Why NIKE is the #1 sports brand in the world

The sportswear equipment and apparel industry is highly

competitive and includes many prominent players. NIKE,
Inc. (NKE) is the largest seller of athletic footwear and
apparel in the world. It has a footprint in 190 countries.
NIKE has sustained its competitive edge by applying some
effective strategies:

Focusing on innovation and the introduction of proprietary

products NIKE AIR, Lunar, Shox, Free, Flywire, Dri-Fit, FlyKnit,

NIKE+, and NIKE Fuel

Building up a portfolio of globally recognized brands

Using targeted high-impact marketing at high-profile sporting

events such as the soccer World Cup, the Rio Olympic Games,

and the NFL Super Bowl

Making endorsement deals with high-profile athletes like

Neymar, LeBron James, and Roger Federer

The NIKE brand

NIKEs brand products are available in eight main sporting
categories:

Running

Soccer

Basketball includes Brand Jordan

Mens Training includes US football and baseball

Womens Training

Action Sports includes Hurley

Sportswear sports-inspired lifestyle products

Golf

NIKE also markets products under the NIKE brand focused

on kids and other sports, including cricket, lacrosse, tennis,
volleyball, and wrestling, among others.
NIKEs line of performance equipment includes bags, socks,
sport balls, eyewear, timepieces, digital devices, bats,

gloves, protective equipment, golf clubs, and other

equipment designed for sports activities.
Who uses NIKEs products?

NIKE, Inc. (NKE) is the worlds leading sports footwear and

apparel company. NIKEs high-performance athletic gear is
mostly targeted at professional athletes. NIKEs
innovations, products, and services seek to develop athletic
potential, according to the company.
The company also focuses on women customers. In fact,
the Womens Training segment is faster growing than the
Mens Training segment. With a view to ensuring future
growth, young athletes are a big part of its sales strategies,
especially in categories such as soccer, basketball, and
running. Young athletes will form NIKEs target market in
the future. Well have more on these opportunities and
their potential later on in the series.
The cogs in NIKEs supply chain

Delivery precision in a multi-product and multi-jurisdictional

company like NIKE, Inc. (NKE) is critical. It improves profit
margins, reduces inventories, minimizes price markdowns,
and ensures that the customer receives the right product
assortment on time. NIKE moved ~900 million units
through its supply chain last year. Its manufacturing
network consists of over 700 factories in 42 countries. Each
product moves from 57 distribution centers across a
network of 18,500 accounts and 140,000 retail doors.
Yet NIKE owns no factories for manufacturing its footwear
and apparel, which make up ~88% of its revenues.
Instead, manufacturing is outsourced to third parties
because of the cost advantages of doing so. Most raw
materials in NIKEs supply chain are sourced in the

manufacturing host country by independent contractors.

Overseas manufacturing of products features in the
strategies of rivals Under Armour Inc. (UA), VF Corporation
(VFC), Lululemon Athletica Inc. (LULU), and Adidas AG
(ADDYY) as well.

NIKEs manufacturers
NIKE is one of the pioneers of the industry-defining
manufacturing outsourcing strategy. Its now exploring
innovative ways of manufacturing so it can customize
products on an unprecedented scale.

Key manufacturing thrusts

Lean manufacturing By the end of fiscal year 2013, between

70% and 76% of its apparel and 85% of its footwear products
were manufactured on lean lines. This delivered additional
savings of $0.15 per unit through better labor productivity and

lower waste

Material consolidation Reducing the number of vendors

through which NIKE sources materials and also reducing the
materials used in manufacturing products

Manufacturing innovation and modernization

Footwear manufacturers
NIKEs footwear is manufactured outside the US by
independent contract manufacturers that often operate
multiple factories. In fiscal year 2014, the company was
supplied by ~150 footwear factories in 14 countries.
Contract factories in Vietnam, China, and Indonesia
respectively manufactured approximately 43%, 28%, and
25% of total NIKEs footwear. The largest single footwear
factory accounted for ~5% of total NIKE brand footwear
production.

