Who Can Challenge Nike at the Top of Its Game? | Top 15 Annual Report

Nike has never commanded a higher market cap — or faced a more complicated competitive landscape.

On the surface, 2015 looked like a relatively quiet year for Nike. Financially, the company did well: by January 31, 2016, its stock had risen 40.47% from the start of 2015, giving it a market cap of $105.61 billion and a place among the roughly 80 companies worldwide valued at over $100 billion.

But outside the specialist sports-industry press, most of the sneaker conversation in 2015 flowed toward Adidas's Yeezy and Stan Smith. On the social-media front, the fast-rising Under Armour — which had acquired three fitness apps and built a base of 150 million registered users and the world's largest store of user data — spent the year repeatedly signaling that sports digitization would be its defining priority.

Nike's most recent earnings ran through the second quarter of fiscal 2016. In the full 2015 fiscal year, its marketing budget was $3.2 billion. Josh Arnold, an analyst at the investment research site Seeking Alpha, argued that Nike needed a few "lessons": despite high gross margins, the company's spending was eye-watering — counting day-to-day operating costs, Nike's total outlay for the year reached $9.9 billion.

If you remember anything about Nike's past year, it's probably a handful of things: women's sports, the 30th anniversary of Jordan, and a run of campaigns built around running and the Nike Running Club.

Jordan, above all. QDaily covered its 30th-anniversary activations across six cities worldwide, and those campaigns were the fullest display of Nike's marketing firepower: the new Jordan flagship store in Chicago, inventive retail designs across major cities everywhere, Michael Jordan himself (who seemed to spend most of the year on airplanes), the roster of NBA players under the Jordan brand, and the online blitz around each new Jordan release — video games, social media, and the rest.

On the product side, setting aside the niche Tech Pack line, no new release came anywhere close to the cultural presence of Yeezy or Stan Smith.

Over the past three years, Nike's strong financials have come largely from high-margin products — the Flyknit line launched in 2012 and star-player shoes such as the Jordan and Kobe signatures. The Flyknit Lunar is now in its third generation, and Flyknit technology has spread across product lines from soccer cleats to running trainers. These shoes, priced at around 1,000 yuan, have become Nike's biggest revenue-growth engine. A few lifestyle lines, such as the Roshe Run and Air Max 1, also paid off in 2015.

But for Nike in 2015, none of this created value until it was paired with social and digital marketing. The company has never been more widely recognized than it is today — yet its rivals, and the competition it faces, have never been more complex or more varied.

Huang Xiangyan, Nike's former senior director of communications for Greater China, once described Nike's archetypal consumer to QDaily: 23 years old, young and fast. That demographic — or, more broadly, young consumers of that age — is what almost every large company craves. But only a handful of brands have actually become this group's choice, and Nike has, so far, held on to that spot.

A big part of the reason is that on top of having the right products, Nike knows how to talk to young people. In our earlier roundup of the sports industry, we compared Nike with its rivals on the digital front: it has the most complete e-commerce and digital-services platform in the business. Over the three years from 2010, Nike cut its U.S. television and print advertising spend by 40%; according to its latest earnings, sales through the official site jumped 50%.

Back in 2013, less than a year after Instagram launched, Nike had already rolled out a project on the platform called PHOTOiD, letting users design sneakers from their own Instagram photos. By 2015 it had become the most popular brand on Instagram, with multiple accounts totaling 33.9 million followers. @nike, @nikebasketball, @nikefootball, @nikewomen, @nikelab, and the rest built a global fan community — we all love posting a shot of our shoes on a run, and rallying hashtags like #runfree and #werundirty spread on their own and became the best brand advertising. Instagram even used @nikerunning as the example in its how-to videos for marketers, the gist being: "Do what they do and you can't go wrong."

You may have read our sports-brand technology review. Nike's Instagram success was no accident: the company knows exactly what each social platform is for. Beyond Instagram, on YouTube it wins with big-budget commercials starring athletes; on Weibo, timely posters — "China's women's football reaches the quarterfinals," "Liu Xiang retires" — still land right on time; and on WeChat, rather than copying other brands and treating the platform as one more content channel, Nike has focused on providing services, with NikeRunClub linking the last piece of NRC's Greater China ecosystem. On the final day of 2015, if you were an NRC member, you got a push: "Your runs through 2015" — a custom video Nike had made for you.

In August 2015, four months before Kobe Bryant's retirement, he came to Shanghai's Black Mamba Court for the second elimination round of Make It Count (《打出名堂》), Nike's basketball reality show. The thing to watch wasn't the MVP but the court itself: an interactive LED surface that dazzled fans in the darkened arena, tracing the path of every dribble in real time.

In December, when it came time to launch the second Kyrie Irving signature shoe, Nike held no press conference. Instead, it put a virtual billboard reading "Kyrie 2" inside the video game NBA 2K, while Irving played an online game against fans — streamed start to finish on Twitch. Behind that launch you can see a company with a clear read on where media is heading, and the discipline to act on it.

