North American Athletic Footwear Update – 29 June 2021
Disclaimer
The information, material and content contained in this transcript (“Content”) is for information purposes only and
does not constitute advice of any type or a trade recommendation and should not form the basis of any investment
decision. This transcript has been edited by Third Bridge and may differ from the audio recording of the Interview.
Third Bridge Group Limited and its affiliates (together “Third Bridge”) make no representation and accept no liability
for the Content or for any errors, omissions or inaccuracies in respect of it. The views of the specialist expressed in the
Content are those of the specialist and they are not endorsed by, nor do they represent the opinion of, Third Bridge.
Third Bridge reserves all copyright, intellectual and other property rights in the Content. Any modification,
reformatting, copying, displaying, distributing, transmitting, publishing, licensing, creating derivative works from,
transferring or selling any Content is strictly prohibited.
Specialist:
Title:
David Thiebes (DT)
Former VP, Business Development & Chief Transformation Officer, North America at Adidas
AG
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Agenda:
1. Consumer preferences across athleisure and function
2. Competitive positioning – Nike (NYSE: NKE), Adidas US (ETR: ADS) and others
3. Innovation and partnership strategies
4. Supply chain constraints and inventory forecasting
Contents
Q: What’s your overview of the athletic footwear industry? Which main subcategories, drivers and top
players would you highlight?
Q: What impacts the athletic footwear and apparel categories’ performance? What similarities or influences
does one have on the other? Do consumers typically buy running shoes and then buy athletic gear?
Q: What were 2-3 notable pre-pandemic trends in the athletic footwear industry? Did trends differ across
regions?
Q: Could you elaborate on China’s more advanced and forward-looking technical and digital capabilities?
What can US companies learn from some of the trends in China? Do you think the trends in China are
because China is so advanced – would the trends not develop in the same way in the US? How tightly
connected are trends typically?
Q: What does it mean to be a lifestyle brand and why is it becoming so popular with consumers?
Q: How have players retained their market shares, especially given emergent brands and new market
entrants? What is notable about consumers nowadays? How far does brand loyalty go?
3
4
4
5
5
6
Q: What does it mean to be a global brand? You said Under Armour failed because it spread itself too thin,
but plenty of companies who struggle domestically seek out ex-US markets for growth. Why do some brands
succeed globally while others fail?
6
Q: Which of the key pieces are most important when entering a new market? How would you rank them in
importance? For example, Nike and Adidas both have decent products but to expand into China or Asia,
would marketing, collaborations, product innovation or marketplace be most critical to success?
Q: How has distribution shifted from more of a physical to a digital focus? How has the industry been
impacted by that?
7
7
Q: Is the big e-commerce push and cutting out the wholesale players the right strategy? Is there an
opportunity cost when it comes to getting product in front of a consumer who might not walk into the store?
What are the considerations around spreading a brand and reaching new consumers while maintaining a
nimble wholesale footprint? With Nike, it seems like none at all.
8
Q: How does the wholesale approach apply to China? Although it’s online and probably considered e-
commerce, would selling via a third party be considered a wholesale approach? How can a brand such as
Nike be strategically nimble and control its marketplaces when marketplaces are so critical to consumer
behaviour in China?
9
Q: How does the digital presence and shift impact supply and demand? Presumably it makes it easier for
some brands to manage supply for consumers but is there an added cost to freight and other factors? Nike is
notorious for restricting supply to increase product demand. At what point does this strategy tarnish the
consumer relationship? It’s a visible trend online – consumers can’t get a new Nike drop and everyone
becomes frustrated. How does the supply-demand dynamic work around heightening consumer desire but
avoiding backlash?
10
Q: You referred to the scarcity model and Nike feeding more supply at a slower rate over the years, but
trends quickly come and go and consumers are fickle. What’s the risk of consumers no longer wanting the
product, or the older consumer being aged out of that lifestyle? What are the short-term sales risks? For
example, if the latest Jordan model sells out and a consumer tries Adidas and Pharrell Williams’ Human
Races only to prefer it – now Adidas has a new customer who is committed to the product. At what point
does limiting supply start to backfire? How is Nike measuring and listening to consumer feedback vs its data
11
science models?
Q: Is anything commonly overlooked in the global or domestic athletic footwear industry? Which areas of
interest should be closely monitored?
11
North American Athletic Footwear Update
Transcription begins at 00:00:00 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview entitled North American Athletic Footwear Update. I’m
Nyree Hinton and I’ll be facilitating today’s Interview with Mr David Thiebes, former VP, Business
Development & Chief Transformation Officer at North America Adidas AG.
David, before we get started on 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.
DT: I agree.
