[Photo by Phillip Pessar, CC BY 2.0, via Wikimedia Commons]
Friday, June 28, 2024 was far from a red letter day for Nike shareholders—and for CEO John Donahoe. The stock fell 20% in a single trading session to drop to $79.05. It left the world stunned.
Behind the stock’s precipitous decline lies the story of Donahoe’s flawed strategy to remake the Nike juggernaut that once captured the hearts and minds of a generations of consumers with its “Just Do It” mantra, which wasn’t just a tagline, but almost heralded a cultural revolution of sorts. The lessons from that flawed makeover hold true for every iconic brand.
Nike is now bringing back veteran Elliott Hill as the new CEO. Hill had retired in 2020 after a 32-year career at the sportswear giant. He will take charge from October 14.
[From left: Elliott Hill, Nike's new president and chief executive; John Donahoe. Photos from Nike]
Donahoe’s gamble
In 2020, when Donahoe had first come on board, Nike had already been grappling for the previous five years with a major, seemingly insurmountable challenge: the emergence of a new digital-first generation, imbued with an entirely different digital shopping habit. To address this big shift, Donahoe seemed to have all the right credentials. He had an impeccable background as CEO at Bain Consulting and at leading companies like eBay, and seemed the ideal candidate to lead Nike into the new world.
Donahoe’s strategy rested on three pillars, which are widely understood:
1. Focus on the direct-to-consumers (D2C) format (Nike.com) that included online sales and experiential stores, downplaying the rest of the stores’ sales and eliminating the wholesale business deals like with Footlocker, Macy’s, Designer brands, Pro, which had hitherto been the backbone of Nike customer connect and accounted for over half of overall sales. The wholesale deals supplemented Nike’s own stores by providing a much larger footprint and had a significant impact on customer relations.
Nike used its wholesale distribution model to sell its products to other businesses, including department stores and other chains. Nike’s B2B model was a mainstay and addressed a large catchment of consumers.
2. Bring in the much talked about data-based decision models. Centralise marketing and make it data-driven and digitally led. This was based on the assumption that since Gen Z was buying mostly online and there were complete lifestyle changes, there was no need to invest behind physical stores and stock the inventory. The supply chain needed to gear for D2C, a model that Nike was still experimenting with. A huge catchment of data on Nike.com about the consumers’ buying behaviour would help it take all the major decisions.
3. Do away with categories. Nike was organised along six categories: running, basketball, Jordan Brand, soccer training and sportswear (lifestyle products). Of these, running, Jordan and sportswear were the strongest ones in revenue. Such was the power of Nike that a collection of sneakers that superstar Michael Jordan wore when he and the Chicago Bulls won six NBA championships, fetched $8 million at auction, setting a new record for game-worn sneakers, according to Sotheby’s.
[The partnership with basketball superstar Michael Jordan since 1984 was a defining one for Nike. The first Air Jordan shoe was released in 1985, and the brand defined sneaker culture for years. Photo from Nike]
Donahoe eliminated the categories to reduce duplication and streamline the costs. “Eliminating categories meant that products were no longer organised by sport, but by gender (like Zara, GAP, H&M),” said a former Nike branding executive named Massimo Giunco, in a blogpost on LinkedIn that went viral. In the process, hundreds of capable people with knowledge of running these businesses were fired.
This was the essence of Donahoe’s gamble to make Nike a part of the lifestyle of a new generation, and compete on design and range of merchandise. It seemed like a sound decision at the time. It was further accentuated by the Covid pandemic, with online dominating people’s lives. In the initial years of Donahoe’s strategic thrust, D2C sales saw a spike.
Though the initial few months were smooth sailing, the reaction, thereafter, was fast and furious.
In the quarter ending August 2024, Nike suffered a 10% decline in revenues—which telegraphed its sudden lack of growth. To put this decline in context, the company has reported similarly big revenue declines twice since 2007: once in Q1/2010 and once during the pandemic (for only one quarter), said a blogpost in Ada Insights, authored by retail analyst Arhi Kivilahti.
