Nike is all over the news at the moment and for all the wrong reasons. Brandwave Founder, Daniel Macaulay weighs in on what went wrong and what he thinks the iconic sports brand will do next…
First off, let me be clear – I’m a proud sneakerhead, however uncool that makes me in the eyes of my preteen daughter. And for the record, I absolutely love Nike – always have, always will.
Nike is one of the iconic brands that inspired my transition from sports to marketing. It has breathed the rarefied air cool for as long as I can remember. It defined and redefined modern marketing and wasn’t afraid to put emotions over metrics. My entire subsequent career has been peppered with Nike-isms, tropes made true by Nike that have become benchmarks for an industry determined to look up to it.
In recent weeks, much has been made of the sporting giant’s very public fall from grace, especially in the marketing arena. Outgoing CEO John Donahoe’s decision to prioritise demand over brand has been relentlessly scrutinised ever since he blew $28bn in enterprise value in a single day in June.
Yes, Nike –– the brand behemoth –– has spent the last four years sacrificing a long-term play for short-term gains (and has paid a hefty price for it). But the roots of its current woes are more nuanced than the simple choice of metrics over emotion.
The Panda Dunk phenomenon
The Panda Dunk serves as a handy model of the mindset behind Nike’s demise. It started as a slick revival of a 40-year-old basketball shoe that everyone, and I mean everyone, wanted. Initially, Nike stuck to its usual playbook, teasing consumers by keeping stock levels somewhere between readily available and a little scarce.
But by 2021, with the pandemic boom in full swing, Nike capitalised on the Dunk’s popularity, churning out Pandas in more colours than Skittles, effectively turning the product into Crocs with laces. Overnight, Panda Dunks became deeply uncool and, in the words of more than one TikToker, in need of ‘cancelling.’
It’s a mistake reminiscent of early 2000s Nokia: market dominance one day, saturation and irrelevance the next. It was presided over by then CEO John Donahoe, a Silicon Valley suit who likely thought Dunk is something you do with a biscuit.
Under his leadership, Nike cranked out 1980s classics like Dunks, Air Force 1s and Air Jordan 1s and people snapped them up. This meant his first two years at the helm of one of the biggest brands on the planet were a resounding success and Nike charted record sales, surpassing $50 billion.
Source: BGG
But Donahoe failed to read the room. He was so far in the data that he missed the vibe. Like Nokia, Nike’s valuation started to slide. Over the following years, the brand continued to miss expectations. Bloomberg Intelligence analyst Poonam Goyal summed things up pretty well: a “lack of newness” was turning shoppers off.
So far, so Nokia. Yet Nike still has a very real chance to reclaim its dominance.
“It was presided over by then CEO John Donahoe, a Silicon Valley suit who likely thought Dunk is something you do with a biscuit”.
Context, context, context
But ringing the bell and crying “Shame! Shame!” (as so many want to do) with the benefit of hindsight is easily done and not at all helpful. Nike’s position as an industry leader means its decision-making is scrutinised more than most, so it’s worth remembering that the entire industry was grappling with unprecedented challenges — remote working, supply chain issues, increased material costs, and an unexpected demand surge. Like everyone else, Nike made the best decisions with the information available at the time, and that was a boom in online sportswear orders – Statista stats here.
The real blunder was the industry-wide assumption that the pandemic bubble wouldn’t burst and that these changes were here to stay forever. Brands like Nike saw the fitwear boom and the success of online retailers like Gymshark and Tala and thought, “Hang on! They’re eating our lunch. We need to double down on D2C (direct to consumer) and digital.”
Much has been made of the obsession with D2C that got Donahoe hired – and then fired – so I’ll avoid flogging a dead horse. What’s important to note is that, while D2C is a triumph for items like leggings, it doesn’t work as well for performance products like running shoes. Buying leggings online is relatively low-risk; the worst that happens is they fail the squat test or you look like a potato. But dropping hundreds on running shoes requires more than carefully curated pictures and half a dozen reviews. Athletes, even amateur ones, want to try their shoes on and talk to someone who knows the relative benefit, pros, and cons of every product on the shelf, especially when performance and safety are on the line. While digital shopping is improving every day, there still really is no digital substitute for the curated in-store experience.