NH: Thank you, David. Could you start by giving the audience an overview of your background or varies roles
you’ve held in the industry?
DT: I’m about a 20-year veteran in the sports, athletic apparel and footwear industry. Almost all of that was
with Adidas. I spent about half my career in North America and about half of my career in Greater China with
Adidas, covering virtually every function from marketing to sales, strategy, supply chain. The last eight or nine
years, I was at the executive leadership level, both in Greater China and North America. In Greater China, I
was Vice President of Concept to Consumer, a function in the marketing team, and I was also Vice President of
Strategy and Business Development in Greater China. Then, more recently, the last four or five years in North
America, I was Vice President of Strategy and Business Development and Chief Transformation Officer for the
North America business. A lot of my responsibilities over the last eight or nine years, both in China and in
North America, were strategic planning and strategy work for those different markets, big company-wide
projects, market research, strategic partnership, transformation programmes. I led the COVID response plan
for North America for about six months, and towards the end of last year, I made a very long-planned decision
to leave the company and start my own consulting company. I did that in August of last year, and have been
doing some consulting for the last nine months.
[00:02:23]
Q: What’s your overview of the athletic footwear industry? Which main subcategories, drivers and top players
would you highlight?
DT: The athletic footwear industry right now, depending on who you talk to, it’s roughly in the USD 80bn
range globally. Biggest players are the ones you probably know. Nike, Adidas are the top two, and then there’s
a pretty big drop-off to other brands, whether it’s niche running brands like Brooks, Asics, some new players
like Hoka One One. You have Puma in there, Under Armour, but it’s Nike- and Adidas-dominated. I know that
Nike is roughly 40-45% market share, with their Nike brand and their Jordan brand combined. Adidas is in
the 15%, maybe 20% range of market share for footwear specifically.
Apparel is a little different, if you want to talk about it. I would say, from a footwear standpoint, running is
probably the biggest globally from a revenue standpoint. Soccer, or football in Europe, is another big one. On a
broader level, lifestyle is becoming quite dominant. There’s a blend across all categories, but the lifestyle,
athleisure footwear space, whether it’s running silhouettes, just general sportswear or lifestyle silhouettes, has
been growing rapidly and becoming a huge category for all brands in the athletic footwear space.
Private and confidential 3
[00:04:29]
Q: What impacts the athletic footwear and apparel categories’ performance? What similarities or influences
does one have on the other? Do consumers typically buy running shoes and then buy athletic gear?
DT: Athletic apparel is much more fragmented of a market. There are a lot more players coming in, and there
are a lot of fashion brands merging into the athleisure space from an apparel standpoint, so the market is a lot
bigger but it’s a lot more fragmented. Just as an example of that, if, on footwear, Nike has 40%-plus market
share and Adidas has 15%-plus market share, in apparel, Nike has 10-15% and Adidas has 5-10% market share.
It’s a lot bigger and it’s a lot more fragmented, with a lot of players, including fashion brands, coming in. I
think you’re seeing growth, especially post-COVID, across both footwear and apparel in a pretty strong way.
As there’s a return to sport and health and wellness and the digital acceleration is happening, you’re seeing a
lot of growth in both apparel and footwear. Footwear has always been the anchor for Nike and Adidas, and
that, I think, continues, with apparel being an opportunity to take more share in a fragmented market. Brands
have been trying to innovate into the apparel space less successfully than they have been in footwear. Because
of the saturation, it’s a little harder to make ground on the apparel side, but growth is happening in both in a
pretty big way. If you look at some of their publicly available earnings calls and transcripts and some of the
numbers that are out there publicly, you’re seeing strong, strong growth across both.
[00:06:48]
Q: What were 2-3 notable pre-pandemic trends in the athletic footwear industry? Did trends differ across
regions?
DT: 2-3 trends, especially pre-COVID, I think it’s interesting these trends were happening pre-COVID and
COVID has just accelerated them. One trend is the digital acceleration, and just the transformation to e-
commerce and more of a digital business. That was obviously happening across all industries, including the
athletic footwear space, pre-COVID, and that has accelerated dramatically with COVID and, I think, is
expected to continue to grow extremely fast post-COVID. Digital acceleration is one. You were also seeing,
across the world, a continuing shift from a sport, health and wellness standpoint, people working out more,
trying to become more healthy. You were seeing that across all markets, and COVID actually accelerated that
to some degree, as well. Another big trend, I think, is on the sustainability side, and that was also happening
pre-COVID, where just being authentic and purpose-driven as a brand is more and more important, especially
to the younger consumer. A lot of sustainability, investment and efforts from all brands, in their products and
how they market it and their whole value chain, is a huge thing that was happening and a big trend that was
happening, and it’s continuing in an even bigger way during and as we are moving into a post-COVID world.