Apparel manufacturers

Like footwear, all of NIKEs apparel is manufactured outside

the US by independent contract manufacturers. In fiscal
year 2014, NIKE was supplied by ~430 apparel factories
operating in 41 countries. China, Vietnam, Thailand,
Indonesia, Sri Lanka, Pakistan, and Malaysia accounted for
most of the apparel production. The top five apparel
contract manufacturers together accounted for ~34% of
NIKEs apparel production. One apparel contract
manufacturer accounted for over 10% of production.

Analyzing NIKEs distribution channels and retail

model
NIKE distributes its products through three major channels:

By selling products to wholesalers in the US and international

markets

By direct-to-consumer (or DTC) sales, which include in line and

factory retail outlets (see graph below) and e-commerce sales
through www.nike.com

Sales to global brand divisions

NIKEs sales mix and retail slant

Sales to wholesalers are the largest revenue category.
However, this categorys contribution in the sales mix
contracted from 83.3% in fiscal year 2012 to 79.2% of
revenues in fiscal year 2014. DTC sales, on the other
hand, increased from 16.2% to 20.3% over the same
period. This is significantly lower than the ratio of DTC
revenues for NIKEs rivals in the space. In the most
recent quarter, the respective ratios of DTC revenue to
total revenue for Under Armour Inc. (UA), VF
Corporation (VFC), and Adidas AG (ADDYY) were
25.3%, 23%, and 25.4%.
NIKE is focusing on direct selling to the consumer
with its DTC initiative. Comparing NIKEs distribution
channels, direct sales to the consumer provide higher
margins than do sales to wholesalers. In fiscal year

2014, DTC revenues accounted for ~20% of total NIKE

Brand revenues as compared to 18% in fiscal year
2013. On a currency neutral basis, DTC revenues grew
22% in fiscal year 2014 and 30% in 1Q15, year-overyear.
The company is attempting to grow the DTC category
to $8 billion in sales by fiscal year 2017, up from $5.3
billion in fiscal year 2014. Thats an annual growth rate
of 14.7%, compounded.
Read the key elements of its store and online
strategies in the next part of this series.
VFC

$75.24

$1.18

1.59%

FL

$62.68

$0.60

0.97%

UA

$81.45

$0.44

0.54%

NKE

$102.26

$3.94

4.01%

ADDYY

North America: NIKEs largest growth driver

Despite having operations in 190 countries across the

world, North America continues to be the most important of
NIKEs growth drivers. North American sales make up about
44% of its total revenues worldwide. And, NIKEs projecting
high single digit top-line growth in North America through
2017.
A combination of product innovation and pricing power
spearhead the companys efforts to stay ahead of the pack.
Theres also a large gap between NIKE, Inc. (NKE) and its
nearest competitors, Under Armour Inc. (UA), VFC
Corporation (VF), Lululemon Athletica Inc. (LULU) and
Adidas-owned (ADDYY) Reebok.
Emerging markets

NIKE believes Brazil and China (FXI), two key markets, are
under-penetrated. Chinas growing middle class and the
growing sporting environment are important revenue
opportunities. The company wants to improve its product
mix and profitability in the Chinese market to take
advantage of the changing landscape.
Brazil already has a healthy sports culture, even apart from
soccer. NIKE was a sponsor at the FIFA 2014 soccer World
Cup and is also a sponsor at Rios Olympic Games, slated
for 2016. The company wants to use these opportunities to
enhance its image not only in Brazil, but all over the world.
Parts 11 to 13 discuss how these opportunities are likely to
pan out.
Equipment

Athletic equipment sales are the smallest product category,

accounting for 6% of revenues, or $1.7 billion in fiscal year
2014. The category grew at a CAGR of 12.7% over the
fiscal year period 20102014.
NIKE also has a targeted plan for each world market. The
next part covers geographies and the products that will
drive growth.

Revenue analysis for NIKE by geographical segment

NIKE, Inc.s (NKE) operations consist of the design,
development, marketing, and selling of athletic footwear,
apparel, and equipment. Sales are seasonal and dependent
on geography. Historically, Q1 and Q4 have been relatively
stronger in terms of sales. NIKE categorizes revenues by
geography, except for its separate unit, Converse.
NIKE has seven reporting segments:

North America

Western Europe

Emerging Markets

Greater China

Central and Eastern Europe

Japan

Converse