Problem
Nike loves to JUST DO IT. To counter the competition from Adidas, who recently acquired Reebok, Nike would like to sell low-priced shoes through Costco and other wholesellers in US and Europe, just like Adidas does. Some executives within Nike think that it will dilute the Nike brand, if they go through these discount wholesellers. Other executives think that it will boost revenue and profits for years to come. Will this move dilute the Nike brand? Should they shake hands with Costco and other discount wholesellers? What do you think?
Solution
(Note: The client's / interviewer's words are in italics, and the consulant's words are in bold.)
Consultant: How strong is the Nike brand in Europe vis-à-vis Adidas?
Client: Wow, I love the way you have jumped right into the cesspool. Let’s keep the focus on the worldwide footwear market. Adidas, now also in possession of Reebok, is a stronger brand in terms of market reach. Out of the total market they control together, Adidas-Reebok owns 55% and Nike owns 45% in Europe. Together, they control 75% of the footwear market in Europe. Does that answer your question?
Consultant: Yes, it does. I know that Nike is a stronger brand in US, I was just curious to find out who was stronger in Europe, considering Adidas’ European roots. Thanks for giving me focus that we need to consider only on the footwear market. Worldwide, how much does each company own in footwear?
Client: Good. Adidas' global share of the branded footwear market is 34%, vs. Nike's 38%, according to NPD Group.Adidas’ share includes the Reebok brand as well.
What is Nike’s objective in assessing whether to add the likes of Costco and other whole-sellers? Is it to increase market share, or profits, or both?
Nike’s three long-term financial goals are high single digit revenue growth; mid-teens earnings per share growth; and increased return on invested capital and accelerated cash flows. So, to answer your question, yes, they want to increase not only revenue and profits, but also market share. However, this should not come at the cost of diluted brand equity.
Yes, I am planning to go in-depth into the valuation of Nike as a brand. However, before I do that, I want to understand Nike’s business a little better. So, I have a few more questions.
Shoot.
Through what channels does Nike currently sell its shoes?
How are the margins on these channels?
Not relevant to the case we are pursuing.
I understand that gross margins will be the same if Nike decides to add Costco etc. as a new distribution channel. What I wanted to compare was the net margins on these channels with the net margin Nike would make from Costco and other whole-sellers. If for this distribution segment, net margins will be higher, for example, that will be an important part of the decision criteria for solving this case.
Sure, Nike has a gross margin of 44%, and a net margin of 9.3% for the latest financial year. So, are you suggesting that Nike should calculate the net margin for the Costco portion of its business to see if it will be higher than 9.3%?
Yes.
Good, what other factors would constitute your decision criteria for the case at hand?
Yes, for competitive analysis purposes, it would be good to know what kind of margins Adidas enjoys for the Costco segment vis-à-vis the overall business, as far as footwear market is considered. Also, do we have any data on what product lines are being pushed by Adidas through Costco?
Sure, Adidas probably enjoys similar gross margins on its overall footwear business as Nike does. For the specific distribution channel, we have no competitive data so far. However, we do know that Adidas is pushing its hiking shoes product line, both for men and women, through Costco in US and similar wholesale retailers in Europe and Australia. Also, Costco likes to have lower prices on its products, in general. So, the margins will be squeezed, and Nike does not hope to get more than 9.3% on this distribution channel. However, there is an opportunity for competing headlong with Adidas on the hiking shoes front through the Costco warehouses. Also, the opportunity exists to push Nike’s classic product lines such as running and basketball shoes as well, through this Channel. So, what other factors would you consider for helping Nike with this business decision?
I would like to pursue the competitive analysis of Adidas a little deeper...
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