Instead, Nike focused on opportunity cost and the margin it was giving away, forgetting that wholesale is a marketing channel in itself, one that attracts a sizeable amount of traffic. Even in the near post-pandemic world of 2021, Footlocker (once responsible for more than a quarter of Nike’s domestic sales revenue) grew net sales by 28.2% compared to 2019. And let’s not forget, customers who fall in love with products they find in retail are more likely to shop direct for round two. Nike eventually realised that going all in on digital at the expense of everything else was a mistake. On an investor’s call in April, Donahue admitted that in the move towards digital, the brand had “over-rotated away from wholesale a little more than we intended.” But rebuilding burned bridges takes time, and the damage was already done.
By focusing exclusively on aggressive D2C targets, Nike ultimately threw the baby out with the bathwater. D2C and wholesale aren’t mutually exclusive. Nike could have reserved certain products for direct sales while still growing that channel without burning bridges with retailers. But the Nike obsession with D2C was absolute.
If the industry leader doesn’t innovate for the performance market or fill wholesale shelves, someone else will. Nike created a gaping hole for smaller brands like Hoka and On to jump joyously into. In the four years leading up to 2023, Hoka’s sales rose from $223m to $4.3bn, while On Running went from $314m to $2.1bn during the same time. That takes their share of the market from 1% in 2019 to 10% in just four years. It’s an assault that would have made even the boldest analyst raise an eyebrow pre-pandemic, and it’s not slowing down. Hoka sales at Footlocker doubled in Q1 of this year –– a figurative middle finger to Nike, which used to dominate those shelves.
“While digital shopping is improving every day, there still really is no digital substitute for the curated in-store experience”.
Source: Mi3
These smaller brands have managed to avoid some of the post-pandemic pitfalls that have plagued the bigger industry names. Brands who thought the Covid demand spike would last forever ordered like they were preparing for the apocalypse and are still drowning in stock. The cost-of-living crisis also means consumers are now shamelessly prioritising buying food and paying the mortgage over purchasing sportswear, which further compounds the problem.
Research by McKinsey and the World Federation of Sporting Goods Industry revealed a staggering 4 out of 5 companies had higher inventory peaks in 2023 than 2022. And over half of industry leaders expect overstocking issues to plague them long-term.
Restriction of innovation is a real issue at the moment. There’s a lot less incentive to innovate when you’re sitting on mountains of stock. But smaller, younger brands deal in smaller quantities and haven’t been as hamstrung by this restriction. They’re innovating faster than you can say “clearance sale.”
Heritage vs nostalgia – an identity crisis
Mid-pandemic, Nike and the gang essentially had an existential crisis. They eyed the furore around the likes of Gymshark, saw Lululemon making up for closed stores with online sales, and hoped to echo their model –– driving demand with lead generation campaigns and selling D2C. Which is endemic of a bigger strategic issue… when did Nike, of all brands, become the kid trying too hard to fit in?
Brand heritage is sometimes seen as a neck-adorning albatross by more established brands. They look at the new players coming in with fresh new underdog/attacker status and they want it. This ‘grass is greener’ mentality isn’t just reserved for household names. The noughties saw it play out in the opposite direction, with newly launched brands fabricating their legacy. Hollister, Abercrombie & Fitch, and American Eagle tried to create fake heritage with staged ‘All American’ sports scenes. They grew fast, sparked backlash just as quickly, and inadvertently created a new generation of consumers who can spot a fake from a mile away.
