Nike: An Epic Saga of Value

Destruction
Massimo Giunco

CMO/Brand Strategist/Human Being

Published Jul 28, 2024

A month ago. June 28th, 2024. Nike Q2 24 financial results. 25bn of

market cap lost in a day (70 in 9 months). 130 million shares exchanged
in the stock market (13 times the avg number of daily transactions). The
lowest share price since 2018, - 32% since the beginning of 2024.
It wasn’t a Wall Street session. It was the judgement day for Nike.
The story started on January 13th, 2020, when John Donahue became
CEO of Nike, replacing Mark Parker. Together with Heidi O’Neill, who
became President of Consumer, Product and Brand, he began
immediately to plan the transformation of the company.
A few months later, after hist first tour around the Nike world, the CEO
announced – via email – his decisions (using the formula “dear Nike
colleagues, this is what you asked for…”):
1) Nike will eliminate categories from the organization (brand, product
development and sales)
2) Nike will become a DTC led company, ending the wholesale
leadership.
3) Nike will change its marketing model, centralizing it and making it
data driven and digitally led.

To implement all of that, the CEO also announced a major reorganization

of the company which took place in two waves from August 2020 until
March 2021 (US first, the rest of the world after).
Things seemed to go well at the beginning. Due to the pandemic and the
objective challenges of the traditional Brick & Mortar business, the
business operated by Nike Direct (the business unit in charge of DTC) was
flying and justifying the important strategic decisions of the CEO. Then,
once normality came back, things slowly but regularly, quarter by quarter,
showed that the separation line between being ambitious or being wrong
was very thin.
Let’s go through the impact of the three key decisions, one by one.

Elimination of categories
The legend says that the decision was advised by McKinsey and
embraced by the CEO and the President of Consumer, Product and Brand
with great enthusiasm. Hard to know if this is true or not. Reasons behind
it were mainly the duplication of certain operations in the matrix of Nike,
the possibility to streamline the process and therefore optimize the cost
of the organization and above all, the confidence that a data driven
insight model (the famous “flywheel”) would have easily replaced the
knowledge of the category led product and brand creation process. In 6
months, hundreds of colleagues were fired and together with them Nike
lost a solid process and thousands of years of experience and expertise in
running, football, basketball, fitness, training, sportwear, etc., built in
decades of footwear leadership (and apparel too). Product engine
became gender led: women, men, and kids (like Zara, GAP, H&M or any
other generic fashion brand).
If today, we talk about lack of innovation and energy in product creation,
well, we know exactly what originated all of that.
Categories were reintroduced in Nike with the reorg. announced by the
CEO in December 2023, after the release of Q2 24 disappointing results.
By the way, they are now called “Fields of Play”, name that Nike was using
20 years ago, and not “categories” because otherwise someone might
think the CEO and the President of the Brand made a mistake…

End of Wholesale leadership

Before the beginning of FY21 (4 years ago), the CEO and the President of
the Brand gave clear directions to their direct reports about the
development and the composition of the new distribution construct by
2025: decline wholesale to become the second source of revenues; grow
Nike Direct business heavily to transform it in the first and major source
of company revenues; and lead with [Link] (an astounding 24%
CAGR over the following 3 fiscal years…)
End of discussion. “This is what we need to do. And this is what we will
do”. For the first time in Nike history, long term vision wasn’t about
sustainable growth anymore driven by Products, Brand and Marketplace
leadership. It was about the supremacy of DTC, led by digital. Period.
At that moment, people couldn’t exactly understand the impact of it, and
if it was confidence, overconfidence, megalomania, genius, madness or
just a mistake.

The marginalization of the wholesale business was very easy to achieve.

