Can Nike Get Unstuck?

  • For the past couple of years, Nike's biggest business problem has been scraping the competition from the sole of its exquisitely designed, high-priced athletic shoes. Since 1995 Nike has racked up an astonishing average growth rate of 39%, sprinting from $4.8 billion to $9.2 billion in sales, capturing nearly half the athletic-shoe business in the U.S. while simultaneously expanding across the globe. In its last fiscal year, which ended in May, the company boosted sales more than 42% and posted earnings of almost $796 million. By any measure, that's a stunning year.

    But since then Nike has been shooting bricks. Sales dropped 8% in the company's third quarter, and footwear sales in the U.S. were down 18%. Orders for spring are off too. Inventories ballooned as customers shunned boring products with high prices. And because Nike cranks out an entirely new product line every year, it has been powerless to stop the damage. "You are always six months away from disaster," says Nike's chairman and shoe-bah, Phil Knight. Nike's earnings projections have been dropping like so many Tiger Woods putts. Worse, the company's top shoe salesman, fella named Jordan, is threatening to retire to run his own little business.

    Like a teenager after a growth spurt, Nike is a multibillion-dollar monster finding its size awkward. Knight's challenge is to re-create the essence of the outfit he first operated out of the trunk of his car with his college track coach and a bunch of running geeks who would do anything to avoid a real job. But this won't be a jog in the park. Last week the company announced a restructuring that landed heavily on its sports center-cum-headquarters in Beaverton, Ore., where about 250 employees were laid off. "When you grow quickly," says Thomas Clarke, the biomechanics Ph.D. who is president and chief operating officer, "sometimes you have layers you don't need; sometimes you have some areas that aren't as focused."

    Nike is reassessing everything, from the way it sells to retailers to the number of times the famous swoosh appears on products and in advertising. It will try to act smaller by developing categories such as golf, soccer and women's as separate business units. A gentler new ad campaign with the tag line "I Can" will augment--but not replace--"Just Do It." The company is also betting heavily that a new Alpha line of shoes and apparel, to be introduced late this year, will swing momentum back in its favor. "What we have to do is re-energize ourselves, starting with the product," says Knight.

    Nike is no stranger to off years. Knight hobbled the company with a cockamamie expansion strategy in the mid-1980s, and sales skidded in 1994. "There's going to be a down cycle every four or five years," he says. "And our job is to recognize that and keep the downs as shallow as we can."

    The problem is that Nike is facing not just one obstacle but a whole teamful of them. The Nike negatives include:

    A sporting-goods retail consolidation that has claimed hundreds of stores in the U.S. The survivors, including powerful chains like the Sports Authority, complain that every store is selling the same stuff. Nike, as the biggest shoe supplier, with a 47% domestic market share, suffers most.

    The brown-shoe phenomenon. Teens and young adults, the core shoe buyers, haven't forsaken their hightops. The new Air Jordan XIIIs are a hit. But kids have extended their shoe buying over a wider range of styles: Vans, Airwalks, Skechers and Lugz for the skateboard dudes and the hip-hop crowd; outdoor brands such as Timberland for everyone. Reebok estimates that 15% to 20% of the sneaker business went brown last year.

    Better competition. Once blessed by rivals who couldn't tie their own shoes without risking injury, Nike faces a resurgent Adidas, whose sales increased 92% in North America in the last quarter. True, Reebok could still screw up a one-man 100-m dash, but it is pumping fresh money into shoe technology and advertising. New Balance expects sales to rise 25% this year, and fashion brands such as Tommy Hilfiger are breaking out sneaker lines.

    Asia. Two million pairs of Nikes are looking for toes in Japan, a result of that region's economic problems.

    Lately, Nike bashing has become a spectator sport. Cartoonist Garry Trudeau lambasted the company in his Doonesbury strip. Filmmaker Michael Moore featured Knight in his latest excoriation of corporate America, The Big One. Nike has been accused of bigfooting its way into soccer and despoiling academics by paying the University of North Carolina to wear its wares. A long-standing criticism is that it uses extravagantly paid endorsers to sell overpriced sneakers to underprivileged kids. The company has been tarred by an image as a sweatshop operator that exploits Asian workers who make shoes and apparel for Nike subcontractors (see box). Nike's efforts to be a good corporate citizen, and they have been considerable, have been unavailing in the public forum.

    "Basically, our culture, and our style, is to be a rebel, and we sort of enjoy doing that," says Knight, who created a jock empire based on hero worship backed up with good product and great advertising. "Now that we've reached a certain size, there's a fine line between being a rebel and being a bully, and yeah, we have to walk that line."

