How Nike Lost $27 billion in one day? : Direct-to- Consumer Business case study

hi everybody Nike is feeling Nike is no longer dominating the running Market the 60-year-old company is stumbling this is the first real time that you're seeing Nike really struggle with competition do do you have Nikes or you don't 50% of people are wearing Hoka now this is a story of misfires being masked by a pandemic sales Boom for the fiscal fourth core it looks like a Miss pretty much across the board really worried that the company just doesn't have the next like a for us in the past one year while Adidas stock price has appreciated by 19% Nike stock price has gone down by 21% while in the first quarter of 2023 Adidas had an unsold inventory of $6 billion in the same quarter Nike had an unsold inventory of $8. 9 billion and it even touched 9. 3 and 9.

7 billion so Nike sales are dropping dead inventory is very very high and the stock price is going down which is why this year Nike seems to be a stock market disaster in the United States of America and all of this started because Nike made one big big mistake and this mistake is called direct to Consumer strategy or d2c the direct to Consumer retail space is making some pretty big Market moves donaho pointed to the results as proof his strategy was working and started cutting those ties with retailers and Nike is just lagging behind Nike market value nose dived over the past few years an era that was about to come to an end now this d2c approach is the reason why this case study is super super important because while America got hit by the d2c wave in 2010 now in India everybody wants to start a d2c brand so if you're a d2c investor or a Founder watch this episode very very carefully because you can get all the hard lessons that Nike learned by burning a billion dollars and that too in less than 20 20 minutes so in this episode today let's dig deep and try to understand what exactly is this d2c model why did Nike switch to this d2c model what are the most fundamental flaws in this model because of which Nike is now going back to the wholesale model and most importantly as investors and entrepreneurs what are the lessons that we need to learn from Nike's billion doll mistake before we move on I want to quickly thank our education partners of today's episode and that is one person Club people we often too busy or lazy to look after small financial decisions and then these little problems add up to our stress whether it is poor money management or not knowing enough about Finance or simply not caring enough about it it is very easy for you to fall into a financial trap because of these little Financial mistakes but that's where one person Club is here to help you out one person Club has been founded by my dear friend Sharon hegre they are India's largest Finance Community with 50,000 plus members and it is all about helping people understand money better to reach their financial goals they are offering 25 plus easy to ouse tools and lessons that will teach you how to pick the right credit card how to choose the best insurance how to invest in the right stocks how to invest in the right mutual funds and much more and for this one person Club is hosting an exclusive masterclass to help you learn the basics of managing and growing your money and the best part is for a limited time things school learners will get a special 50% discount on the retire early masterclass so don't miss out on this opportunity to improve your finances and register Now using the link in the [Music] description this is a story that dates back to 2011 when Nike realized that they were the Godfather of the American shoe market and it's quite understandable because Nike was a legend in the market Jordans were flying off the shells their stock price had shot up by more than 300% in the past 10 years and they recorded a revenue of $20 billion people rush to get the newest pair of Air Jordans a crowd busted through this door in Indiana and remember as you're watching these pictures this is all over shoes How many pairs of Air Jordans do you have I have about nine pair of Air Jordans since I was a kid I've been you know working hard just to come up here early in the morning just to wait line to get these shoes and by that time Nike had such a strong brand image that every star player was wearing a Nike whether that was Roger Federer or Kobe Bryant Tiger Woods or Cristiano Ronaldo everybody was wearing a Nike once I went through the presentation with Nike they really made a grave effort of trying to have my input on the shoes when I first signed up with with Nike lines and apparel that know people love it's just been amazing for me to be part of at 35 years old he's still lighting up the Siri a for Juventus coming in this season as runner up for the Golden Boot with 31 total goals so since Nike had an incredible brand pull Nike decided to make a tectonic shift and this tectonic shift was to go from a wholesale model to a direct to consumer model and this is what shook the entire Sports Market of America for those who don't know wholesale model is a model whereby Nikey sells its shoes to a wholesaler like Foot Locker or Macy's who then use their distribution to sell these shoes at their own price in their own stores all across America or the wholesalers might sell it to other retailers who further go on to sell it to their customers whereas in a direct to Consumer model Nike can directly sell all of its products directly to the customer either through its own website or through its own retail store so in this model the wholesaler is completely eliminated now the question is if Nike was able to sell its shoes to wholesalers without the worry of website traffic or store maintenance why did