Nike just began to terminate hundreds of agreements with many local
business partners or reduced the business they had with them (selling in
less products, and/or diverting premium products to Nike Direct). And
they did it globally, showing the middle finger to partners Nike had
worked together for decades in any part of the globe and brutally
downsizing the number of people working for the sales teams in local
country teams.
More challenging was the growth of the “mono-brand” distribution and
the digital one, especially at the pace requested by the CEO and the
President of the Brand.
Clearly, one important support came from the brand investments. The
marketing org. dramatically changed its demand creation model and
pumped – over the years – billions of dollars into performance
marketing/programmatic adv to buy (and the word “buy” is the proper
one, otherwise I would have used “earn”) a fast-growing traffic to the
ecommerce platform (we will talk about that later).
After a few quarters of good results (as I said, inflated by the long tail of
the pandemic and the slow resurrection of the B&M business), things
started to take unexpected directions. Among them:
a) Nike – that had been a wholesale business company since ever,
working on a well- established “futures” system – did not have a clear
knowledge and discipline to manage the shift operationally. Magically
(well, not so magically), inventory started to blow up, as all the data
driven predictions (the “flywheel” …) were simply inconclusive and the
supply chain broke up. As announced by the quarterly earnings releases,
the inventory level on May 31st, 2021, was 6.5bn $. On May 31st, 2022, it
was 8.5bn $. On November 30th, 2022, it reached 10bn $. Nike didn’t
know anymore what to produce, when to produce, where to ship. Action
plans to solve the over-inventory issues planted the seed of margin
erosion, as Nike started to discount more and more on its own channels –
especially [Link] (we will talk later about it).
b) Consumers are not so elastic as some business leaders think or hope.
And consumers are not so loyal as some business leaders think or hope.
So, what happened? Simple. Many consumers - mainly occasional buyers
- did not follow Nike (surprise, surprise) but continued shopping where
they were shopping before the decision of the CEO and the President of
the Brand. So, once they could not find Nike sneakers in “their” stores –
because Nike wasn’t serving those stores any longer -, they simply opted
for other brands.
c) This “unexpected” consumer behavior had also another
consequence for Nike and the sporting-goods industry. Until late 2010s,
Nike had been on a total offense mode (being #1 in every market, in
every category, in every product BU, basically in every dimension), a sort
of military occupation of the marketplace and a huge problem for
competitors that did not know how to react under such a domination.
The strategic focus was only one: win anywhere. The new strategy
determined the end of the marketplace occupation. Nike opened
unexpected spaces to competitors, small, medium, or large brands (with
exception of the company based in Herzogenaurach, that – as they
usually do - copied and pasted the Nike strategy and executed it in a
milder format). The retailers that were abandoned or downsized by Nike
started offering shelves and square meters to all the other brands in the
arena. And suddenly, certain brands started gaining market share,
attacking Nike especially in those specialized categories where the
company founded by Phil Knight and Bill Bowerman was once leader (i.e.,
running, football, fitness, training and, in part, lifestyle).
d) The growing focus on e-commerce – together with the “unexpected”
consumer behavior, the supply chain problems, and the lack of product
innovation – gave an additional surprise to the Nike top management.
One of the empiric laws of business says that online, the main lever of
competition is “price” (as the organic consumer funnel is built on price
comparison). The proverbial ability of Nike to leverage the power of the
brand to sell sneakers at 200$ began to be threatened by the online
appetite for discounts and the search for a definitive solution to the
inventory issue. Gross margin – because of that – instead of growing due
to the growth of DTC business, showed a rapid decline due to a never-
ending promotional attitude on [Link] (Black Friday was a day, then
became a week, then became a month, then was attached to boxing day
and to the end of the year sales. And more and more, end of season sale,
mid-season sale, member sale, friends & family sale). Results? Gross
margin of FY22, 46%. Gross margin of FY 23: 43.5%. 250bp of margin
erosion in 4 quarters…

All unexpected, isn’t it? The CEO of Nike doesn’t come from the industry.
So, probably he underestimated consumer behavior and the logic behind
the marketplace mechanisms of the sport sneakers and apparel
distribution. Or wasn’t aware of them. At the end, he is a poorly advised
“data driven guy”, whatever it means. It is more difficult to understand
why the President of the Consumer, Product and Brand, a veteran of the
industry, one of the creators of the Women’s category in Nike, a
professional with an immense knowledge of the company and the
business, approved and endorsed all of this. Maybe, excess of confidence.
Or pure and simple miscalculations… hard to know.
The truth is that together, John and Heidi created a cannibal ecosystem
that ate brand equity, product equity, gross margin, market share,
demand creation budget and consumer connectivity. In just three years…

Lead with Digital Marketing

Nike has been built for 50 years on a very simple foundation: brand,
product, and marketplace. The DC Investment model, since Nike became
a public company, has been always the same: invest at least one tenth of
the revenues in demand creation and sports marketing. The brand model
has been very simple as well: focus on innovation and inspiration,
creativity and storytelling based on athletes-products synergy, leveraging
the power of the emotions that sport can create, trying to inspire a
growing number of athletes* (*if you have a body, you are an athlete) to
play sport. That’s what made Nike the Nike we used to know, love,
admire, professionally and emotionally.
What happened in 2020? Well, the brand team shifted from brand
marketing to digital marketing and from brand enhancing to sales
activation. All in. Because of that, the CMO of that time made a few epic
moves:
a) shift from CREATE DEMAND to SERVE AND RETAIN DEMAND, that
meant that most of the investment were directed to those who were
already Nike consumers (or “members”).
b) massive growth of programmatic adv investment (as of 2021, to
drive traffic to [Link], Nike started investing in programmatic adv and
performance marketing the double or more of the share of resources
usually invested in the other brand activities). For sure, the former CMO
was ignoring the growing academic literature around the inefficiencies of
investment in performance marketing/programmatic advertising, due to
frauds, rising costs of mediators and declining consumer response to
those activities. Things that were suggesting other large B2C companies -
like Unilever and P&G - to reduce those kind of DC investments in the
same exact period… Because of that, Nike invested a material amount of
dollars (billions) into something that was less effective but easier to be
measured vs something that was more effective but less easy to be
measured. In conclusion: an impressive waste of money.
c) elevation of Brand Design and demotion of Brand Communication.
Basically, style over breakthrough creativity. To feed the digital marketing
ecosystem, one of the historic functions of the marketing team (brand
communications) was “de facto” absorbed and marginalized by the brand
design team, which took the leadership in marketing content production
(together with the mar-tech “scientists”). Nike didn’t need brand creativity
anymore, just a polished and never stopping supply chain of branded
stuff.
d) explosion of the centrally driven production of marketing contents to
serve all the digital owned channels and significant reduction of locally
driven contents and brand building contents. On top of that, massive
downsize of local marketing/creative teams and local investments, as DC
was supposed to fuel e-commerce and digital commerce, not local
markets.
e) creation of the “membership” madness. Suddenly, Nike marketing
became a ubiquitous conversation platform for “members” only and
loyalty became the key driver of any brand initiative plan (it seems the
madness have been mitigated over the last 12 months…)

