Just Do It, A lot more direct
Nike shares jumped more than 35% since the beginning of the year. Nike is a pandemic winner and has been delivering impressive results, fueled by online sales that jumped more than 82% in the last quarter.
Nike's ability to thrive during a period when physical visits to retail stores has collapsed is down to its investment in its direct-to-consumer (DTC) business. Per Statista, in 2010 about $2.5B Nike-brand products were sold directly to consumers. A decade later they sold almost $12.5B DTC – more than a third of all Nike brand revenue.
Apple is not selling you a computer, or a phone, or a tablet; they are selling an experience that encapsulates everything from their ads and stores to their packaging, to the actual user experience of their devices. They sell a commodity product, and make their profit off of the differentiation provided by the Apple Experience.
Nike's ability to thrive during a period when physical visits to retail stores has collapsed is down to its investment in its direct-to-consumer (DTC) business. Per Statista, in 2010 about $2.5B Nike-brand products were sold directly to consumers. A decade later they sold almost $12.5B DTC – more than a third of all Nike brand revenue.
The upside of DTC is alluring – it allows you to cut out the middleman (wholesale retailers) and, in theory, capture a higher profit margin for your business. But for Nike, it has been less about capturing higher margins and more about owning and controlling the full customer experience.
What kind of company is Nike?
They started with shoes, but their product line has extended far beyond that. They are certainly a marketing company, one of the best in the world, but they also make many genuinely innovative products. Over the last few years they’ve been expanding their push into software and wearables, yet no one thinks of them as a technology company. And, despite self-owned and franchised stores in almost every neighborhood in the world, no one thinks of them as a retailer either.
One could make a similar point about Apple. They certainly have great technology, but to call them a technology company doesn’t seem quite right. They have great marketing, but to call them a marketing company isn’t true either. They have an incredible retail chain, but to call them a retailer is clearly off base as well.
Both Apple and Nike have markedly similar business models. They are both selling commodity products at gross margins well above their industries' averages (~40% for Apple, and ~45% for Nike). They can do that because they are both Experience companies.
What Nike is selling is the experience of being a runner (or a basketball player etc.) It’s not just the athletes in their advertisements, or the quality of their shoes, the sportiness of the clothes, or the sophistication of the apps. It’s the whole, and it’s greater than the sum of its parts. They sell a commodity product, and make their profit off the differentiation provided by the Nike Experience. And they’re better at it than just about any company in the world, except maybe Apple.
I expect the good times to keep on rolling for Nike.
Disclaimer: This post is merely my own assessment and is not an investment recommendation. For professional advice, seek input from a licensed investment advisor.
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