they suddenly shift to the direct to Consumer model well that is because ladies and gentlemen a direct to Consumer approach gives you four major superpowers the first superpower is a superpower of profit margins in simple words if Nike makes a shoe for $80 and sells it to Macy's at $100 Macy's would then sell the same shoe at $120 so even though the product cost is $120 the profit of Nike is only $20 but theoretically if Nike sold this product directly to the customer they could sell the same shoe at $110 and still make a profit of $30 so do you see even with decrease in cost Nike can still generate more profits the second superpower is brand control and pricing so during a holiday season a retailer like Macy's might heavily discount Nike shoes just to attract customers and this creates a perception that Nike is a low value brand but with Nike's own stores of website Nike could maintain a consistent pricing which can maintain the premiumness of the brand the third superpower is customer relationship and data so if a customer buys a Nike shoe from Foot Locker Nike might receive basic sales data like which product was sold and which state did the sale happen in but in a d2c scenario if the same customer buys from nike. com Nike can collect all the micro details like customer preference age gender location interest and even profession and testimonial so this allows Nike to run the most accurate ads which are personalized to every single person who buys from Nike and more importantly when it is able to collect direct feedback from the customer it is also able to improve its product life and lastly while a wholesaler might have a Salesman who doesn't know about the product or a shelf that could be completely disorganized if Nike owns a store it can control everything from quality of sales staff to the lighting to even the music in that store and this results in a better customer experience so do you realize this way the d2c strategy could literally offer everything that a brand wants Better Price better margins better experience better customer data and most importantly better control over both the product and the Brand This is a reason why ladies and gentlemen in a revolutionary approach Nike announced something called consumer direct offense strategy under this strategy Nike cut off onethird of their wholesale Partners including Macy's Urban Outfitters and even Zappos and eventually they reduced their supply to the remaining stores on top of that it also ended its high-profile partnership with Amazon yes Nike ended their relationship with Amazon and where the d2c strategy of Nike started the real story is direct to Consumer DTC a business model that had exploded in the 201 it is the golden model of the new age they want to sell direct to Consumer and like not do the retail stores as much but they're doing something that really no Behemoth has ever done before instead of selling through wholesalers they established a three-pillar framework the first pillar was digital product portfolio and this portfolio had four apps Nike Training Club for gym and yoga and Enthusiast Nike run club for runners sneakers for sneaker enthusiasts and they had the main Nike app which sold all their products this layer collects all the data from the customer from location to preference to purchase data to search data to age and even gender Now using this data layer Nike understood the hot spots of their customer base all across America so now they knew where to set up their stores and what kind of products they need to keep in those stores in order to maximize sales and here's way they built their second pillar which was their retail store portfolio and this portfolio again had four types of stores firstly they had the Nike rice store which are focused on customized shopping experience with localized products and events then they have Nike House of innovation stores which are specially made to launch Cutting Edge Nike products thirdly they have Nike live which are small stores which were designed for quick pickup and returns and then they have Nike style which is specifically aimed at genz consumers with a mix of streetwear and sports inspired fashion then Nike had the third layer which was the interconnection between physical and digital layer so let's try to understand this better you see when a customer uses these Nike digital products Nike is able to understand where is the maximum density of Nike customers and then Nike is able to set up its stores and here's where this third layer makes people use both the digital products as well as the retail stores and eventually it results into a virtuous cycle for example in the app when the customer feeds all the data the retail stores use customer data of that location to decide which products will be kept in which store and then the customer data is feeded into the app so when the customer walks in Nike will use that data from the customer's profile to give customized recommendation to that customer based on the store products and then for the products that are already there in the store Nike has these QR codes which the customers can scan so if you look at an airone one in a store the QR code will tell you everything from what sizes are available which other products will go well with that particular shoe what is the review that the customers have given and it will even give you similar recommendations based on that particular store's inventory so your buying experience is enhanced by a large large extent and lastly if you have the Nike app you don't need to wait in the queue at all you can simply check out from the Nike app itself and this again feeds data into the Nike database so so if you see this third layer helps Nike build an ecosystem where the customers use