“These poor numbers are especially concerning considering that the previous quarter also saw revenue declines, and the two quarters before were essentially flat. Nike last reported revenue growth a year ago, and even then, it was a meagre 2% — not great for a company that prides itself on growth,” said Kivilahti.
Nike just did not see it coming
The “all-things-digital” was not to be. The sheen was off the once brilliant blockbuster. Technology does have unintended consequences. Nike’s new business drivers such as data-driven decisions, eliminating wholesale distribution, and everything digital just did not deliver.
The online saga. Donahoe’s flawed assumption was around a single-minded focus on digital in his pursuit of his D2C strategy, almost to the point of exclusion of everything else. Generation Z, presumably obsessed with digital and social media, is also equally obsessed with premium malls and buying premium products. They look for unique experiences. They look for newness all the time. But this does not in any way suggest that they look for only digital. Far from it.
Categories are a great way to connect with the customers. In 2008, Nike’s shift in focus towards sports and athletes, rather than being product centric, led to a massive sales growth for a corporation of its size. This was supported by sharp marketing and storytelling campaigns. American track and field coach Bill Bowerman, Nike’s co-founder, framed what eventually became its mission statement: “Bring inspiration and innovation to every athlete in the world. If you have a body, you are an athlete.” Co-founder Phil Knight elaborates on this ethos in his book Shoe Dog, when he says, “What if there was a way, without being an athlete, to feel what athletes feel?”
Focusing on categories helped Nike build an ecosystem around the brand that was virtually impregnable by any other sneaker brand like Hoka, Asics, etc. Its product portfolio was organized around sports, i.e. tennis, football, basketball. This allowed Nike to focus on sports, rather than just shoes and to associate with all the leading sports like no other brand was doing—it became a specialist in every major sport. It then associated the brand with the leading star of that sport and created a kind of magnetism around the brand that set it apart from all the competitors. It also built a marketing powerhouse by getting celebrity sportsmen to endorse the technical superiority of Nike.
Wholesale: the key to driving in-store experience. Anyone who has visited a Nike store will aver that the quality of experience is decidedly next level. Much like an Apple store. I still recall my last memory of a visit to a Nike store in Bengaluru nearly two years ago.
It wasn’t just the merchandising standard and the look of the store. Highly knowledgeable staff guided me through the selection by engaging me in a meaningful and highly informative dialogue. They made the effort to understand me well, before making a recommendation. The premium I paid was worth it. (Some interesting and innovative store concepts were announced in 2018—many of the most daring opening in New York, retail’s test bed for experiential shopping.)
Now, why do we assume that the new generation, which is a lot more fitness conscious, would not appreciate such an in-store experience and would prefer to stick to buying digitally?
A blogpost on Brand Hopper casts the spotlight on the strategic value of retail partnerships for Nike:
“Nike doesn’t just sprint to success alone. Strategic partnerships with major retailers fuel its global domination. In the US, Dick’s Sporting Goods provides crucial brick-and-mortar muscle, while Zalando in Europe offers exclusive products and access to its massive membership base. But it’s not just about big names. Nike’s “Connected Partnership” with JD Sports leverages data and technology to personalize the shopping experience, giving customers the ultimate boost.
“These retail alliances are more than just sales channels. They’re springboards for brand exposure and market penetration. Imagine the reach: a LeBron James fan browsing shoes at Dick’s, a Zalando member discovering a limited-edition Jordan collaboration, a JD Sports customer greeted with personalized recommendations. In each scenario, Nike’s presence is amplified, its impact multiplied. These partnerships aren’t just deals; they’re strategic alliances powering Nike’s relentless victory lap.”
In 2023, Nike's wholesale retail revenue was $27.8 billion of overall revenue at $51.2 billion, i.e. 53% of the total revenue, which grew by 5% over 2022, while digital sales grew only by 1%, which is insignificant. Closing the channel down made no sense.
Yet, in 2021, Nike finance chief Matthew Friend said that the brand had “exited about 50%” of its retail partners, in favour of own stores and e-commerce. Now, that is significant.