I think it’s interesting, the differentiation on some of these trends across regions. China, for the last 5-10 years,
has been more digitally advanced than US or Europe. China has 800 million internet users right now. That’s
more than the US and Europe combined. They have a younger population. They’re mobile-first. China has
built an infrastructure and ecosystem that is not matched, and they’re investing, from both government and
venture capital, in a much larger way in digital and technology than US or Europe is. I think that digital trend,
China has a lead across all other regions. COVID has accelerated that everywhere, but I think China has had
the infrastructure to capitalise on it in a bigger way. Nike and Adidas, for example, in the US are still trying to
build that infrastructure and invest in the right way to capture the full opportunity. That’s one kind of
difference I’d pull out across regions. From a sustainability standpoint, US and Europe, I think, are more
advanced, and that’s and more driven by the consumer focus on that as an important aspect in brand loyalty.
China is slowly gaining in that but sustainability is not as important to the Chinese consumer as it is US and
European consumers.
Private and confidential 4
[00:10:35]
Q: Could you elaborate on China’s more advanced and forward-looking technical and digital capabilities?
What can US companies learn from some of the trends in China? Do you think the trends in China are because
China is so advanced – would the trends not develop in the same way in the US? How tightly connected are
trends typically?
DT: I think there’s some uniqueness in China but it’s also, I think, more just China’s been ahead of the curve.
You’re seeing it happening now in the US, as an example, and in Europe, following suit with China. If you look
at Alibaba, Tencent and some of their ecosystems that they have in China, they are massive and have been
around for a while. They’ve been investing and investing in technology and acquisitions and in capabilities,
and they’re just further along. I think you see the same things happening in US and Europe. It’s just a little bit
behind the curve that China has set. I think it’s more so a fact of the Chinese consumer has been more digitally
savvy and digitally open. They’re younger, they’re mobile-first. The infrastructure and ecosystem in China, and
actually the government investment, as well, in technology and digital, has just put them ahead of the curve,
and everyone, US and Europe, is following. I think it’s more of a following aspect, and just following in the
footsteps of China for the most part. There’s some uniqueness in China with the strength of Alibaba, the
strength of their Tmall platform, when we talk about retail, that is not quite in place in the US outside of
Amazon, especially from a sports, athletic footwear and apparel standpoint. There’s some uniqueness in the
platforms they have that drives a lot of business and sales, but overall, I think it’s that China is there first, they
invested first, they have a consumer that was ready earlier, and other regions are now following that path.
[00:13:32]
Q: What does it mean to be a lifestyle brand and why is it becoming so popular with consumers?
DT: I think, as most people have seen and heard, athleisure has been the new, not even that new, big trend
that’s been going on, I would say, over the last five years, and really building and gaining momentum over the
last five years. If you look at it historically, everything was very categorised and sport-focused, functional.
That’s how Nike and Adidas really built their products. It’s a basketball shoe, it’s a running shoe and it was
function first, performance first. That has really evolved over the last 5-10 years, where the consumer has
changed. Aesthetics are much more important. The health and wellness lifestyle of shifting between work and
going out and working out, and that seamless transition that consumers have been moving into and
embracing, has led to a consumer mindset of, “I want something that works in all occasions,” and you’re
seeing that across all regions. I think athleisure is in a similar space. You’re seeing consumer behaviour in
health, wellness shifting to different activities and different occasions seamlessly, a need for that. With
influencers and celebrities and social media and the fashion aspect of the world today, you want to look good,
not just have a purely functional product, so all of that is driving the athleisure momentum.
I think, as a brand, athleisure is the new default. You’re not making a product if it doesn’t have some flexibility
for different occasions and different activities and doesn’t look good. I think every single brand, from big to
small, is taking that when they develop products and when they innovate, and taking athleisure as a default for
product development. I would say, if you look at the landscape, Nike and Adidas are the big ones, and they
have very large lifestyle, athleisure elements to both footwear and apparel. If you look at some other, newer
brands that are, I think, on the footwear space and that are really driving that athleisure focus in a bigger way,
you see Allbirds. You see Puma, which is just a smaller version of Adidas and Nike, New Balance, to some
degree. There are some upstarts like OluKai. You’ve got even brands that are traditionally functional, Brooks,
Asics, Saucony, those running brands that are traditional running brands, you’re even seeing them start to
merge more into an athleisure type of product. It’s the new default, and by everything that I see and read and
hear, my opinion is athleisure will be a major focus for all footwear companies going forward. It’s a must. It’s
not a special category necessarily. It needs to be incorporated into everything, all categories, all products.