    Despite the pounding, Nike is still the force in athletics. Reebok chairman Paul Fireman has admitted as much to Wall Street analysts. Curiously, Fireman blamed Nike's ascension for the current malaise of the footwear category. "The way it came about was clearly the proliferation of a single brand," Fireman said at February's Super Show, the industry's big trade fair. As Nike pulled away over the past couple of years, retailers began to up their swoosh orders. At the urging of retailers (they hate having any one brand dominate), competitors began to ape Nike's look. Says Fireman: "I don't think anybody had bad intentions, but we were fools to follow."

    The stores, which have to order well in advance of production, took on tons of expensive basketball shoes, only to watch the goods sit on the shelves. In running shoes, Nike had problems with fit and what insiders call product "freshness." And missing in the retail mix was a good selection of shoes below $80, in what the industry calls the "kill zone"--where the bulk of unit volume is done. The sluggish sales accelerated an industry consolidation among retailers. "I can't emphasize enough the profound revolution the retail side has gone through in 1996 and '97," says Clarke. "No way you can go through this without some adjustment."

    Consumers were making an adjustment too. Nike's best customers, who are young and male, typically buy 10 to 15 pairs of athletic shoes each year. It's about style, and kids were seeing less of it in Nike and more of it in the so-called brown-shoe category, which broadly describes anything that isn't a dress shoe and isn't an athletic shoe. Says Geoff Hollister, who heads Nike's grass-roots running program: "We were just filling the pipeline. You've got to come up with great stuff all the time. You miss just one season, and you can flatten out just that quickly." Nike has conceded that it is likely to lose market share to surging Adidas and niche brands like Asics this year.

    The brown-shoe momentum is so significant that some observers wonder whether Nike has lost its relevance to young stylemeisters. "Coolness. That is the issue; that's something that I worry about constantly," notes Faye Landes, an analyst for Salomon Smith Barney. Not Clarke. He calls the shift a predictable phase that will fade, just as it did in the mid-'80s.

    Nike is banking on a new line known as Alpha to turn the U.S. business around starting late this year. A coordinated line of shoes, apparel and equipment (including watches and eyewear), Alpha represents a tripling of its R.-and-D. investment since 1995. In shoes, Nike is spreading air around, moving the cushioning from the heel through the midsole. It promises a form-fitting heel, more flexibility and reduced weight of shoes in all the categories.

    In apparel, Nike is attempting to turn sweatshirts and shorts into real athletic equipment that it calls "total performance product." Its fabric is skinlike, a point being made by a series of ads that feature pictures of such star athletes as Michael Johnson, Scotty Pippin and Gabrielle Reece wearing not so much as a sock.

    Reebok and Adidas plan to match Nike on the technological front, but a big change is happening in how they sell. Reebok, in particular, is parting company with many high-priced athletes. "I have all the autographs I need," says Fireman.

    Nike is staying hitched to the stars. Indeed, it is hard to overstate Nike's veneration for top jocks. The company's verdant campus headquarters just outside Portland is a sort of perspiration museum. Knight's office is in the John McEnroe Building. Other structures are named for Jordan and marathoners Alberto Salazar and Joan Benoit Samuelson. Preschool linebackers are dropped off in the Joe Paterno day-care facility, while the grownups work out in the Bo Jackson sports center--the Bo.

    The essence of Nike is that it is a multibillion-dollar company built by pretty good athletes to serve great athletes, a place where work is play and play is damned serious. "We are in the sports business, not the shoe business," says Mark Parker, a vice president and former shoe designer who has been Nike's chief strategist. "It is not just a better definition of what our epicenter is but what we are all about." That's why, for instance, Nike bought Canstar Sports, which makes Bauer hockey equipment and inline skates; why the swoosh has been extended, with middling results, to other equipment such as bats, balls and gloves; and why the company created an entertainment division to produce events featuring Nike stars.

    The sports heritage is genuine. Knight launched the company in 1964 with Bill Bowerman, his former track coach at the University of Oregon. Knight's business plan, hatched as an M.B.A. project at Stanford, was straightforward. He figured that by importing shoes made in Japan, where labor was then cheap, he could undercut the dominant player, Adidas. At first he merely imported Japanese running shoes. Then Bowerman, in the kitchen one morning, had one of those Aha! ideas. He made an outsole by pouring a rubber compound into the waffle iron. The waffle trainer was born--and Nike was ready to run.

    From Bowerman, a legendary coach, Knight got two things: an innovative track shoe and a relentless appetite for competition. "Every time I tour people around, I show them a picture of Phil Knight running behind Jim Grelle," says Hollister, who ran track with Knight and became one of Nike's first employees. It was Knight's customary position. Grelle was a champion, and Knight never caught him, says Hollister, but he never stopped pursuing. Another Oregon track god, Steve Prefontaine, became patriarch of the culture. "Pre," a rebellious soul and ferocious competitor, prodded Knight endlessly to improve the quality of track shoes.

