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With 38% of total sales, the United States represents Nike's largest market. Europe is a distant second at 29%; despite the overall difference in sales, Europe buys nearly as much apparel as does the United States. With 38% of total sales, the United States represents Nike's largest market. Europe is a distant second at 29%; despite the overall difference in sales, Europe buys nearly as much apparel as does the United States.
-====First Quarter 2008==== 
-An 11% rise in revenue puts Nike off to a strong start in 2008. According to earnings releases, while some of this growth is attributable to positive shifts in currency exchange rates, especially in the Europe/Middle East/Africa (EMEA) region, most of it still comes from solid sales growth, with first quarter earnings up 51% from 2007. (Footwear in the Asia/Pacific region was saw particularly impressive growth, at 25%.) Worldwide futures orders have also risen 11.5%, the Americas leading the sales regions with a 20% increase, and EMEA and Asia/Pacific close behind at 17%. In the US, however, futures orders increased only 3%, while apparel and equipment revenues actually decreased 1%, marking a continued trend of sluggish domestic growth which Nike is striving to offset by continued overseas expansion. 

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Nike is the world leader in sales of athletic footwear and apparel, athletic equipment, and non-athletic sneakers; in 2007, revenues totaled over $16 billion. While Nike's sales are spread throughout the world, its two largest sales areas remain the United States and EMEA (Europe, Middle East, Africa), accounting for 37% and 29% of 2007 revenue, respectively. Still, diversification is increasing and Nike's dependency on these core sales regions is down significantly from 2006, when it was 44% and 33%, respectively. Earnings from the first quarter of FY2008 (see below) continue this trend of increased regional revenue diversification.

Nike distributes its products through bulk and retail channels. It sells shoes at a wholesale discount to large vendors like Foot Locker, but increasingly it has begun investing in its own retail stores. Some of these are generic Nike stores, but others are concept stores like the Nike Goddess store, which sells only women's athletic equipment.

Nike aims to invest 11%-12% of revenue in marketing. This expense helps promote strong brands and maintain high product recognition. The marketing takes the form of traditional television and print advertisement, but especially focuses on celebrity athlete endorsements; Nike sponsors marquee athletes in basketball, golf, soccer, and tennis. The endorsements complement an investment in strong brands: Air Force One and Air Jordan remain among the strongest product lines in the United States.

Recently Nike has begun to move into the emerging casual sneaker market. Nike has historically focused on high-performance athletic equipment, eschewing the non-athletic customer. But the low-performance market in the US has seen growth relative to the fashion and athletic footwear markets. Just as important, Nike has seen a significant amount of revenue growth for its sales of low-performance shoes though it affilate Converse, which grew 29% from FY 2007 to 2008 due to significant growth in emerging markets such as Brazil, China, and Russia.[1]

Business Operation

Nike earns revenue through the sale of athletic footwear, which makes up 53% of its revenue, as well as apparel (28%), equipment (13%), and non-athletic brands (6%). Nike sells its products directly in its own stores, and it wholesales its products to retailers like Footlocker and Dick's Sporting Goods. Footlocker is the largest distributor of Nike products in the US and globally, providing 10% of all Nike sales. Nike's athletic brand is segmented into seven product categories: basketball, running, soccer, women's, men's training and fitness, sports culture, and other. Running, basketball, and women's are the largest three categories, with 26%, 20%, and 18% of total revenue, respectively.

Nike sells to five principal markets: the United States; Europe, Middle East, and Africa; Asia-Pacific; and the rest of the Americas. The non-athletic lines include Converse and Cole Haan. The following table breaks down Nike's revenue by location and product type.

Nike Revenue, 2006 data $millions United States Europe, Middle East, Africa Asia-Pacific Americas Non-athletic Total
Footwear3,832.20 2,454.30 1,044.10635.3007,965.90
Apparel1,591.60 1,559.00 815.60 201.80 0 4,168.00
Equipment 298.70 313.30 194.1067.800 873.90
Other 0 0 0 01,947.101,947.10
Total5,722.50 4326.60 2,053.80904.901947.10 14,954.90

With 38% of total sales, the United States represents Nike's largest market. Europe is a distant second at 29%; despite the overall difference in sales, Europe buys nearly as much apparel as does the United States.