Private and confidential 5
[00:17:30]
Q: How have players retained their market shares, especially given emergent brands and new market
entrants? What is notable about consumers nowadays? How far does brand loyalty go?
DT: Holding onto your market share, or protecting your brand and your brand equity and your brand
leadership, it’s really driven through the lens of the consumer. It’s everything that companies like Nike and
Adidas are spending millions and millions of dollars on, brand awareness, engagement with consumers,
especially in the digital space, personalisation, one-to-one relationships with consumers, and that’s really
helped brand equity. Brand equity is built, piece by piece, through every single consumer interaction, whether
it’s your product innovation, the experiences and one-to-one relationships with the consumers, collaboration,
sustainability, all of these things, purpose, even your customer service. Every way that you are engaging and
interacting is driving that loyalty, and I think companies like Adidas and Nike have the resources and the
breadth and the scale to do that in a lot of ways. Smaller companies and more niche companies have been able
to do that in the lanes that they’re in, and I think there are some interesting case studies of how, if you go too
far outside your lanes or stretch too far too soon, you lose that loyalty.
Under Armour is a good example of that, actually. Starting out, they were really a compression garment,
undergarment sports company that has been expanding and expanding into apparel and now footwear, and
footwear, I think, by all accounts, has been received in a lukewarm way. Their footwear business has not been
great. They’ve tried to go into lifestyle footwear, which has failed. They tried to stretch and extend, maybe too
fast and a little too aggressively, and they didn’t have that foundation that I think Nike and Adidas have built
over time. Lululemon is another interesting one, where they have a huge following base. Through their
apparel, they have built things up, and they’re now stretching into footwear and going to be launching
footwear very soon. It’ll be interesting to see, as they grow, if they keep hitting on all those elements of
innovation and experience and one-to-one marketing, and purpose-driven, authentic communication with
every consumer interaction. I think they probably are better positioned to grow and expand into footwear and
other areas, based on that brand foundation that they’ve been building over time as a vertical model. They
have their own retail and digital, they don’t do wholesale, and I think Under Armour is a good case study of
how they stretched, fell back and now they’re trying to rebuild and grow again.
[00:21:23]
Q: What does it mean to be a global brand? You said Under Armour failed because it spread itself too thin, but
plenty of companies who struggle domestically seek out ex-US markets for growth. Why do some brands
succeed globally while others fail?
DT: I think, first and foremost, it comes back to products. If you have a powerful product and powerful
message behind that product, that translates in one way, shape or form globally. Whether you’re talking about
from US to Europe and Asia or from Europe to US and Asia. You haven’t seen that many experiences yet or
situations yet of Chinese athletic footwear and apparel brands coming to US or Europe, but I think the
foundation of being a global business is products, product innovation and how you market yourself and
position yourself. I think that’s where you just see Nike and Adidas. They have the legacy and the time to build
up the model that is there today, of the right assets, the right celebrities, the right athletes, the right events,
and they have somewhat of a market hold on some of these premier, premium partnerships. Whether it’s
event-driven or whether it’s athlete-driven or celebrity-driven partnerships, along with the product innovation
at scale, this has allowed them to be successful globally.
Under Armour is a global company, but they have struggled to really grow internationally in a big way. I think
you’re seeing that because they, from a product standpoint, have not been able to scale products, and footwear
especially, in a strong and innovative way. They have some good partnerships and relationships with some
celebrities, but it’s very US-focused. It’s not globally focused. Adidas and Nike are partnering with major
Chinese celebrities, they’re partnering with global brands, partners that are globally known. I think it’s just
that foundation of marketing, partnership and product innovation, especially on the footwear side, and that
history and legacy of that, that has driven their global success. A lot of it is footwear. Apparel is fragmented,
Private and confidential 6
and there are a lot of players there. There are a lot of good players in the apparel space. There are not a lot of
top, good, great players in athletic footwear, and that’s where Nike and Adidas just have that product
innovation, experience and skill and legacy. If you look at other players like Lululemon, Under Armour, they’re
big on the apparel side. They’re pretty small to minuscule on footwear so far. Puma is a smaller player, and
then there are niche players after that, really. That footwear piece and that innovation around that, and the
marketing around that with celebrities, partners, events, is what’s driving the global business.
[00:25:14]
Q: Which of the key pieces are most important when entering a new market? How would you rank them in
importance? For example, Nike and Adidas both have decent products but to expand into China or Asia, would
marketing, collaborations, product innovation or marketplace be most critical to success?