Obviously, the former CMO had decided to ignore “How Brands Grow” by
Byron Sharp, Professor of Marketing Science, Director of the Ehrenberg-
Bass Institute, University of South Australia. Otherwise, he would have
known that: 1) if you focus on existing consumers, you won’t grow.
Eventually, your business will shrink (as it is “surprisingly” happening right
now). 2) Loyalty is not a growth driver. 3) Loyalty is a function of
penetration. If you grow market penetration and market share, you grow
loyalty (and usually revenues). 4) If you try to grow only loyalty (and LTV)
of existing consumers (spending an enormous amount of money and
time to get something that is very difficult and expensive to achieve), you
don’t grow penetration and market share (and therefore revenues). As
simple as that…
He made “[Link]” the center of everything and diverted focus and
dollars to it. Due to all of that, Nike hasn’t made a history making brand
campaign since 2018, as the Brand organization had to become a huge
sales activation machine. An example? The infamous “editorial strategy” –
you can see the effects of it if you visit its archive, the Nike channel on
YouTube or any Nike account on Instagram – generated a regurgitation
of thousands of micro-useless-insignificant contents, costly and mostly
ineffective, all produced to feed the bulimic digital ecosystem, aimed to
drive traffic to a platform that converts a tiny (and when I say tiny, I mean
really tiny…) fraction of consumers who arrive there and disappoints (or
ignores) all the others

Conclusion
As Matt Powell – one of the most qualified experts and authorities of the
Sporting Goods Industry - said, this is the history of a self-inflicted
damage. What happened on June 28th at Wall Street is just the result of
what was decided four years ago. And for sure, this is not even the last
episode. We don’t know what would have happened if certain decisions
had not been made and implemented. And we don’t even know why
those decisions were made. What we know is what we saw. And what we
saw is an epic saga of value destruction, harming Nike’s brand mental
and physical availability, in just 3 years, made by a team of executives led
by John Donahue and Heidi O’Neill.
However, there is still hope.
At the end, this is mainly a Wall Street “crisis”. Investors are disappointed
and mad at the company leaders who have wasted un unbelievable
amount of financial value for nothing in return and destroyed the
reputation of Nike as growth company.
At the same time, a huge number of consumers is still there, thinking that
“the swoosh” is somewhat cool. Nike is still one of the most famous and
popular brands in the world. Nike is still the market leader of its industry.
Nike still makes $5bn of earnings before interests and taxes every year
($5.7bn in FY24) and doesn’t have a dollar of debt. Nike has a history of
unbelievable comebacks.
But…
 It will take years (and a lot of investments – I mean, it won’t be a free
ride) to:
- re-establish the lost leadership in product creation (they lost the
competence, not only the focus).
- re-gain the ability to influence and drive the marketplace, occupied
now by new, agile, and profitable brands (without considering that many
wholesale partners are angry at Nike after being abandoned and in some
cases marginalized and/or insulted).
- detox the “swoosh” from the performance marketing addictive
abuse.
- become again a beacon brand (many brilliant marketers were
“kindly” invited to leave over the last 4 years, those left are masters of
sales activations, local teams have been canceled or downsized, the
“brand magic” competence is gone and needs to be rebuilt… and it won’t
happen in a quarter).
In 2008, year of the Olympic Games in Beijing, as part of the brand
campaign for the Olympics, Nike enchanted the planet with the “Human
Race”, a massive global event and campaign, from LA to Rio, from Rome
to Seoul, from Tokyo to Istanbul, from Paris to London, that made the
world run. In 2024, year of the Olympic Games in Paris, as part of the
brand campaign for the Olympics, Nike EMEA has just launched “Defy the
Distance: Nike Running Challenge”, a sort of digital activation to let
consumers win a 20% discount on full price products if they run 5k. Easy
to understand why – while the potential of brand greatness is all there –
it is going to be a very long (and expensive) journey to achieve it again…

The CEO and the President of Consumer, Product and Brand – against all
odds - are still serving the company, working on an action plan to find
solutions to the problems they created. And that can be an issue, if not
“the” issue.
In my humble opinion, the two executives are more a problem than an
opportunity in the quest to find the lost glory. Not necessarily for their
ability. Mainly for their credibility in the eyes of Wall Street, the
marketplace and – especially – the Nike people, the army of once
passionate and inspired employees, that today – after three
reorganizations in 7 years – struggle to believe the “new” narrative of
their mistaken leaders.
At the end, dear CEO and dear President of Consumer, Brand and
Product, winning isn't for everyone.

Massimo Giunco
CMO/Brand Strategist/Human Being