‘Brands with heritage’ are fundamentally different to ‘heritage brands’. The brand message should always convey a rich heritage underpinning a bright future. Just because the new kids on the block can’t do it, doesn’t mean there’s no value in legacy and nostalgia – a fact Adidas showcases perfectly. Its retro ‘Originals’ product line is clearly defined and underpinning the rest of its broader brand proposition. The message is clear, “We’ve been doing this for decades, folks. Trust us, but don’t get confused. We are still very much future-focused.”
And that resonates. Consumers are tired of curated imagery and contrived, meaningless USPs; they want credible, reliable brands. We’ve seen this in the resurgence of brands with legacy and legitimacy, like Levi’s, which is once again ‘cool’ and growing in popularity. In my mind, brand equity is just another word for trust, and with a generation now roundly mistrustful of pretty much everything, there’s huge value in tapping into the cultural zeitgeist and leaning into legacy — if you have it.
“Hollister, Abercrombie & Fitch, and American Eagle tried to create fake heritage with staged ‘All American’ sports scenes”.
Dropping the ball
I once read that ‘people don’t leave jobs, they leave toxic workplaces’. For me, internal culture is as important – if not more so – than what’s happening on the high street, particularly in a world where half your audience has a finely tuned BS detector, and the other half has access to Glassdoor reviews.
Morale at Nike was widely reported to have tanked during Donahoe’s tenure. Culture comes from the top, and Donahoe was seen as an outsider and a bureaucrat. His cost-cutting layoffs (very on-brand for Silicon Valley) seem to have been the final straw for many. Last December, when Nike announced plans to cut headcount by 2%, insiders told Bloomberg that the move “sapped any remaining faith in Donahoe’s regime” and “lost the community at Nike.”
The comeback trail
All great stories have a narrative arc, and Nike’s legacy means its story plays out with a changing cast of characters. Donahoe is the villain for now, but whether history will remember him as such remains to be seen. He made decisions based on what he knew at the time, during what was largely a succession of never-before-seen crises.
Decisions made during the pandemic — like pulling back from wholesale, restricting innovation, and spending less on brand — invariably looked good in the short term, but they dealt a blow in the long term, and that damage is now on show.
A course correction was already plugged in with the backtrack on wholesale earlier this year, but the ship hasn’t righted quickly enough. Donahue is out, and Nike lifer, Elliot Hill, will now return to take the helm. Hill resigned when Donahue was hired, so his appointment is akin to the ‘return of the rightful King’ in many ways, and I’m not the only one who thinks so. Nike’s stock jumped 8% in extended trading following the news that he’ll take over from Donahoe in October. For context, Nike’s stock returned -16.5% to investors from the time of Donahue’s appointment through to close on the day Hill was announced (Donahoe, by the by, reportedly made $104m at Nike over that time).
So what comes next?
I’m fully expecting that the next step will be a brand-centric campaign — something reminiscent of Apple’s legendary ‘Here’s to the Crazy Ones’, which celebrated Steve Jobs’s return. It’ll be a nostalgic love letter to remind everyone what Nike really stands for. But that’s not going to rectify its decline overnight.
I think that Nike’s issues result from a thousand tiny cuts rather than a single monumental blunder. Ditching wholesale and losing focus on product innovation are part of a bigger issue. Fixing relationships with retailers might actually be one of Hill’s easier tasks. Regaining Nike’s ‘cool factor’ will take some serious effort. The new leadership team will need to address issues with culture, morale, investment, strategy and direction.
In the meantime, newer players will continue to innovate and win consumer loyalty, but Nike must resist the urge to dance to their tune. This brand has been around the block; it has a legacy –– admittedly, it’s a bit battered and bruised, but it’s far from dead. I don’t think Nike is the next Nokia; it can and will claw its way back to the top. It’s read the room, has a decade’s old playbook at its disposal, knows what needs fixing, and it’ll (just) do it.
“This brand has been around the block; it has a legacy –– admittedly, it’s a bit battered and bruised, but it’s far from dead”.
