[2014] Nike: Possibly Its Best Year Since 1965

Top 15 Year-End Review: Nike

Regular article

On October 23, 2014, four large hotels in Manhattan were almost fully booked with media Nike had flown in from around the world. Most were fashion and lifestyle outlets, joined by key opinion leaders (KOLs) who carry real weight in setting trends. More than 200 of the world's top female athletes walked a runway Nike had built for the occasion, among them the retired tennis player Li Na and 57-year-old Joan Benoit, who won the women's marathon at the 1984 Los Angeles Olympics.

That day Nike unveiled what may be its most important strategy of 2014: Nike Women, an initiative said to change everything from how products are managed to how retail stores display them. But unlike in the past, CEO Mark Parker did not take the stage to announce a product built on disruptive technology, nor did he mention star athlete endorsers. Instead he talked about the 65 million women members on Nike's digital platform and about where consumer trends are heading.

In fact, he touched on everything Nike now has: technology, design, the ability to promote a lifestyle, a feel for fashion trends, and consumer relationships built on a huge social network. Put together, these make up the Nike Women strategy.

On the eve of the 2014 World Cup, Nike, which was not an official sponsor, launched Magista, a new football boot built with Flyknit technology. Earlier in the year the company had released the KOBE 9 Elite basketball shoe, using the same technology. Both changed how people think about two things. The first was the belief that Flyknit's main advantage is simply making shoes lighter and thinner, and that it cannot protect athletes well enough in intense sports like football and basketball. The second was the more fundamental question: what should the best football boot or basketball shoe look like?

Yet neither product was Nike's best ambassador of the year. Nike Women was, because it brings together all of the company's strengths and ambitions. Flyknit, which Nike introduced in 2012, rewrote the rules of athletic footwear manufacturing and created entirely new consumer demand. But the women's market plays by different rules. Until now, Nike's women's lines have never had a product-upgrade concept like the KOBE basketball shoes, and the link between marketing and star athletes has been far weaker. Why, exactly, would a woman buy Nike? It looks like an entirely new question, all the more so because Nike entered this field decades ago, yet the women's business has never contributed more than 20% of its profit.

Judging by its financial reports, 2014 may be the best year in Nike's history. Analysts credit high-margin products such as Flyknit. But like its ally Apple, Nike is clever not merely because it raises prices, but because it has built an ecosystem: star endorsers, high-value-added products, marketing centered on sport and the sporting spirit, trend-setting crossover collaborations, and, finally, social networks.

Let's look at what the company did this year and before it.

2014 Highlights

February: Launched the KOBE 9 Elite basketball shoe.

April: Integrated Nike+ and e-commerce into its official website. Opened the Nike+ Fuel Lab in San Francisco, but the same month laid off most of the FuelBand team and confirmed it was leaving the smart-wristband market. Rumor has it the move was meant to strengthen its alliance with Apple, to "let those who are good at something do what they are good at."

June: Released Nike Free 6.0 and, with the sought-after French fashion brand A.P.C., launched a limited-edition sneaker.

Nike Lab flagship stores opened in six cities worldwide, one of them in Shanghai. They mainly sell limited-edition designer products and avant-garde sports goods.

July: For the first time, sponsored more World Cup teams than Adidas, putting it in first place. Spent heavily on World Cup marketing. Released the Magista football boot.

September: Launched Nike Women. Consolidated its existing women's product lines and, for the first time, announced a move into "lifestyle."

December: Relaunched the ACG (All Condition Gear) brand, entering the outdoor goods market.

Nike's mission is to sell more shoes, yet it is still talking to you about lifestyle

At the October 23 launch event in New York, Amy Montagne, Nike vice president and general manager of Nike Women, brought up her cousin. "She just graduated from college and lives a completely digital life, never without her phone. She'll try a half marathon with friends, but she also loves yoga and all kinds of sneakers. She wants to try all of those new things, just like young female athletes today."

If Amy's cousin is 22, she is the typical Nike Women customer: young, eager to spend, and seeing sport as a new kind of social life and lifestyle. In an interview after the event, Amy told QDaily: "Today's female consumers really are using sport to express who they are. They are the ones who chose sport."

