standards. CEOs are the new politicians. The Business Roundtable said that all companies should serve
stakeholders, not just shareholders, and Nike is going to capitalise on that. John Donahoe was ranked by some
indexes as the top-performing, purpose-driven CEO for 2021. He has clearly made a strategic investment in
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sustainability. They’ve come out with a ton of different sustainable products sourced from literally low-carbon
or zero-carbon aspects. Think about the Stay Hippie shoe, or its first-ever on-court, basketball sustainable
shoe like the cosmic unity, which was worn by Anthony Davis of the LA Lakers.
For all those reasons, Nike could be doing very well. However, if lockdown continues, variants continue to
expand across the world and China, in particular, experiences some sort of disruption that even the COVID
vaccine can’t ameliorate, that, for Nike, could be a big area of threat, given that, right now, China is by far the
biggest growth engine. Q3, Nike is down in the US 10%, China is up 50%, so that’s an area of focus for me.
Similarly, if Europe has to continue its lockdown or the US retail market does not rebound, that’s still the
majority of Nike’s revenue in the retail space. That’s an area of focus, so the real question is, would Nike be
losing market share or would it simply be losing revenue? I can’t see a scenario in which Nike is ceding market
share, with a big gainer like UA or Adidas taking it over. It’s probably either the market grows and Nike
capitalises at the same rate, or the Nike stock, the market softens, and Nike takes a revenue hit alongside its
competitors. Overall, I think it’s much more likely to have a best-case scenario, and analysts have around USD
170 price target for the stock that reflects that.
[00:54:43]
NH: We will now end the Interview there, and I also want to, once again, thank you for your input. Answers
were excellent. I’m sure clients were also just as pleased. I also would like to say thank you to clients for
joining Third Bridge Forum’s Interview today. Clients, if you wish to speak with our specialist in a private call
or meeting then please let your relationship manager know. Goodbye.
DG: Thank you.
Transcription ends at 00:55:00 of the recorded material.
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