Among the world's big companies, perhaps only Disney and Apple match this kind of control over the consumer touchpoint. But the crucial difference is that Nike's market is genuinely fragmented — which is exactly why its competitive picture is so tangled.

One of the biggest differences between Nike and Adidas is that Nike rarely ties itself to anyone outside the world of athletes. Collaborations like the one with Sacai stay inside the niche Nike Lab line, and its brand ambassadors are, without exception, athletes. Adidas — the Originals line especially — is happy to stand alongside pop-culture stars. After Stan Smith went viral, Adidas's design director explained on several occasions how the brand had pushed the product to the front of street culture: the playbook leaned more on celebrities than on Adidas's own assets. For a sports company, that may be a future risk.

Under Armour shares Nike's strategy on this point — and is its number-one rival. Through three quarters of 2015 it held growth above 20%, and third-quarter net revenue topped $1 billion for the first time. In the United States, Under Armour holds a staggering 75% share of the professional athletic-apparel market it has always been strongest in.

Under Armour is steadily moving toward a full range of categories, and its fastest-growing profits come from footwear — a field where it is still just getting started. QDaily talked to customers at the Under Armour flagship in Shanghai; many of them were wearing Nike clothes and Air Jordans, or had just wandered over from the Nike flagship next door. Compared with Nike, packed to the rafters on the weekend, the Under Armour crowd looked more purposeful: young shoppers like Ni Songnan and He Shengdong had found the brand through watching the NBA and following Stephen Curry, and had come specifically to buy his signature shoe. Among gym-goers, Under Armour was the brand their trainer wore — "comfortable to work out in," "wicks sweat better" — and that professional image had won the brand a place in customers' minds.

In more serious athletic performance, Nike does have a real weakness. Plenty of dedicated runners say they would never pick Nike for running shoes, turning instead to Asics, New Balance, or niche brands like Brooks Running. Here the talk among consumers is all about "feel underfoot" — they see Nike as fine for beginners, but not for serious athletes.

Consumers with a taste for fashion have even more to choose from. Once athleisure made sportswear a real wardrobe option, countless brands opened active lines. The French fashion label A.P.C., which seems to have nothing to do with sport and is known for clean basics, invested last October in an internet-native athletic brand called Outdoor Voices — a New York label founded in 2013 that sells almost entirely through its own site and cares more about cut, color, and silhouette than Nike's products do.

If you follow QDaily, you probably know that countless brands — from Uniqlo and H&M to Victoria's Secret — can make a shopper hesitate over a sports bra or a pair of running tights.

The confusion shows up most clearly inside a Nike store. When these well-dressed shoppers walk in carrying bags from fast-fashion brands — stepping into a "gym" they once would never have entered — buying a pair of athletic shoes to round out an outfit may be the real point. Up in the Jordan section on the top floor of the flagship store, a customer named Dice, trying on the latest colorway, told us: "Because Air Jordans are huge right now." Meanwhile, the gait-analysis machine on the third floor gets at most five customers a day to try it — though that, to be fair, is already more than when it opened.

Nike poured a fair amount of its resources into its women's line over the past year. In fiscal 2015 that business grew 20%, but it still makes up only a small share of the total. Women are complicated creatures, and their spending bears that out faithfully.

According to the research firm NPD Group, sales in the women's athletic market topped $18 billion in 2014, much of it from women's sports brands like Lululemon, which made its name on yoga pants. We have covered high-end pieces like Lucas Hugh, whose tights sell for $400, and Carbon38, worn by Iron Man's girlfriend — clothes with a more feminine design that also work for everyday occasions off the mat, exactly the things that draw women shoppers.

In our 2014 Top 15 report, we laid out what set Nike apart from its rivals. Back then there were two things: Nike had used Nike+ to build the world's largest online community of sports enthusiasts, and Nike had the ability to play across every sports category — beyond mainstream basketball, football, and running, it reached into niche markets like golf. The latter may not be a major profit center, but in spreading business risk and diversifying its market, Nike still came out ahead of its rivals.

Now the first of those advantages is under challenge. Under Armour, with 150 million registered members, has gained real clout too — it just hasn't yet taken the shape of digital products.

On October 14, 2015, Nike unveiled its next five-year plan: $50 billion in revenue by 2020. E-commerce is meant to be its strongest driver — the direct-to-consumer online business, now just $1 billion, is targeted to reach $7 billion by 2020. After Nike relaunched its global site in November 2015, the next quarter's earnings announced 50% growth in e-commerce.

Of all its channels, e-commerce may be the most complicated to navigate. It means Nike making the most direct adjustment yet with its longest-standing and most far-reaching partners. To reach those final growth targets, the company will have to balance its relationships with distributors and balance physical sales against online sales. When none of it is a zero-sum contest, the situation only gets harder.

(Illustration: Zhu Kailin)