Monday, March 23, 1998

The Trouble With Nike
by Jim Surowiecki (TMF Cinder)

They didn't just do it.

You can't.

It's the shoes, Mike. It's definitely the shoes.

And so on and so on. The list of word games you can play with former and current Nike slogans in the wake of the company's recent woes is endless. Having made itself into the sneaker for brash, unstoppable young athletes who never did anything but win, Nike must find itself a little haunted by all those mottos that promised that everything was possible. This last year, after all, has taught Nike management and Nike shareholders that everything isn't.

Now, as the numbers in Nike's third-quarter earnings report -- issued last Wednesday -- suggest, much of what's wrong with the shoe and apparel manufacturer right now is simply a function of poor inventory management and demand forecasting, coupled with the ongoing and dramatic slump in Asian sales. Nike had anticipated a doubling of Asian revenues this year, but saw instead a decline. In no small part as a result, in the middle of last month the company reported that its inventory had soared $500 million, to $1.4 billion. Nike has had recurring problems managing the flow of goods from manufacturers to retailers and is seeing the full effects of those problems at this moment.

Still, if that was all that was wrong with Nike, then there would be no real reason for concern, at least not in the long term. Asia will come back, eventually (though even Nike now says that its goal of $1billion in Japanese revenues won't be realized until 2002, when previous projections had the company reaching that target next year). And presumably the inventory woes will push Nike to do a better job of matching supply with demand, since for a company with no factories of its own, Nike has far too much of its capital tied up in shoes for which there are no guaranteed buyers.

Nike's problems, though, run deeper than this. The now-legendary turn of young consumers to "brown shoes" -- a label that needs to be retired in favor of something more euphonious -- has put a serious dent in the sneaker market as a whole, while Nike's competitors -- most notably Adidas and Fila -- have coopted much of the look and sensibility of Nike's advertising campaigns. Watching an ad for basketball shoes today, with its inevitable moody music, hushed voiceover, bleached film, and slow-motion athletic pyrotechnics, it's impossible to tell what company is doing the advertising. Nike's brand identity, in other words, is being diluted by its very influence.

In the same way, Nike's rapid growth over the last decade has sowed the potential seeds of its own demise. It's worth remembering that when the "I Love L.A." campaign, one of the first great Nike campaigns, appeared in 1984, Nike owned just 16% of the athletic-shoe market, and that for much of the 1980s it was running neck-and-neck with Reebok. Now, with somewhere between 43-47% of that market, Nike is the undisputed leader. But that is a difficult spot to be in for a company that prided itself on its outsider status, and that redefined sneakers as vehicles of hipness. The core image for Nike -- even after it moved from running shoes to basketball shoes -- was always the athlete who was outside of the pack, the one who didn't follow the crowd. But when everyone in the crowd is wearing Nikes, then how does wearing Nikes help you stand out?

The picture is certainly more complicated than this, since ubiquity can breed a kind of inevitability and create a situation where everyone wears Nikes precisely because if you want to wear sneakers, Nikes are what you have to wear. But in an industry as fickle and as devoted to the concept of the cutting edge as fashion, bigness is more of a curse than a blessing. Nike's domestic footwear sales revenue dropped 18% in the last quarter, while its domestic athletic apparel revenues fell also. And orders for the current quarter were down 13%, suggesting that quick solutions are not in the offing.

Nike and its fans are fond of comparing the company to other consumer brand giants like Coke, Gillette, and McDonald's. But Nike actually has very little in common with these companies. Coke runs hip ads, to be sure, but it has no pretensions to coolness, and it makes no attempt to suggest that drinking Coke will mark you off as a certain, exceptional kind of person. The whole point of Coke and Gillette, in fact, is to weave themselves into the fabric of everyday life, to combine a reputation for product excellence with consumer familiarity to make themselves the automatic choice. But everydayness is exactly what Nike has always feared.

In this sense, Nike's decision to adopt a premium-pricing strategy constituted an overestimation of the strength of its brand name and, perhaps, confusion about the places where premium pricing works. Warren Buffett is fond of saying of Gillette that it is able to charge more for its razors because the average man only spends $30 or $40 a year on razors, so that the extra three or four dollars he shells out for Gillette doesn't matter. On the other end of the scale, Mercedes-Benz and Porsche are able to charge premium prices because consumers imagine they're paying not simply for the hood ornament but also for superior performance. But Nike is somewhere in the middle of these two alternatives. Its shoes are not qualitatively better than those of Adidas or Reebok, which makes paying for performance an unrealistic option. But its shoes are also expensive enough that the Gillette strategy doesn't really apply, either.

Obviously, Nike is not going to willfully shrink itself in order to become hip again. And the company has begun to diversify its operations, with thirty percent of its sales coming from athletic apparel and another five percent from its other brands. Still, its acquisitions -- most notably that of shoe manufacturer Cole Haan -- have been uninspired, and it has yet to make the strong move into sporting goods that everyone has been anticipating for a while now.

Nike remains, of course, in an enviable position in many ways. Its brand recognition is very high, it has a strong international base, and its manufacturing operations, while hardly smooth, are still set up in such a way that it doesn't have to worry about idling its factories when demand slows. On the other hand, Nike's product development division, particularly on the shoe side, has been less than impressive, and the company has not done as good a job of managing the flow of goods as it might have. More to the point, Nike needs to rethink its approach to the brand and try to construct an approach that will combine the edginess of the old Nike with the reality of the new, establishment Nike. The company has one real asset, its brand, and that's an asset that it has carefully built in value over the last decade and a half. Before it does anything else, Nike needs to make sure it knows what it wants its brand to be a decade from now.

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