No one expresses a lifestyle better than female customers, but Nike cannot use its usual marketing playbook on them. Normally Nike makes athletes the focus of product development, the vehicle of its marketing and the ambassadors for its products, and uses them to fire up ordinary people's enthusiasm for sport.

Most women, however, are not especially moved by athletes or competitive sport. What moves them is the influence of friends, or the pull of "a certain way of living." So Nike still develops products around athletes' needs, but it quickly made its new-product posters more everyday: a woman on her way to the gym, a woman running down a San Francisco street, a woman stretching at the gym...

Nike+ plays a crucial role in this. In his short speech, Mark Parker stressed the importance of social platforms five times. Stefan Olander, Nike vice president and general manager of Nike+, who helped the company achieve major success in running, also told QDaily that progress in the women's business is partly owed to the rapid growth of Nike's online business.

New products from new technology, different experiences from social platforms and heavy marketing spending have made consumers far more attached to the Nike brand. As Tim Kobe, the designer behind Nike's flagship stores, put it: "A good, complete brand experience should be rich and multidimensional, letting consumers experience the brand in all kinds of settings, through products, services and other forms."

Thanks to these moves, Nike's stock grew rapidly in 2014

In fiscal 2014, Nike's total revenue was US$27.79 billion and net income was US$2.69 billion, up 9.29% from the previous year. (Note: the units in the chart below are wrong; they should be growth rates.)

More than 80% of Nike's revenue currently comes from male-dominated product lines such as basketball and football.

Several media outlets have cited the financial targets Nike published earlier: by fiscal 2017, Nike will reach total revenue of US$36 billion, with Nike Women becoming an important engine of fast growth and accounting for 20% of total revenue.

Nike's 2014 annual report also lists a range of competitors. Besides old rival Adidas, the yoga-focused Lululemon and VF Corporation, owner of The North Face, two are worth mentioning: Under Armour, a sports brand that is likewise growing fast on technological innovation and high-value-added goods, and Uniqlo, which can take Nike's customers in casual wear.

Nike didn't so much create trends as ride broader consumer trends

1. The most notable trend of 2014 was athleisure

Yoga pants became a fashion item long ago (to the dismay of conservative fashion insiders), but this year sneakers (especially wedge sneakers) and the sporty look as a whole went fully mainstream. Besides New Balance and ASH, which grabbed much of the attention, dozens of companies, including Alexander Wang and Chanel, put out clothing in this style.

But as a Lane Crawford stylist said in an interview: "These days, a pair of sneakers from Marc Jacobs or Ash is stylish enough, but if you want a tasteful sporty look, you're better off buying a pair of real athletic shoes."

2. The rise of new feminism

It is hard to say whether actress Emma Watson's speech at the United Nations showed that so-called new feminism had become a public topic, or whether her speech prompted more people to start thinking about it: was it a peak, or a starting point? Either way, 2014 brought a cluster of news about women's rights. Malala, shot by the Taliban for demanding girls' right to education, won the Nobel Peace Prize, and Microsoft CEO Satya Nadella said in public that women should wait for karma to bring them promotions and raises, and was roundly criticized by the media...

3. Health has become a major middle-class expense

You will see more on this below. Every era has its own character. Just as hippie rock made jeans popular worldwide, sports gear is popular now because people are embracing healthy living. QDaily has reported on the popularity of "mountain girls" and "forest girls" in Japan, and this is not happening only in Japan.

How Nike cultivates a lifestyle: running and the Chinese market

China accounts for a modest share of Nike's global sales, largely because the country lacks a sports culture. This market treats competitive sport as a form of education and a way to make a living, not as part of personal life. At the same time, Nike and Adidas were among the first apparel companies to expand in China, which is why sportswear was the first to become mainstream street wear. Now these sports equipment makers face competition from Gap, Uniqlo and more local sports brands, and Adidas and Nike have taken very different paths.