DT: I think, if you’re talking about what are the key factors to expansion in other markets, if I recall Nike’s
most recent earnings call, they even talked a little bit about this. First and foremost, it’s product innovation,
and being able to do that in a relevant way across the world and be relevant to different regions and different
consumers. It is the relationship with your consumers, the one-to-one engagement, the inspiration of your
consumers, and that’s through marketing, that’s through partnerships, that one-to-one engagement as an
umbrella for all of those things, and it’s digital. I think that’s probably key. Those three things I would take and
say those are the most important. Ranking them? That’s a little hard but it starts with product, so I would have
to say product innovation. I would have to say number two would be how you engage with consumers, how
you inspire them, how you have a relationship with them, and all of that is coming with a marketing effort and
who you’re partnering with and some of those things. Then, the digital piece, and if you can get digital right in
China. It’s unique in different markets, but that digital infrastructure and technology and capability and
investment, globally and to meet the specific needs of different markets, if you have those three things in
place, that’s a recipe for future global success.
NH: Where do companies or brands largely fail on that 1-3 scale? At which point? Do companies typically
have great products but fail to maintain a relationship with the consumer? Do they have a great product and a
consumer relationship but no digital focus? Where would you say many fail in that pyramid?
DT: I think it’s a combination. You see some cases where the product and the product innovation is not there,
and I think that’s the case for Under Armour. I think you see other cases where the digital infrastructure is
lagging behind competition and that consumer engagement is lagging behind. I think, even, you see it with
Adidas. Between Adidas and Nike, Nike is and has been more advanced in their acquisitions of technology
companies and AI capabilities and data capabilities, and the roll-out of their apps. Adidas is still good and
strong, but they’re behind Nike in that aspect. I think that’s one big reason why you’ve seen Nike, from a share
price, from a growth standpoint, over the last three or four years, be a leader, because they have capitalised on
that digital pieces. I think it’s not one problem that everyone faces. I think it’s a little bit unique. I think, when
you talk about footwear specifically, it’s really Nike and Adidas. There are a lot of other players that are
medium to small, but no one close to Nike and Adidas from a footwear standpoint. If you talk about overall
athletic apparel and footwear, then you need to throw Under Armour, and even potentially the big Chinese
brands, Li-Ning and Anta, in there. From a, “Where do companies fail?” I think Under Armour, to me, is
products, from a footwear standpoint. Adidas is lagging behind on the digital side, still doing well but not
nearly to the level that Nike has, and you see that in revenue and margins and in growth over the last three or
four years.
[00:30:36]
Q: How has distribution shifted from more of a physical to a digital focus? How has the industry been
impacted by that?
Private and confidential 7
DT: Traditionally, the athletic apparel and footwear space has been very wholesale-dominated. Just to take
the US as an example, Footlocker, Dick’s Sporting Goods, all of those big retailers, that was historically 70% of
the business for Nike and Adidas, for years and years and years. Obviously, even pre-COVID, there was a
continued shift in investment into digital and a growth of e-commerce, and a growth of own-retail stores for
Nike and Adidas, branded own-retail stores that they operate. There has been a growth in the D2C business,
direct-to-consumer business, for the last 6-7 years. COVID has taken those growth goals and, with COVID,
delivered those growth goals three, four, five years early, essentially. If you look at share of business right now,
if you just look at the industry from a direct-to-consumer standpoint, it’s already close to 50%. It’s between
40% and 50% industry-wide for direct-to-consumer. That’s branded own retail stores and e-commerce.
Wholesale is 50-60%. That’s already changed 10-20 percentage points, shifted down, and you’re going to see
this.
E-commerce and own retail, own retail will not be growing as fast. I think every company is rationalising their
own retail store portfolio, and really narrowing it down to the key stores and key locations. Very like a
marketplace focus of brand experience stores, it’s having fewer but more quality, a high, premium brand
experience, flagship stores in key locations and cutting a lot of the excess. You’re going to see e-commerce just
keep booming. I think you’re seeing that everywhere. I believe e-commerce is going to be 50% of business in
the next three or four years, by 2025, I would say. I think Nike just even said that that was their goal. I think
that’s the goal, probably, industry-wide, of getting e-commerce to be half of total business in the next five-ish
years, and you’re seeing the growth rates line up to that trend. With that said, that means that wholesale will
keep coming down. I think own retail will roughly maintain as stores are rationalised. Retail may even grow a
little bit from an own-retail standpoint, but wholesale business, it has been coming down pretty fast, especially
with COVID, and it’ll keep coming down.
