Massimo Giunco posted an article on LinkedIn titled Nike: An Epic Saga of Value Destruction (28 July 2024).
« A month ago. June 28th, 2024. Nike Q2 24 financial results. 25bn of market cap lost in a day (70 in 9 months). 130 million shares exchanged in the stock market (13 times the avg number of daily transactions). The lowest share price since 2018, – 32% since the beginning of 2024. »
« The story started on January 13th, 2020, when John Donahue became CEO of Nike, replacing Mark Parker. Together with Heidi O’Neill, who became President of Consumer, Product and Brand, he began immediately to plan the transformation of the company. »
« A few months later, after his first tour around the Nike world, the CEO announced – via email – his decisions (using the formula “dear Nike colleagues, this is what you asked for…”):
- Nike will eliminate categories from the organization (brand, product development and sales)
- Nike will become a DTC led company, ending the wholesale leadership.
- Nike will change its marketing model, centralizing it and making it data driven and digitally led.
Let’s go through the impact of the three key decisions, one by one. »
Elimination of categories
« In 6 months, hundreds of colleagues were fired and together with them Nike lost a solid process and thousands of years of experience and expertise in running, football, basketball, fitness, training, sportwear, etc., built in decades of footwear leadership (and apparel too). Product engine became gender led: women, men, and kids (like Zara, GAP, H&M or any other generic fashion brand). »
« If today, we talk about lack of innovation and energy in product creation, well, we know exactly what originated all of that. »
« Categories were reintroduced in Nike with the reorg. announced by the CEO in December 2023… By the way, they are now called “Fields of Play”, name that Nike was using 20 years ago, and not “categories” because otherwise someone might think the CEO and the President of the Brand made a mistake… »
End of Wholesale leadership
« For the first time in Nike history, long term vision wasn’t about sustainable growth anymore driven by Products, Brand and Marketplace leadership. It was about the supremacy of DTC, led by digital. Period. »
« The marginalization of the wholesale business was very easy to achieve. Nike just began to terminate hundreds of agreements with many local business partners or reduced the business they had with them (selling in less products, and/or diverting premium products to Nike Direct). »
« inventory started to blow up, as all the data driven predictions (the “flywheel” …) were simply inconclusive and the supply chain broke up. As announced by the quarterly earnings releases, the inventory level on May 31st, 2021, was 6.5bn $. On May 31st, 2022, it was 8.5bn $. On November 30th, 2022, it reached 10bn $. Nike didn’t know anymore what to produce, when to produce, where to ship. Action plans to solve the over-inventory issues planted the seed of margin erosion, as Nike started to discount more and more on its own channels – especially Nike.com (we will talk later about it). »
« Many consumers – mainly occasional buyers – did not follow Nike (surprise, surprise) but continued shopping where they were shopping before the decision »
« The retailers that were abandoned or downsized by Nike started offering shelves and square meters to all the other brands in the arena. And suddenly, certain brands started gaining market share, attacking Nike especially in those specialized categories where the company founded by Phil Knight and Bill Bowerman was once leader (i.e., running, football, fitness, training and, in part, lifestyle). »
« Gross margin – because of that – instead of growing due to the growth of DTC business, showed a rapid decline due to a never-ending promotional attitude on Nike.com … Results? Gross margin of FY22, 46%. Gross margin of FY 23: 43.5%. 250bp of margin erosion in 4 quarters… »
Lead with Digital Marketing
« Nike has been built for 50 years on a very simple foundation: brand, product, and marketplace. The DC Investment model, since Nike became a public company, has been always the same: invest at least one tenth of the revenues in demand creation and sports marketing. The brand model has been very simple as well: focus on innovation and inspiration, creativity and storytelling based on athletes-products synergy, leveraging the power of the emotions that sport can create, trying to inspire a growing number of athletes* (*if you have a body, you are an athlete) to play sport. That’s what made Nike the Nike we used to know, love, admire, professionally and emotionally. »
« massive growth of programmatic advertising investment … For sure, the former CMO was ignoring the growing academic literature around the inefficiencies of investment in performance marketing/programmatic advertising, due to frauds, rising costs of mediators and declining consumer response to those activities. Things that were suggesting other large B2C companies – like Unilever and P&G – to reduce those kind of DC investments in the same exact period… Because of that, Nike invested a material amount of dollars (billions) into something that was less effective but easier to be measured vs something that was more effective but less easy to be measured. In conclusion: an impressive waste of money. »
« Obviously, the former CMO had decided to ignore How Brands Grow by Byron Sharp, Professor of Marketing Science, Director of the Ehrenberg-Bass Institute, University of South Australia. Otherwise, he would have known that: 1) if you focus on existing consumers, you won’t grow. Eventually, your business will shrink (as it is “surprisingly” happening right now). 2) Loyalty is not a growth driver. 3) Loyalty is a function of penetration. If you grow market penetration and market share, you grow loyalty (and usually revenues). 4) If you try to grow only loyalty (and LTV) of existing consumers (spending an enormous amount of money and time to get something that is very difficult and expensive to achieve), you don’t grow penetration and market share (and therefore revenues). As simple as that… »
Conclusion
« The truth is that together, John and Heidi created a cannibal ecosystem that ate brand equity, product equity, gross margin, market share, demand creation budget and consumer connectivity. In just three years… »
« the Nike people, the army of once passionate and inspired employees, that today – after three reorganizations in 7 years – struggle to believe the “new” narrative of their mistaken leaders. »
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