As reported by Bloomberg (November 2019), Nike is breaking up with Amazon and will stop selling its apparel and sneakers directly from Amazon’s site.
“As part of Nike’s focus on elevating consumer experiences through more direct, personal relationships, we have made the decision to complete our current pilot with Amazon Retail,” the company said in a statement. “We will continue to invest in strong, distinctive partnerships for Nike with other retailers and platforms to seamlessly serve our consumers globally.”
Saying no to Amazon might sound crazy. According to statista, in 2017, Amazon’s market share in the US e-commerce retail market was 37%. Then, why Nike is breaking up with such a huge sales channel?
– Customer experience: One of retailers or e-tailers’business pillars is customer centricity. Bulding a brand, increasing and nurturing loyal customers and fostering community engagement requires to take control of the brand experience from product design to customer service (all the value chain).
Customer experience is impacted by the following topics. The better information, visibility and control, the better experience you will be able to deliver.
While searching “Nike running” on Amazon.com and Nike.com, users can feel the difference in many aspects. Images, descriptions, features… user experience. It’s clear that Nike is not selling its best products on Amazon (quality/price). Even if Nike stops selling directly to Amazon, other vendors will do it, but I don’t think customers would find high-end sneakers or high-tech apparel. Nike is selling mostly basics (high rotation, low value, lower margins) on Amazon.
– Data: Nike is pivoting to Technology as we described in a previous post. The new CEO, John Donahoe is coming from e-Bay and knows how important data is to analyse sales and margins but also in respect to knowing what is your customer and how is he/she shopping.
Was Amazon sharing all the analytics behind Nike sales? I don’t think so. As a supplier, you will know your sales, but not customer insights. And customer data is key to success. Even B2B players are developing the e-commerce/retail channel to know who are their customers. Nike has grown starting from the B2B business and knows how important is to collaborate with retail chains and being closest to the customer.
Regarding its digital strategy, Nike acquired Zodiac (software analytics platforms for forecasting), Invertex and Celect (cloud-based predictive analytics platform). I’m pretty sure that Nike didn’t own data while selling on Amazon and this was a red line.
– Retail: As mentioned in Nike’s Direct Consumer Offense post, NIKE, Inc. introduced the Consumer Direct Offense in June 2017, a new company alignment that allows the company from Beaverton to better serve the consumer personally, at scale. The Consumer Direct Offense is fueled by Nike’s Triple Double strategy: 2X Innovation, 2X Speed and 2X Direct connections with consumers.
When analysing Nike’s latest annual reports, the increase on Direct-to-Customer contribution highlights. From a 20% of revenues coming from DTC (Sales through Nike Direct) in 2014 to 32% in 2019 (+12 pp) while wholesale is decreasing in a similar proportion. Clearly, Nike is betting on Retail.
– Pricing and Margins: In relation to the previous topic, DTC is the channel where brands obtain the higher margins compared to wholesale (but wholesale gives volume, and therefore revenues. It’s the fastest way to reach economies of scale).
From 2014 to 2019, Nike’s net income margin increased from 9,7% (in 2014, Net Income was $2.693M and Revenues were $27.799M) to 10,3% (in 2019 Net Income was $4.029M and Revenues were $39.117M). Selling thru the retail channel (DTC) will probably help the company to increase its margins.
But another important point in order to achieve this goal is managing prices. Brands can’t control the price of their products when their products are sold thru the wholesale channel. In this respect, the only pricing lever is fixing a maximum or/and minimum recommended selling price. Then, marketplaces like Amazon, department stores like Norsdtrom or retail chains like Foot Locker tend to position their prices below Nike’s direct channel (e.g. Nike.com). Increasing DTC will enable Nike to control its prices.
Managing data directly from DTC will benefit:
- What product to sell (assortment)
- What quantity to buy (forecasting and planning)
- Where to sell the product (clustering) and at what time/period
- To whom (customer segmentation)
- At the right price (reducing inventory and clearance sales)
Considering all the above, customer experience will be empowered: less intermediaries to control the authentic brand experience. In fact, and taking Maslow’s pyramid of needs as example, Nike doesn’t sell shoes (phisiological need) but a way of life (self-fulfilment need).