Adidas leans toward "leaving fashion to fashion": it launched co-branded lines with Yohji Yamamoto and Stella McCartney and chose non-athletes such as Eason Chan as endorsers. For a while this worked very well in China, leading young consumers to see Adidas as the very image of fashion. Remember, this market cares more about "looking good" than about how well the gear performs.

But that approach was challenged after Nike launched Flyknit. In China, Nike has long built its sports culture on partnerships with schools, but that did not necessarily win it a reputation in the market. Then Nike began sponsoring night runs for university students. The fluorescent colors, chosen for safety after dark, struck young people as very cool, and running came to seem "completely different from the running we did in school." Driven by the Nike+ community, running caught on among young people and gradually spread to office workers.

Riding this wave, Nike's products became familiar to more and more people. Note: these are people who do not play sports. When they walk into a Nike flagship store out of curiosity, the company's business begins. In using physical stores to influence consumers, Nike is far ahead of its rivals.

Things about Nike you may not know but might find interesting

1. The DTC business is growing

Directly operated stores such as factory outlets, Nike Lab and Nike flagship stores make up what the company calls its DTC (Direct to Consumer) business. In its 2014 annual report, Nike said it will invest more in DTC to strengthen brand building and other areas.

This may signal that the company is going all in on "lifestyle." For now, of course, DTC is still a very small part of Nike's revenue.

2. Its core strengths: running a diversified business and a digitally based product experience

On current performance, Nike differs from its competitors in two main ways. First, through Nike+, Nike has built the world's largest online community of sports enthusiasts. Second, Nike can move into every category of sport. Beyond the mainstream basketball, football and running, it also operates in niche markets such as golf. These niches are not big profit sources, but they give Nike an edge over competitors in spreading operating risk and diversifying its markets.

3. Steadily shedding unrelated assets

QDaily has previously summarized the various assets Nike has sold off since 2012. CEO Mark Parker says this keeps the company focused.

4. The Innovation Kitchen, where R&D starts with star athletes

The "Innovation Kitchen" is Nike's center for future technology, with a team of 100 people, and it is already working on projects for 2016 to 2020. Every six months it meets with Mark Parker to review its innovation projects from the past half year and plan the next.

5. The role Mark Parker plays

What sets this CEO apart is that he rose to the job as a designer. That is very rare among corporate leaders (the only other example is probably Burberry's current CEO, Christopher Bailey). He believes the greatest source of creativity is "time planning and a financial budget," and that the biggest challenge of being CEO is making trade-offs: leading different talents to work together, like a conductor leading an orchestra, and finding the right balance of resources. In an interview with the fashion site BoF, he said the biggest obstacle for designers is a "you're you, I'm me" mindset, and that business can help design achieve its full value.

How can Nike become consumers' "third set of clothes," after formal wear and casual wear?

The phrase comes from a senior executive at a Chinese sports brand. He told QDaily this is where Nike is strong. And clearly it cannot get there by relying on distributors alone.

At the end of 2014, Nike opened two Nike Women experience stores, one of them in Shanghai. QDaily asked Stefan Olander, Nike vice president and general manager of Nike+, how the retail experience might improve, and he answered: "The experience begins before you walk into the store." Judging by the experience so far, Nike has the ability but has not yet fully delivered.

Challenges Nike will face:

1. Specialist sports makers such as Lululemon. Especially in areas like yoga, where they compete head-on with Nike Women, specialist companies can offer more attentive service and experience, and so eat into Nike's market.

2. The sports lines of fast-fashion brands. Companies such as Uniqlo keep stressing the added value of new technology in their products, and their prices are unbeatable.

3. A more complicated Chinese market. To present a complete lifestyle and brand concept, Nike must rely on displays in physical stores. Nike+ can make up for some of this, but distribution channels and a feel for fashion trends remain the core issues.

The Top 15 are: Apple, Google, Baidu, Alibaba, Tencent, Amazon, Disney, McDonald's, Starbucks, Nike, Xiaomi, IKEA, Uniqlo, Wanda and Vanke. This list will change as companies' businesses, markets and trends change. We will follow them, and their competitors and partners too.

For why we started the Top 15 reporting project, please read this article, which we think turned out rather well.