both the app as well as the store to feed Rich data into the Nike database at Nike's new flagship on Fifth Avenue the house of innovation you can shop 68,000 ft of Cutting Edge retail space without talking to a human you take a picture of that QR code and this entire look is loaded onto your phone we are going to be allowing our consumers in the mobile app um to buy product in their app and walk out without needing to talk to us and this gives Nike three incredible superpowers number one is better Inventory management and optimized product placement for example with the intelligence of evolving customer data Nike will know which products will sell better and which products need to be produced more for example suddenly if there is a trend of white sneakers in Brooklyn and a trend of Jordans in Manhattan Nike will quickly send more Jordans to Manhattan and more white sneakers to Brooklyn the second superpower is customer segmentation insight for better marketing for example if Nike understands that Brooklyn has gym and Tennis enthusiasts and Manhattan has more yoga practitioners Nike would sponsor tennis tournaments in Brooklyn and they would Place their products in the best gyms in Brooklyn similarly they would organize more yoga workshops in Manhattan and they would try out more yoga products in Manhattan and lastly when Nike organizes these special events or sponsors tournaments that are close to the hearts of the people it builds a sense of community and eventually it would help them command loyalty from their customers so as time passes the database was expected to get richer and richer with better and better insights eventually it was expected that this entire d2c ecosystem will help Nike pinpoint opportunities all across America and it will help Nike make better decisions eventually keeping it way ahead of its competition this was the Revolutionary framework that Nike designed to go all in with its d2c strategy so do you realize Nike literally had everything to achieve success in his d2c model they had a solid brand value insane amount of data millions of customers using the app to collect data and a billion dollars to make all of this happen all across America so the question is did they succeed well initially yes their d2c sales Rose from 16% of the total revenue in 2011 to 35% in 2020 in fact even during co Nike sales started Rising drastically now just to give you an idea about how big a deal this was while Adidas's entire Revenue in 2022 was $24 billion just with the d2c channel in the same year Nike generated $18. 7 billion this is how insanely well the d2c channel was doing for Nike so everything was great right well you know what guys something changed after covid and this is what led to disastrous consequences for Nike now whether this is shortterm or long-term we don't know but as of now Nike is facing in a hard hard time so the question over here is what exactly went wrong well if you look at this graph Nike's sales growth from apps and website started dropping drastically now even while d2c scales are rising overall they are left with billions of dollars in inventory the revenue is dipping and lastly after all this leap Nike is now making a uturn to go back to the wholesale model as the world reopened turned out people still quite liked buying shoes in stores but but Nike just wasn't in as many of them now it was kind of like done and uh the hype was done so now the question over here is when the d2c strategy was so well plotted out when it was so well designed when Niki had all the money in the world all the data in the world what exactly went wrong well here's where ladies and gentlemen the dark side of the direct to Consumer Channel comes in and here's where you need to pay very very close attention because these are the same problems that d2c brands are facing in India so if Nike faed to this problem so will you so listen to this carefully the first Factor was the impact of recession in simple words Whenever there is a recession a consumer would want to compare multiple shoe options and choose the most economical option rather than just blindly preferring a Nike over others for example during a recession a consumer would look for discounted shoes at Foot Locker rather than paying the full price at nike.

com And this is exactly what happened in case of Nike whereby Nike's d2c sales in the last quarter of fi 24 fell by 8% to $5. 1 billion whereas the wholesale sales of Brands like Foot Locker and DSW they remained super stable which means people were buying shoes it's just that they were buying from wholesalers and not directly from Nike itself the Second Challenge was the challenge of inventory and supply chain shocks for example in case of a wholesale model Nike simply has to sell its products to the wholesaler and the wholesalers would take care of everything from inventory to shipment to to stock clearance to even reverse shipping so once Nike sells the products to the wholesalers Nike doesn't have to worry but in case of the direct to Consumer Channel Nike has to take care of everything from inventory to shipment to clearance to even the reverse supply chain at the same time when you deal with wholesalers wholesalers share the burden of inventory management so they Place bulk orders in advance which helps Nike forast the demand and reduce the risk of Overstock similarly if Nike over produces a particular shoe then they can rely on wholesale Partners to help them move those products through their extensive distribution networks and promotional efforts so if you look at what happened after Nike event d2c you will see that they started to pile up more and more inventory in fact in 2022 they had 8. 42 billion of inventory which further went up to touch 9.

7 and 9.