Companies continually look for ways to establish an advantage. In the continuing saga between Foot Locker (NYSE:FL) and Nike (NYSE:NKE), a simple press release reveals a great deal about how Foot Locker looks to gain a little leverage over Nike.
On April 13, Foot Locker agreed to purchase about 350 Footaction stores from bankrupt retailer Footstar for $160 million. The deal has to be approved by the bankruptcy courts and at an antitrust hearing, but Foot Locker expects the deal to close at the end of July.
Why were the Footaction stores available for purchase? Because Footstar could not extend its supply agreement with Nike. Could Procter & Gamble (NYSE:PG) or Mattel (NYSE:MAT) hold out on Wal-Mart (NYSE:WMT) and make such a detrimental impact? No way. Without distribution through the world's largest retailer, those firms would definitely suffer. That's why specialty retailing carries additional risk. Nike's brand is powerful enough to put a retail chain out of business.
Should Foot Locker be concerned about this possibility? We know about the disagreements between Nike and Foot Locker in the past over product pricing and selection. So, Foot Locker CEO Matthew Serra's comment on the Footstar acquisitions was interesting. He said, "The agreed-upon purchase of the Footaction stores is in line with our previously stated strategic priorities, including the acquisition of compatible athletic footwear and apparel retail companies." In other words, of course Foot Locker's concerned! It jumped at the opportunity to increase its size and scale in order to have a stronger seat at the negotiating table with Nike next time.
Nike and Foot Locker depend on each other. Foot Locker is Nike's biggest customer, and Nike supplies Foot Locker's best-selling products. Both companies are fighting for as much of the consumer dollar as possible. Thus, they are playing a zero-sum game -- i.e., for every winner, there is a loser. Foot Locker has made its play and punched the chess clock. It's your move, Nike.
How much negotiating power has Foot Locker really gained? Talk about it with other Fools on our Nike discussion board.
Fool contributor David Meier wears Nike soccer cleats, hits Nike golf balls, and rides with Nike cycling gear. Fortunately, he eats his own cooking and owns Nike stock, too.