You’re going to be seeing brands like Nike and Adidas continue to cut wholesale partners out that they don’t
believe are strategic or serving a really focused purpose. You’re going to see big wholesale partners like
Footlocker, Dick’s Sporting Goods, JD Sports, those big strategic players, and a handful of boutique
experience, niche, consumer-driven partners, and there are a lot of other retailers that have been already or
will be in the future, cut out of the mix. I think wholesale, ultimately, 5-10 years from now, it may be 20-30%
of total business, which is incredible when you think that they were 70% just even 5-7 years ago. That’s a
massive change in a pretty short period of time, but that’s the strategy across the industry. Invest, move
resources from wholesale to digital, digital get to 50% of your total business, manage your own retail stores
very carefully in a focused, premium-experience-driven way, take strategic partners, some big players and
some boutique, strategic wholesale partners. You align on strategy, you co-invest, and you have the right
marketplace coverage across key cities and key trade zones. You’re going to see that keep evolving, and that
mix across e-commerce, retail and wholesale will adjust pretty dramatically and continue to adjust over the
next five years.
[00:35:53]
Q: Is the big e-commerce push and cutting out the wholesale players the right strategy? Is there an
opportunity cost when it comes to getting product in front of a consumer who might not walk into the store?
What are the considerations around spreading a brand and reaching new consumers while maintaining a
nimble wholesale footprint? With Nike, it seems like none at all.
DT: Nike is definitely not none at all – they definitely have some strategic partners, some of the big players as
well as some smaller, niche, boutique players from a wholesale standpoint. To your question, consumers are
digitally-centric now and they will keep becoming this way in this industry. Digital sales will keep growing
significantly, brands have an incentive to do as much business as possible digitally. It’s a higher retail price, it’s
a higher revenue and it’s higher margins, because they don’t have the wholesale cost that goes into it. There’s a
financial incentive, there’s a consumer relationship incentive. You have consumer data, you can then market
and build a one-to-one relationship and personalisation, all of that stuff. It’s a whole ecosystem and cycle. It’s
a virtuous cycle that doesn’t stop when you are selling digitally, so I think brands have a very large incentive to
push their business even further into a digital space.
Private and confidential 8
To your question of what’s the opportunity cost and do they miss out on brand visibility, I think brands are
doing the right thing in keeping a smaller portfolio of wholesale partners that can really drive a marketplace
approach. Both Nike and Adidas, they’re looking at the market and they’re looking at key cities. For an
example, they’re looking at LA, and, “What are the key trade zones in LA? What do I need to have the right
presence in the right geographies around the United States, and who do I need? Is that just a digital presence,
is that an own-store presence or is that a wholesale presence?” They’re carving the market up in a pretty
strategic way, looking at key cities, key trade zones, key locations around the country. “What do I need to have
the right visibility and capture the right consumer from an omnichannel view, whether it’s digital or physical?
If it’s physical, who are the players I need to be partnering with vs my own stores to make that happen?”
That’s where they’re looking at their strategic partners from a wholesale standpoint. Nike has them, Adidas
has them, they’re just getting fewer and they’re getting more focused and more co-invested together. I
wouldn’t say it’s just completely cutting out wholesale, but I think there’s a major incentive for the mix to
change from a brand standpoint. I think wholesale in general is in trouble, unless you’re a strategic partner
that can differentiate yourself and really say, “I can pull a consumer in and I have enough of a retail brand
presence to do that,” whether you’re boutique or a big player. I think those are the partners that the big brands
are going to look for and that will drive the wholesale landscape in the future. I think consumers are just going
to keep going further and further online and in digital, and that is just naturally. Look at the malls. There’s an
oversaturation of physical retail. Thousands of doors are closed every year over the last five years. Forget
COVID. Even pre-COVID, thousands and thousands of doors, malls that are not sustainable in the long term,
all of that is going to be shut out, especially as more and more brands are pushing and driving and forcing
consumers online or consumers are willingly going online. You’re left with a much smaller wholesale business
and a much more strategic and focused approach from brands like Nike and Adidas, with their marketplace
management efforts.
[00:41:23]
Q: How does the wholesale approach apply to China? Although it’s online and probably considered e-
commerce, would selling via a third party be considered a wholesale approach? How can a brand such as Nike
be strategically nimble and control its marketplaces when marketplaces are so critical to consumer behaviour
in China?
DT: Let’s talk a little bit about the China landscape for a minute. When you look at China from a wholesale
standpoint, it’s really two major retailers and it’s franchise-driven, so it’s a mono-brand franchise. There are
two major retailers, PaoSheng, which operates YY Sports, and there’s BaiLi Sports. Both of those retailers,
from a wholesale standpoint, operate as a third-party wholesaler, like a Footlocker or Dick’s Sporting Goods,
but they are operating an Adidas-only store or a Nike-only store, a franchise store, and there are thousands of
those around the country. Similar to the US, there is an oversaturation in China of physical retail. They’ve
expanded and expanded and expanded, and that will be rationalised, I think. You’re seeing inventory levels in
China still not having recovered from COVID. There are too many retail stores, there are not enough
consumers flowing through there. That franchise store or wholesale rationalisation will happen in China. If
you look at the digital side of things, every brand has their own site, like they do in the US and Europe, but
sales through that are extremely low. Those branded e-comm sites are really used more for just a premium
brand presence and a premium experience for consumers. Their branded sites are growing, but it’s still a small
overall part of their business.
