Nike’s strategy for a turnaround needs the second shoe to drop
Summary
- One shoe has dropped: New CEO Eliott Hill plans to revive this brand known for its ‘swoosh’ and ‘Just do it’ slogan. But Nike’s challenges are steep, retail relations need a patch-up and the sportswear company’s real test lies ahead.
The first shoe has dropped at Nike Inc. Last week, new chief executive officer Elliott Hill set out his vision for turning around the [American maker of sneakers whose ‘swoosh’ brand logo is globally recognized and “Just do it" slogan remains among the most memorable for significant numbers].
The world’s biggest sportswear company has lost out to rivals after it prioritized selling through its own stores and website, and did not deliver enough new products, relying instead on classic styles.
Also read: The risky strategy behind Nike’s massive holiday discounts
Hill warned that his efforts would be painful in the short term, with sales and margins in the current fiscal quarter expected to fall more sharply than in the previous three months.
But he stopped short of getting all the bad news out of the way early, for example by writing off those out-of-fashion sneakers and lowering sales and earnings expectations for the coming years.
That looks like a missed opportunity, and it means the continued threat of a reset as Nike embarks on the difficult task of winning once more.
It has been obvious for some time what Nike should do. And Hill set out a plan to just do it.
The company will be obsessed with sport once more. Hill will organize Nike into “fields of play" around basketball, football and soccer, with common divisions between men’s and women’s products within these. The hope is to unleash a wave of innovative new products.
He is right to focus on newness. Nike needs to release novel sports products that can drive broader trends. After all, while performance is the cornerstone of Nike, it and rival Adidas also resemble fashion brands, and need a pipeline of fresh items.
Hill will step up marketing action to tell the story of Nike as a brand, aiming to get back to the great campaigns the company was traditionally known for.
He will give more power to its teams in cities and counties to restore connections with local athletes. Nike, for instance, became less focused on neighbourhood running clubs, creating an opportunity for rivals such as Deckers Outdoor’s Hoka.
The new CEO is also reconnecting with the retailers that Nike abandoned under his predecessor John Donahoe, as it sought to emulate luxury brands by controlling the offtake of large swathes of its products through its own stores and digital channels.
Also read: Nike and Adidas don’t want to share the Olympic podium
As part of this pivot, Hill will cut back on discounting on Nike’s website, where promotions accounted for half of sales. Instead, he plans to turn Nike’s own channels into premium destinations that elevate the brand and carry the broadest selection of products.
He will use Nike’s outlet stores to clear any excess inventory, part of broader efforts to get rid of out-of-style stock, making space for hot new items. The latter will be more carefully managed in an effort to make Nike’s sneakers desirable once more.
His blueprint is sensible, but will be painful.
Consequently, Nike cautioned that third-quarter sales would fall by a percentage in the low double digits, worse than the 8% contraction in the three months to 30 November, as it gets rid of stale footwear inventory.
The gross margin, the difference between the price at which a retailer buys and sells goods, is expected to fall between 3 and 3.5 percentage points in this exercise. Little wonder the shares fell almost 4% in pre-market trading.
But once more, Nike has stopped short of giving longer-term guidance. It might do so when Hill delivers his full blueprint at an investor day next year.
The company’s earnings call last week would have been a good opportunity to clear the decks. Inventory was flat at the end of the third quarter, but taking a charge for all the old Nike Dunks and Air Jordans that need to be sold off might have been wise.
It would also have been a good time to reset longer-term expectations for sales and profits that are more realistic, and reflective of how difficult it will be to reorient the Nike juggernaut.
Also read: A marketing victory for Nike is a business win for Adidas
This is what Hill’s counterpart, Bjorn Gulden at Adidas did shortly after becoming CEO at the beginning of 2023.
Hill will get few chances to make a decisive break with the past and provide himself with a solid foundation. He has gone some way to that end, but it looks as if he needs to go further.
He should not leave it too long. Nike’s recovery won’t be quick or easy, and the more time that passes, the more it will become Hill’s problem, rather than that of his predecessor.
Nike needs the second shoe to drop— and fast. ©Bloomberg
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