    Then came Michael Jordan. Knight signed the great Zeus of hoops in 1984, or a couple of hundred million Airs ago. Although Jordan too has been scorched by some criticism about the high price of sneakers, he remains an all-world marketer. He recently turned a nationally televised game into a two-hour Nike commercial by donning a 14-year-old pair of Air Jordans for his "last" appearance at Madison Square Garden. Then he tortured the New York Knicks for 42 points.

    The Nike campus teems with adherents to this athletistocracy. It attracts a weirdly diverse collection of go-getters who are young (average age: 31) and confident, if not cocksure. Nike remains one of the most sought-after companies for employment by new M.B.A.s. Says Nelson Farris, another of Knight's former teammates: "We like employees who aren't afraid to tee it up."

    Fortunately for Nike, the brand is not so controversial in the rest of the world, where most of its growth lies. Last year sales outside the U.S. increased 49%, and represent about 38% of the total. Like Coca-Cola, Nike measures purchases per capita per country. In the U.S. it's more than $20, but in the rest of the world the figure is $6 or $7, and as little as $2 or $3 in Germany, home of Adidas and Puma. That's why Nike has made soccer the focus of an unprecedented assault. The logic is simple. Soccer is the world's sport, and the company can't have any credibility as a sports brand unless it is a factor in the game. "Our goal is to be the world leader in football by 2002, the next World Cup," says Sandy Bodecker, who runs the soccer division.

    It's a typically outrageous statement. To do that, Nike will have to kick aside heritage brands such Umbro, Diadora, Puma and Adidas, the market leader and three times Nike's size in this category. Yet this June, when 32 nations battle for planetary soccer supremacy at the World Cup in France (Adidas is a title sponsor), six teams will wear Nike gear, which is six more than in the last Cup, four years ago.

    How did Nike do it? Cash. In measures that were seen as both arrogant and amazing, the company got out its checkbook and started writing. World champion Brazil: $200 million, which included the right to promote five exhibition games. The U.S. soccer team: at least $130 million. Nike even tried to steal Bayern Munich, the New York Yankees of Germany, from Adidas. The effort failed, but it forced the German company to triple the price of the previous contract. Nike's appearance, as well as more sophisticated management by the teams, has had a similar effect on the price of sponsorships.

    Nike had to use cash because it had little else to offer. Its first soccer shoes were terrible, forcing Knight to buy a shoemaking operation in Italy. The company poured money into R. and D. and designed a new soccer shoe around Ronaldo, a Brazilian, voted best player in the world last year. The new model, called the Mercurial, uses a synthetic material instead of kangaroo leather, and is 50% lighter than current models. "It's going to rock the shoe world," says Mike Moyle, CEO of Eurosport, a leading mail-order catalog. Despite its investment of hundreds of millions of dollars, Nike is outsold by Adidas 3 to 1. But it has made some inroads: the swoosh is the No. 2 brand in the U.S. and moving up in the rest of the world.

    Nike is also undergoing a holistic reorganization as it struggles with the very size of the company and what it stands for. Says Knight: "What we are doing today might be O.K. for a $3 billion company. It's not O.K. at 9." In reviewing its corporate image, executives reached an interesting conclusion: too many swooshes. "There has been a little bit of an internal backlash about just the number of swooshes that are out there," says Parker, who is the keeper of the brand image. When Tiger Woods made his debut in Nike gear, there were so many logos on him that he looked as if he had got caught in an embroidering machine. Now most of the company's TV ads sign off with Nike's script logo. Expect to see more of it.

    Nike will also try to be more accessible to consumers by continuing to develop subbrands. The first of those is brand Jordan, whose Jumpman logo has replaced the swoosh on those famous sneakers. Nike expects to sell $300 million in Jordan merchandise in fiscal 1998 and considers the brand to have billion-dollar potential. And Nike is creating a golf division around its $40 million swinger, Woods. He has his own brand, aimed at younger, more athletic golfers, and his togs carry his own logo, a swirling yin-yang emblem designed to reflect his Buddhist beliefs as well as his club speed. Another line, Nike Classic Golf, will target the country-club set.

    Will the new Nike work? The strength of the brand and willpower of the organization are still formidable. And rival Adidas is walking proof that great brands can rebound. Knight has written this year off. By 1999 he expects to have new product, a new management structure and better press. Knight envisions a totally global company, one in which communication of the brand flows effortlessly through language and cultural barriers. He knows the past six months have made a sizable dent in that progress. "When we started kind of really emphasizing [globalism]," he says, "I thought, well, Nike could do it in five years. Maybe it'll be 20, but it isn't five."

    That might not be all bad. In some respects, Knight's in a comfortable position again, running from behind.