Retail Stores

Nike has been pushing the development of its own stores, which allow the company to sell at retail prices rather than wholesale ones. Producers and distributors jointly earn a profit per shoe in the area of 12%, retailers earn a profit of 13%. By selling through its own retail stores, Nike is able to capture both streams of revenue of 25%.

Nike Retail Locations 2004 2005 2006 %Change 04-06
Factory Outlets204206 193 -5.70%
Nike Stores719 52 86.54%
Niketown Stores 1514 14-7.14%
Employee Stores 4 4 4 0%
Non-athletic stores 100 131 155 35.48%
Total 330 374 41821.05%

Nike has opened 88 new stores throughout the world in the last two years, for a 21% increase. This change obscures the fact that Nike has closed factory stores and Niketown stores in favor of non-athletic stores and Nike Stores, which sell at retail prices. The growth of non-athletic stores also reflects the heightened demand for low-performance footwear, discussed below.

Branding and Product Lines

Some of Nike stores embody a particular concept. For example, Nike recently opened a Goddess store with the intention of promoting its line of women's athletic products. Concept stores serve as retail locations and branding devices, because when the Goddess store begins selling female shoes, other Nike carriers are quick to pick up the lines.

Thus new product innovation underlies some of Nike's expansion. Nike has traditionally been a leader in shoe design and branding. Its Air Force One and Air Jordan lines remain among the most popular, ever, and Nike is quick to capitalize on its success. In 2006 Nike released the AirMax360, a remake of the 1987 hit shoe, AirMax. In the same year, Nike launched its Nike+ brand, a line of shoes which incorporate iPod technology. Because the shoe comes with an embedded technology, it can track a runner's time, pace, and caloric consumption. Nike's product lines blend successful branding with an eye towards future innovation.

In March, Nike announced a partnership with Payless to sell a high-tech, low-cost running shoe featuring a honeycomb gel that compresses on impact. The shoe marks a move into new territory for Nike, because it will be distributed in PayLess’s low-cost outlets.

Nike's branding includes endorsements from many athletes in all sports as well as international sporting events. Some of the most prominent athletes to wear Nike are Michael Jordan and Lebron James in basketball, Tiger Woods in Golf, Ronaldinho in soccer, Roger Federer in tennis, and Lance Armstrong in cycling. Nike sponsored the 2006 World Cup and will sponsor the 2008 Beijing Olympics.

Scale, Advertising, Profits

With nearly $15 billion in revenue in 2006, Nike was the industry leader. Since 2001, Nike has captured about 35% of the global market. It is largest in the US, with recent market shares in the region of 38%. Nike's scale advantage principally manifests itself in low advertising costs. Scale reduces advertising costs because large brands are inherently recognizable, and because, with a large distribution network, a dollar spent on advertising improves sales in many stores.

The advertising advantage has not turned into a profit advantage. In 2006, Nike spent $1.74 billion on advertising, 11.6% of revenue. This advertising in part led to Nike's operating margin of 8.80%. Nike is not the most profitable company in the footwear industry; that distinction belongs to Puma, with a margin of 9.55%, on about $4.1 in revenue. To obtain such a margin, however, Puma had to put 15.23% of its revenue into advertising. In other words, despite substantially lower advertising costs, Nike is not as profitable as Puma. This disadvantage underscores the importance of other profitability-enhancing ventures, such as the move towards increased retail distribution.

Trends and Forces

Movement towards low-performance footwear

In the last several years, there has been a growing demand for low-performance footwear in the United States and Europe. Low-performance footwear refers to sneakers not intended for athletic use. For Nike, the term includes its non-athletic brands like Converse, and also its sports culture brands. Although Airmax360 and Air Jordans are designed as basketball shoes, they have such a cultural significance that they appeal to casual wearers and athletes alike. The following graphic demonstrates this trend in the United States.

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As the graphic shows, fashion and high-end shoe sales have dominated the footwear industry in the United States in the last few years. Over that time, however, the share of low-performance shoes has increased by a quarter, from 12% to 15% in the first half of 2006.

