Previous Submission

Nike X Amazon: To Partner, Or Not To Partner

Next Submission

Nike has a classic frienemy problem with Amazon, but to reach its $50B revenue target Nike must expand its Amazon partnership

If you asked Nike’s motto whether to sell its products on Amazon or not, you’d get a straightforward answer: Just Do It. However, the question is not so simple. With offline retail struggling, especially in North America (Nike’s largest source of revenue), Nike was under immense pressure to partner with Amazon in a more serious capacity. Yet, doing so could dilute Nike’s brand, reduce its control of how its presented compared to its owned / partner retail outlets, and potentially give Amazon the learnings it needs to create its own fashion brands to take share away from Nike. Despite the risks, this post will argue that Nike made the right choice to sell on Amazon, and indeed needs to accelerate its presence on the site.

 

Retail Context – The Death of a Distribution Channel

Americana has long been associated with retail – from the mom and pop shop selling their wares, to the massive Mall of America selling everything under the sun. Yet in 2017, retail bankruptcies hit a six-year high at 50 retailers, including Toys R Us, only surpassed recently by the 59 bankruptcies in 2011.[i] Additionally, “13.5% of Moody’s retail and apparel portfolio is distressed, compared to 16% during the Great Recession. Debt maturities are also headed toward record levels over the next five years and retailers are filing for bankruptcy at a record rate.”[ii] Specific to sports retail, the bankruptcy of Sports Authority, and the closure of its 450 stores, rocked the industry in May 2016.[iii] At the time, some investors hoped that the gap would be filled by other offline retailers, such as Dick’s and Foot Locker. Yet, as the above bankruptcy numbers in 2017 show, that doesn’t appear to be the case.

 

Amazon Context – A Growing Presence in “Fashion”

As Amazon continues its push for retail, and possibly world, domination, fashion has been directly in its crosshairs. Note the timeline of the following developments:

  • April 26th, 2017: Amazon launched Echo Look, an advanced Echo device with a built in camera, on an invitation only basis. According to a Time article analyzing the launch, “Echo Look owners will be able to create their own look books and get a 360-degree view of outfits recorded on video. Amazon also uses a combination of machine learning and expert input to provide a second opinion on clothing picks through a feature called Style Check. Submit two photos, one of each outfit, and the app will rate them based on their fit, color, styling, and current trends.”[iv]
  • June 20th, 2017: Amazon launched Prime Wardrobe, which allows consumers to try on clothes purchased on Amazon with no requirement to buy them. If customers select at least three Prime Wardrobe eligible items, Amazon will ship the items in a box with a prepaid return label; customers pay for only what they keep.

Notable, although not directly related to fashion, was Amazon’s acquisition of Whole Foods on June 16th, 2017, showing that Amazon was moving meaningfully into the offline space as well.

 

Nike Context – The Struggle is Real

Through June of 2017, the prospects for revenue growth in North America were looking bleak. The bankruptcies and store closures mentioned above were flowing through to Nike’s numbers – after growing an average of 13% from 2012 to 2015, Nike’s North America revenues only grew 7% in 2016. This growth weakness was broad based, as footwear had declined from its previous three year average of 13% to 9% in 2016, apparel declined from 14% to 8%, and equipment from 11% to -13%.[v]

From a competitive standpoint, the market looked challenged – Adidas was crushing the shoe game with its Ultraboost, and its stock had climbed from 56.42 Euros on January 2nd, 2015 to 174.05 Euros on June 16th, 2017 for a return of 208%. Over the same period, Nike had gone from $47.52 to $51.10, for a return of 7%. Notably, Adidas was also a first mover with Amazon, starting a partnership in 2014 and obtaining a “store-in-store” presence in which Adidas items had a customized UI with a deeper brand exposure.

 

Nike had already begun to take action to combat the North American challenges – they announced they would lay off 3% of their workforce on June 15th, 2017 (three weeks into my internship) and reorganize their corporate structure. Still, reducing cost would not be enough – Nike had to decide whether to expand its presence on Amazon or not.

 

Nike X Amazon – The Decision

On June 21st, 2017, a Goldman Sachs analyst report came out stating that Nike planned to officially sell its good on Amazon. At the time, Nike goods were sold on Amazon through third-party sellers. Practically, this meant that people were buying Nike goods and reselling them on Amazon; Nike had no control over how the brand was presented and faced risk that counterfeit products would be sold. In the report, Goldman estimated that by increasing the strength of the brand, diversifying distribution away from the dying offline retail market, and controlling counterfeits, Nike could increase its revenues by $300M – $500M.[vi] Nike’s stock increased 2% on the news, while Dick’s and other offline retailer stocks fell by around 7%.[vii]

In an earnings call on June 29th, 2017, Nike confirmed the partnership with Amazon. They beat earnings expectations for the quarter, and their stock soared by 7% after hours, largely driven by the Amazon partnership. Clearly, investors valued the increased brand control and distribution diversification Amazon could offer.

