Nike: An Underperforming Giant

Nike’s stock price has seen a significant decline since its earnings report in June 2024. In the fourth quarter of fiscal year 2024, Nike saw revenue fall by two percent. Even more concerning, Nike is forecasting revenue in fiscal year 2025 to be down mid-single digits. Unsurprisingly, the market has reacted negatively.

The question is whether the market is overreacting to temporary short-term challenges or if Nike has larger issues that are reducing the quality of the company.

Nike has made numerous mistakes over the past few years. Nike had curtailed inventory to wholesale retailers, cutting ties with many more budget minded wholesalers. Nike was hoping to try to shift more focus to its own stores and its own ecommerce operations.

The decision to curtail partnerships with more budget minded wholesalers has, in my view, shown that Nike’s leadership wants to make Nike a more premium brand. While controlling inventory and being more exclusive is typically a solid strategy for making a brand more premium, Nike did not need to do this. Nike has traditionally been able to both offer premium products while also having more affordable options. Consumers have understood that there are different tiers of Nike merchandise. The $50 pair of sneakers that could be found on sale at a wholesale retailer, for example, are not looked at as being equivalent to the upper-end of Nike’s shoe collection costing well over a hundred dollars let alone its limited-edition sneakers. In essence, Nike was able to offer more budget minded offerings while still being able to offer a selection of premium products at much higher prices.

To be clear, exclusivity is an important concept for Nike, but in a much more specific and constrained way than for many other brands. Nike’s limited-edition shoes need to be exclusive or else they lose some of their appeal. Furthermore, I also am not advocating that Nike become a budget brand which tries to compete on price. However, I maintain my opinion that Nike can and should try to appeal to a rather broad swath of consumers, which it has traditionally done successfully. Curtailing relationships with many wholesalers just excluded many potential customers without making Nike any more appealing as a premium brand.

More significantly, Nike’s leadership seemed to fail to grasp that what made Nike a desirable brand was not exclusivity, but rather, innovation, marketing, and good designs. In other words, Nike made cutting-edge products and marketed them very well. The ability to do this consistently allowed Nike to grow into the world’s leading sports apparel and shoe company. Many people were willing to choose Nike over competitors because they perceived the products to be best-in-class.

This leads right into the next major mistake. Nike failed to innovate enough. Its designs have become stagnate, and the marketing has not worked well enough to convince consumers that Nike’s products are a step above competitors. Nike’s products just aren’t perceived by many to be as appealing as they used to be. 

Nike’s failure in innovation has allowed competitors to catch up. In premium athletic shoes, ON and Hoka have been gaining in popularity, winning many fans who feel that their shoes are more comfortable than alternatives from Nike. Both brands have seen rapid growth and are taking market share from Nike. These competitors have been able to take market share due to successfully designing and marketing products that appeal to consumers in their target markets and Nike’s failure to innovate. These are serious competitors which Nike may struggle to compete with. Fans of Hoka and ON are probably not going to soon switch back to Nike shoes unless Nike makes a rather significant jump in technology and/or Hoka or ON decline in quality. Nike is facing stronger competitors at a time when it itself is lagging.

China is also becoming a more challenging market for Nike. Many western brands are losing some of their luster in China as consumers in China are increasingly favoring homegrown brands. Nike may no longer be able to rely as much on its brand’s prestige to boost sales in China. Brands such as China-based Anta are increasingly a challenge for Nike.

Can Nike turn things around? Nike’s leadership seems to realize that things are not going the way they should be for Nike. Nike’s leadership says that they are focusing on boosting innovation. This is a positive step, as Nike needs to be more innovative to compete with the likes of Hoka and ON. However, boosting innovation isn’t easy or automatic. There is no guarantee that Nike will be able to successfully create new shoes that can retake market share lost to Hoka and ON. 

In China, Nike likewise needs to find a way to boost interest in its brand. Nike may find this to be its most difficult long-term hurdle to overcome as the lessening of interest in western brands is something outside of its control. If consumers increasingly view Nike’s products as good but not necessarily differentiated from competitors, Nike will continue to struggle. Once again, a significant boost in innovation and improved marketing are likely needed for Nike to boost its competitiveness in China.

All is not doom and gloom for Nike. Nike has advantages that may allow it to turn things around. Nike is still an extremely recognizable brand and maintains a strong fan base. It has a history that gives it prestige. Nike has immense size which gives it ample resources to dedicate to research and development and marketing.

Nonetheless, for all its strengths, Nike needs to get back to its roots of being a performance-oriented athletic brand which makes good shoes and apparel and markets them well. Nike’s management seemed to lose focus on this point, which makes me question whether they have the right vision for Nike. Due to that, my personal view is that I need management to prove to me that they have properly refocused the company. Nike’s management is starting to say some of the right things, but I need to see evidence of a change before I am ready to believe that Nike is back on the right track. I will need to see Nike come out with more innovative shoes and improve its marketing.

To conclude, while I certainly don’t see Nike as an irrelevant brand doomed to failure, I do think it has made significant mistakes which are hurting the company and that it is facing increasing competition. I believe Nike has the ability to reignite growth, but I need to see evidence of a turnaround before I am ready to believe that Nike has righted the ship.

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