Most digital e-comm business is done through Tmall, where it’s through a third-party platform but, actually,
Nike and Adidas and any brand control their Tmall stores. They do have control of the merchandise that’s sold
there, the pricing. They’re just operating the store on a third-party platform. The bulk of digital sales in China
is through branded Tmall stores. Nike, Adidas have their Tmall stores. Tmall is like the Amazon of China.
That’s where the consumer goes, to Tmall to shop, and so there is some level of control digitally. It’s not like a
fully uncontrolled third-party situation. There are third-party marketplaces there, but really, it’s a Tmall and
it’s a branded site, and there are these two sites that are making up, I would guess, 90% of the digital revenue,
e-commerce revenue, in China for brands like Nike and Adidas. That’s going to just keep growing, 800 million
users that are growing every day. They’re very digitally advanced in China, younger consumer demographic,
Private and confidential 9
whether it’s through Tmall or their own branded site. It’s not as good of consumer experience through Tmall,
but they do at least operate their own platforms there or they operate their brand on Tmall, so it’s not a full
relinquishing of the brand.
[00:47:00]
Q: How does the digital presence and shift impact supply and demand? Presumably it makes it easier for some
brands to manage supply for consumers but is there an added cost to freight and other factors? Nike is
notorious for restricting supply to increase product demand. At what point does this strategy tarnish the
consumer relationship? It’s a visible trend online – consumers can’t get a new Nike drop and everyone
becomes frustrated. How does the supply-demand dynamic work around heightening consumer desire but
avoiding backlash?
DT: Let me answer that in two parts. First, just the general supply chain part that you were mentioning
before, of freight costs and some of that stuff. I think, with the digital acceleration that has happened, basically
3-5 years of digital acceleration have happened in the last 12 months. If you ask me, “What’s one of the biggest
challenges that brands are facing?” I think it’s on the supply chain side, and not only just with COVID
challenges of Asian suppliers and port issues and all of that. I think there’s a more infrastructure-based
challenge from a supply chain standpoint. Everything is shifting so much more to a large digital scale that is a
much different business model, from a supply chain standpoint, than traditional wholesale, which is big, bulk
orders that are shipped through warehouses. There’s a massive amount of infrastructure change that is going
on in the background for companies like Nike and Adidas, where they are changing their warehouses
completely. It’s a totally different way to process products when you’re digitally, e-commerce-focused than
when you’re wholesale-focused, and that change has been happening before COVID but it’s been slowly
happening. COVID accelerated this dramatically, and everyone is trying to catch up on the supply chain side,
from a logistics-warehousing standpoint, from a freight and cost-of-freight standpoint, from a planning and
inventory planning standpoint.
It’s a lot different planning a digital business and planning inventory than it is when you are getting bookings
from Footlocker six months in advance. There’s a lot of capability and infrastructure and accountant expertise,
from a supply chain and planning standpoint, that is a big challenge and a big investment and a big push for
many companies, to be able to have the right supply and demand model from an e-commerce business
standpoint. To your other question of just the supply and demand model and the scarcity approach that
companies like Nike are using, that’s been a strategy. It’s been a calculated strategy that Nike has excelled at
and done a very good job at, using the scarcity model to drive engagement and demand, and they’ve looked at
it in the way of a pyramid. At the top of the pyramid, you have your hype, exclusive products, where they do an
extremely strategic and carefully planned approach to limiting volumes. I think, honestly, they’re selling those
at such a premium price, and it’s driving so much more from a consumer engagement, membership, loyalty,
one-to-one marketing standpoint, that it’s not necessarily all about just exploding volumes and getting the
sales. It’s about the excitement and it’s about the engagement, it’s about the membership, and it’s about the
CRM aspect of that.