Despite the longstanding popularity of Converse, Nike has been a relative latecomer to the low-performance market, with an historic concentration in high-performance athletic equipment. In 2002, Nike acquired the sneaker maker Hurley, and in 2003, it bought Converse. Together the two rang up $535 million in sales in 2005, adding to the $550 million of Cole Haan, which Nike acquired in 1988. The three brands represent the main thrust of Nike's movement into the low-performance market, although Nike's sneakers have acquired enough of a cultural cache that they are no longer exclusively used for athletic purposes.

Global Market Slowdown

The global market for athletic footwear has grown in the last several years, but the market is cooling down with a reduced growth rate.

$m Global Market 2003 2004 2005
Athletic Footwear18,467 22,000 24,169
Athletic Apparel43,931 47,823 49,535
Total 62,398 69,82373,704

From 2003 to 2004, the market for athletic apparel and footwear grew by almost $7.5 billion, 12%. Between 2004 and 2005, however, it grew by less than $4 billion; in percentage terms, the 6% growth was only half as high as growth a year earlier.

Europe: slow growth

Sales growth declined most significantly in the Europe/Middle East/Africa region, Nike's second largest sales area with 33% of revenue in 2006. In the United States, sales grew by 12%, and they grew by 8% in Asia-Pacific, but only 1% in Europe. The decline in sales is due in part to rising oil prices, which reduce disposable income. As income falls, customers are forced to buy less expensive shoes such as Nike's low-performance lines.

China: big boom

While the global and European athletic footwear market has been slowing down, the market for athletic footwear in China has grown at double-digit rates since 2000. With 400 million young people ready to buy shoes, the high growth rate translates into high sales as well. In 2004 the Chinese athletic market was $3 billion--one tenth the size of the market in the US--but growing quickly. The most popular sports in China are basketball and soccer, and Nike has several Chinese athletes endorsed in those areas. Moreover Nike is sponsoring the 2008 Beijing Olympics and endorses 21 of the 26 national teams.

High growth in China means high sales for Nike, but they may also forebode a deteriorating margin. Nike's production is concentrated in Asia, especially in China, which manufactures 35% of all Nike's footwear. High growth in China is pushing up wages, with some reporting a 10% yearly increase.[1] Overall, average hourly compensation in China has risen from 4.73 renminibi/hour in 2002 to 5.51 in 2004 ($0.57/hour to $0.67), a 17.5% increase in a three year period. [2]

Competition


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Market Share

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The following figure breaks down the $24.2 billion footwear market by its largest producers in 2006.

Nike was the clear market leader, with 37% of the market. Looking at the market in the United States, Europe, or Asia reveals a similar picture: Nike's market share in these regions hovers around 36%, followed by Adidas AG (ADDYY) at 20%, with Puma and New Balance as distant third and fourth.

The global market for athletic footwear is concentrated, with the top four firms controlling 71%. By contrast, the market for athletic apparel is both larger--$49.5 billion in 2005--and more diffuse; the top five firms control only 27% of the market. Nike is, however, also the global leader in apparel, with a 9% market share.

Vitals

Athletic Companies, 2006 data Revenue Net Income Operating Margin Advertising Expenditure Advertising by % Retail Stores
Nike14955 13158.8%174011.6%418
Adidas €15126€1322 8.7%€130112.9%---
Puma 4133 395 9.55% 629.415.2%91
Asics1425 115 8.08% ---------

The dashes indicate missing data; in the case of New Balance, no new data will become available since the company is not publicly traded and therefore does not release financial statements. Note that the table compares total company revenue, not only revenue from footwear and athletic apparel; this explains why Adidas's revenue exceeds Nike's, despite Nike's greater market share. The above statistics provide an overview of performance, but they fail to capture the specifics. One important measure is inventory days, which reflects how long shoes sit on the shelf before they are sold.

Nike's inventory days for 1999-2004 were consistently lower than Adidas's or Puma's, but higher than Reebok's in every year since 1999, however. (In 2005, Adidas acquired Reebok to form Adidas Group.) Nike's low inventory days in part reflect its emphasis on retailing: factory outlet stores allow Nike to sell products that have been piling up on the shelves at a low price. Although Nike has closed some factory outlets since 2004, they still represent almost half of all Nike's retail locations.

In addition to Nike's footwear competitors, the company also competes with other makers of outdoor apparel, such as V.F. Corporation, Columbia Sportswear and Quicksilver.

References

  1. 4Q FY2008 Nike Earnings Call
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