 

Managing the Partnership – A Delicate Balance

Nike’s initial launch, and indeed how it still appears to be today, was for a limited selection of non-premier product. This includes basic workout gear for men and women, some equipment, and apparently lots of socks. Still, Amazon’s classic response a la X Fire Paintball did not take long to materialize: Amazon launched Peak Velocity, a sports apparel brand, in November of 2017 as an apparent low-end disruption to Nike.[viii]

 

Despite this classic Amazonian move, Nike must lean in to the partnership. Offline retail is only going to get more challenged, as stores continue to close and Amazon continues to add Prime Members (breaking 100M recently). Nike should work to make the following changes to its Amazon partnership as it evolves its pilot:

 

  • Create a “store-in-store” model, such as the one Adidas has (Under Armour notably does not have one yet). This special landing page for Nike gear would add brand association on the website.
  • Prevent competitor items, and definitely Amazon-owned competitor items, from showing up on Nike’s product pages, in the suggested items of “customers also searched for” areas.
  • Negotiate for goods purchased on Amazon.com to be shipped to or picked up in Nike stores, increasing brand attribution.
  • Negotiate for a Nike-branded insert in each Nike package purchased on Amazon.com.
  • Continue to advantage owned distribution points – online and offline – with premium product; the Amazon product line should be expanded, but the hottest Jordans or newest clothing should never appear.

 

Conclusion

Nike has set an ambitious goal of $50B in global revenue by 2020, and analysts are skeptical this will be achieved.[ix] In order to get close to this goal, they must offset the declines in traditional retail with online growth in the US and continued on- and offline growth internationally. Online growth must be driven by Nike.com wherever possible, but the size and scale of Amazon is too big to ignore. Nike is still the world’s most valuable retail brand, and as such must use its negotiating power to create a partnership with Amazon that increases distribution while protecting its brand.[x] If it fails to do so, $50B will be a dream of the past.

[i] https://247wallst.com/retail/2017/12/20/more-and-more-retailers-filed-for-bankruptcy-in-2017/

[ii] https://www.retaildive.com/news/retail-bankruptcies-2017/446086/

[iii] http://money.cnn.com/2016/05/18/news/companies/sports-authority-closing/index.html?iid=EL

[iv] http://time.com/4755982/amazon-echo-look-camera-release/

[v] NIKE SEC Filings

[vi] https://www.forbes.com/sites/greatspeculations/2017/06/23/a-closer-look-at-the-amazon-nike-partnership/#35c6eab8f795

[vii] https://www.reuters.com/article/us-nike-strategy-amazon-com/nike-close-to-selling-directly-on-amazon-goldman-sachs-idUSKBN19C21C

[viii] http://www.businessinsider.com/amazon-sportswear-brand-peak-velocity-2017-11

[ix] https://seekingalpha.com/article/3837606-nikes-50-billion-challenge-can-just

[x] https://www.highsnobiety.com/p/nike-most-valuable-apparel-brand-2018/

6 thoughts on “Nike X Amazon: To Partner, Or Not To Partner

  1. Thanks for a great post, Ross!

    While I was reading this, I was continuously reminded of the paintball company we studied – only to see it mentioned smartly towards the end! Some felt X Fire couldn’t afford to ignore Amazon, but others feared that Amazon would gouge their profits. It will be interesting to see if Nike has any strategies for maintain profits even while selling on Amazon. Hopefully, the margins on $10k sneakers will protect them for some time!

    I particularly liked the idea of the Nike-Branded insert in the box. One could pitch an idea of even Nike branded tape on the outside box, though Amazon would be unlikely to go for it. Would probably be too much of a hassle for their operations, and then other partners would want custom packaging as well.

    It will be interesting to watch Amazon’s march towards global domination, as you put it. I hadn’t heard of Prime Wardrobe – will be using that this weekend!

    1. Thanks Jay – love the idea re: Nike tape (or even Nike orange shoe boxes shipped by Amazon), but agree Mr. Bezos wouldn’t go for that..

  2. Thank you for the post Ross. After our Tower Paddleboards class I’ve really been wondering when it makes sense to pursue and how to structure partnerships with Amazon. Firstly, I think for strong brands that have high customer awareness, there is a benefit to using Amazon as they gain access to the large customer base while also being well-placed to stand out from the pack. Secondly, unlike Tower Paddleboards, they own their production so there is no risk of disintermediation. While Amazon might very well try to backward-engineer Nike products, Nike is far ahead in terms of its IP re: developing high quality athletic gear. With that said, from a ‘how to structure’ perspective, in the ECommerce class, we actually talked about a similar approach to the one Nike seems to have taken, i.e. offer accessories an non-premium items on Amazon but keep control of premium items. This also allows Nike to manage the risk of being copied. In addition to what you’ve described above, (and I’m not sure if this is possible), if Nike could also include links back to its own website in the Amazon shop-in-shop that would also be another way to direct traffic to purchase higher priced items. So I agree that Nike could use this partnership to their advantage and I’m definitely interested in seeing how this partnership progresses.

    1. Thanks Crystal – smart to link back to their own website.. they should try it and see if they get caught by Amazon!

  3. Thank you Ross!
    While I was reading the post, I wanted to find a way for Nike to increase the on-line presence without the need for Amazon. But with Amazon’s customer base and logistic capabilities, is there a way for a company like Nike to survive without Amazon? Maybe partnering is the correct way to do it now, but just as Amazon think on ways to depend less on Nike, Nike should think on ways to depend less on Amazon.
    For example, I wonder if, by providing personalized shoes to customers, Nike could offer unique products in it’s off- line and on-line stores, creating customer loyalty. Maybe Nike should start thinking on ways to collect and use customer data, and start thinking on a digital transformation beyond e-commerce, a transformation involving the entire supply chain (from product development to product delivery to customers) as a way to compete in the new digital world.

    1. Thanks D – this is actually something Nike has underway with Nike ID for customization, and Express Lane for a more fluid and adaptive supply chain. However, I don’t think they are there yet with data integration earlier in the supply chain, and I agree that will be key to success.

Leave a comment