That’s at the very top, but they also do a really good job, I think, of product franchise management, where they
have it very calculated and planned. Outside of the hype product, if there’s a new innovation, they will restrict
demand intentionally, and just slowly feed that over years until it becomes a massive volume-driving
franchise. You see that in so many cases for Nike, where they have their hype model, which is very much
scarcity and consumer engagement, and then they have a real franchise management model. They do start
with scarcity, but it’s a slow-feed to build up both the interest and the innovation and the marketing, and then
they explode that, two, three, four years later when they’ve built it up. I think Adidas also does that and tries to
do that. I would say they probably don’t do it at the sophisticated level that Nike does. That scarcity model is
used for many reasons, and I think that’s here to stay and that’s not going away. They may be losing short-
term sales but I think, long-term, it pays off from what they get with membership and consumer engagement.
If they want it to pay off, they do, but it’s two, to three, four years down the road when they actually put scale
onto that scarcity model.
Private and confidential 10
[00:53:47]
Q: You referred to the scarcity model and Nike feeding more supply at a slower rate over the years, but trends
quickly come and go and consumers are fickle. What’s the risk of consumers no longer wanting the product, or
the older consumer being aged out of that lifestyle? What are the short-term sales risks? For example, if the
latest Jordan model sells out and a consumer tries Adidas and Pharrell Williams’ Human Races only to prefer
it – now Adidas has a new customer who is committed to the product. At what point does limiting supply start
to backfire? How is Nike measuring and listening to consumer feedback vs its data science models?
DT: It’s just natural that, with any product, you’re always going to have some hits and misses, and that’s
probably never going to change. You’re going to have some oversupply and too much demand, in some cases.
There are maybe a few examples where it’s backfired for both Adidas and Nike, but I think that’s just part of
normal business. You’re never going to be 100% right. I think that’s the power, actually, of the scarcity model,
that if you’re starting slow, you can feed more later, as opposed to starting big and having a major going-
backwards failure. I think that’s the power of the scarcity model. Just taking a look at the overall portfolio and
the overall business, at least in the last 3-4 years, you haven’t seen a dramatic issue of this happening.
Adidas had a massive inventory issue back in 2013-14, Nike had one in 2015-16, and that was a combination of
many things, I think, lack of innovation, lack of product innovation and maybe chasing some short-term
numbers, trying to manage numbers in the best way and probably pushing too much. You’ve seen examples of
that in the one-year inventory glut period that companies have to dig out of, but if you just look at the overall
trend, it’s hard to answer your question on how much is too much or too little. You’re always going to have hits
and misses. I think the scarcity model is proven, and it’s something that you can build on and grow and scale.
I’d rather have a scarcity model, if I’m a brand, and to be able to build from that than have an all-in, short-
term, all-or-nothing-at-the-beginning model, where you have much more risk of failure. I’m not sure if I’m
answering your question totally. I think it’s hard to say where you draw the line, but the strategy from a
scarcity and growth standpoint vs the opposite of that makes sense to me.
[00:58:15]
Q: Is anything commonly overlooked in the global or domestic athletic footwear industry? Which areas of
interest should be closely monitored?
DT: I would say that the power of third-party partnerships and collaborations in the future is only going to
become more and more important, and I think that this is actually something that Adidas has done in a best-
in-class way. Especially going through COVID, the whole industry had to refocus, and I think you’re going to
see that going forward with companies like Nike and Adidas. They’re really going to hone in on their core
categories and their core segments and core consumers, and then put all their resources and effort into those
core categories and core channels. Then, on the fringe, whether it’s categories, whether it’s channels, whether
it’s areas of capability that they just aren’t the best at, you’re going to see much more third-party partnerships,
and you’re seeing that now. I’m not even just talking athlete and celebrity partnerships, I’m talking about
potential partners to handle categories or channels that are not part of the core.
From a sustainability standpoint, we’re seeing a lot of partnerships in material innovation, in tech and data.
Adidas and Peloton are collaborating, Nike is acquiring or partnering with AI firms. You’re seeing all these
things that are, I think, going to be expanding and growing. I think companies that can get those partnership
models right, whether it’s for sustainability, for digital accelerations, for non-core categories, non-core
channels, these collaborations and partnerships are going to grow exponentially over the next few years, as
resources are funnelled into the core and they’re looking for partners to go in. I think that’s just something to
keep an eye on, and something that is maybe under the radar and not always out there from what you think
about when you think about the core businesses. I think companies that can do that right, and divest in the
right way or divest and partner in the right way and then focus on their core businesses, are the ones that are
going to be positioning themselves for greater growth in the future.
Private and confidential 11
[01:01:40]
NH: We will now end the Interview. Let me close by saying thank you for your input, again, David, a really
great Interview. You were able to cover a lot. Thank you, clients, for joining Third Bridge Forum’s Interview
today. If you would like to speak to David in a private call or meeting, please let your relationship manager
know. Have a good one.
DT: Great. Thanks a lot.
Transcription ends at 01:01:54 of the recorded material
Private and confidential 12