Issue No. 165: Nike’s Digital Transformation

Since the start of the pandemic, activewear has gone from trendy to essential. The indisputable king, Nike is poised to continue its decades-long domination.

But what exactly makes the athletic gear giant so successful? And can anyone catch up?

On the Offensive

Nike commands a 39% share of the global footwear market and 13% of global apparel sales. Transcending shoes and sport, the Nike brand has become a cultural phenomenon. Striving for more, the company has proven willing to reinvent itself.

In 2017, Nike devised a digital strategy to drive growth, targeting 30% digital penetration in five years — a goal that, at the time, seemed lofty.

Then the pandemic hit. Boosted by the global eCommerce boom and spike in activewear sales, Nike surpassed its goal three years ahead of schedule.

Doubling down on direct-to-consumer (DTC) sales, Nike accelerated its digital transformation, executing its “One Nike Marketplace” strategy.

Wholesale, who? While the majority of Nike’s revenue (around 65%) remains driven by wholesale, the company is well aware of the growing competition from DTC activewear brands.

Noting the shift, Nike has closed undifferentiated wholesale accounts, pivoting resources toward direct channels to secure higher margins, reclaim access to consumers, and maintain control.

Content, community, customization. Supporting this move is Nike’s tightly woven ecosystem, from digitally outfitted Nike Live stores to its arsenal of apps.

Case in point, last August, it launched a 24,000-square-foot Nike Rise store in Seoul. A manifestation of the company’s unique digital capabilities, the store is a high-tech, highly personalized retail experience.

Numbers don’t lie. A recent Q2 earnings report confirmed the retailer’s growth in spite of pandemic headwinds and supply chain issues:

• Nike posted $11.36B in revenue in its second quarter ending November 30, 2021, outpacing expectations by over $100M.
• Most of this growth notably came from digital sales, which have grown by over 12%, including by 40% in North America.

Far from a siloed approach, Nike excels by executing interconnected, multipronged long plays — anticipating wider market trends and making tough calls to stay a step ahead.

Facing the Swoosh

Outside of Nike, the activewear sector is booming; experts project the market to top $546B by 2024.

From lululemon to Allbirds, brands across the board are upping their game. But can any of them dethrone Nike?

When life gives you lululemons. A potential Achilles’ heel, Nike has had mediocre success with women — worsened only by internal snafus. Despite efforts to grow, women’s products make up less than 25% of its total revenue.

Meanwhile, female-oriented brands like Athleta and Alo Yoga have made moves to corner women’s activewear, launching digital workouts and investing in experiential retail.

In particular, lululemon has soared in recent years:

• While the pandemic pummeled most of retail, lululemon plotted its overseas expansion and increased brand value by more than 40%.
• In 2021, it grew revenue by 88% to over a billion dollars and posted some of the best gross margins in the apparel industry.
• Challenging Nike directly, lululemon has also entered the digital fitness space with its MIRROR acquisition while teasing a 2022 entry into footwear.

Nike seems to be feeling the heat — in early January, Nike filed a lawsuit against lululemon, accusing it of infringing on a number of patents on fitness equipment and related mobile apps.

Foot race. Over in footwear, Nike’s bread and butter, the company has maintained an iron grip. But with the recent running boom, a number of brands are nipping at its heels:

• CrossFit favorite NOBULL reached a half-billion-dollar valuation last year on 80% YoY growth and has been eyeing global expansion.
• Focused on female runners, Brooks Running unseated Nike in the women’s performance category in Q1 2021, increasing sales by 88% while Nike took a 35% blow.
• Touting pain management, HOKA has posted 96% YoY growth and grew its DTC channel by almost 15%.

Darkhorses Allbirds and On Running have shaken things up as well. Both companies IPO’d last year at billion-dollar valuations, boasting sustainability and simplicity as differentiating streaks. “I’ve tried to make us the opposite of Nike almost,” said Allbirds co-founder Tim Brown.

Elsewhere… from unorthodox contenders to legacy competitors, Nike is getting squeezed from all angles. Peloton debuted its apparel line in fall 2021 while adidas and Under Armour are outlining their own DTC revolutions.

In a digitally driven market where competitors are just a few swipes away, brands that fail to adapt will get left behind.

Looking Ahead

Despite impressive growth, most activewear brands simply can’t compare to Nike’s massive presence.

lululemon’s revenue, for example, sits at a fraction of Nike’s $37B in fiscal year 2020. The yogi favorite would need to maintain double-digit growth for over a decade in order to catch up — and that’s if Nike stood still. As its $44.5B FY2021 shows, that seems unlikely.

Even now, as the web3 movement sweeps the internet, Nike is already diving in headfirst:

• The company has been ramping up to produce digital versions of its products since at least October.
• In November, Nike partnered with Roblox to launch virtual world NIKELAND and it teamed with Snapchat for an AR running experience.
• A few weeks later, it snapped up NFT studio and fashion startup RTFKT.

Punchline: For now, no one seems likely to topple Nike, but activewear brands are steadily carving out their own lane, building billion-dollar empires in spaces that were once considered niche. In other words, this isn’t a zero-sum game — Nike’s dominance signifies the success of the activewear industry at large.