Cutting out wholesale distribution channels hit Nike’s ability to manage inventory hard. Managing own store logistics added a new layer of complexity in its operations. In September 2022, Nike’s inventory ballooned to as much as 44%, forcing the company to offer its shoes at a discounted price online.
Data-driven. While data is useful in making certain day-to-day operational decisions, short-term predictions on merchandise movement and data on existing customer profiles etc., is based on the past and tells very little about the emergence of lifestyles and trends in the future. Donahoe was described as more of a numbers guy. “In his four years at Nike, he’s proven to be more of a calculator than a creator,” wrote Fast Company’s Mark Wilson.
The decision to prioritise digital and data over the power of creative intuition and brand emotion had a telling impact on what really made Nike stand out in the clutter. Much like it was at Starbucks, leading to the exit of CEO Laxman Narasimhan.
The unmaking of iconic brands
Now, there are several key lessons that iconic brands must learn from Nike’s near disaster experience. Growth cannot come at any cost. Strategy is about choices and the tradeoffs you make. And you can’t be all things to all people. Levi’s, Starbucks, The Body Shop, all tried to appeal to the new generation and misread the signals.
A vital part of this lesson is the organisation’s inability to understand its core.
Iconic brands in a hurry to not miss the bus and maintain their dominant position misread the change. While you need to appeal to and understand the new generation and their digital life, completely breaking away from the past—from things that have made you an icon in the first place—can pose challenges.
By eliminating wholesale and focusing largely on the digital front with some of its own experiential stores, and eliminating a category-based marketing structure that allowed Nike to greatly leverage sports, Donahoe cut off the most important elements of its core, built on promoting sports and athletes.
The core values on which the organisational edifice stands need to be protected, and evolved carefully to become relevant to the evolving generational, technological and social changes. The core, much like the DNA, doesn’t change, simply because it is what the organisation has built over its lifetime, investing billions behind building its talent, resources and a loyal user base. The old and new Coke story of the 1980s is still fresh in the minds of many. Their decision to change the original Coke formula, which everyone loved, resulted in a tremendous backlash from its consumers. Coke lost heavily to Pepsi, until they finally decided to bring back the original one.
On the other hand, there are some successful iconic brands like Tag Heuer, that have transformed successfully without compromising their founder’s purpose and organisational DNA.
Tag Heuer, loved across generations, has maintained its core without giving up on Xtreme sports as a platform to engage its customers.
Recently, during one of my trips in Dubai, I saw a host of fitness centres coming up. Extremely upmarket, they were brimming with energetic young people. The craze for fitness all over Dubai is growing. The government had figured out a novel way to inculcate a sports culture. I discovered that to promote sports in Dubai, schools now allow non-students during off-hours to use their sports facility. Which means that a large population in Dubai—from young students to middle aged people—now have access to all kinds of sporting facilities.
So why would Nike not seek to become a part of this emerging fitness centre culture? It is its rightful place even today. Abandoning its powerful sports platform allowed competition to step in. This was a disaster in the making. Much of the vacated wholesale space, run by its retail partners, allowed competition like Hoka, Asics and On a foot in the door that was virtually forbidden for them.
[Zoomers are a lot more fitness conscious. Photo from Unsplash]
Gen Z is heavily into sports and fitness. Mobile is an extension of their self, but at the same time they are much more physical than the previous generations when it comes to outdoor activities and out of home entertainment. Post Covid, they are also becoming very health conscious.
IKEA is another iconic brand that has not changed its value proposition. Even today it has kept its original retail format intact. It has not embraced digital blindly but has responded to it by integrating it into its overall format and experience. Today even the young generation flocks to IKEA Experience Arenas in droves as did earlier generations.
A strong commitment to the core
My own experience working with some of the iconic brands like Bacardi, Evian, and Campari, underscores this point of sticking to one’s core. When I visited the Bacardi museum at their HQ in Miami, which was being curated by their master curator, I realized how important it is for them to protect their 162-year-old core, heritage and the bat emblem, which has helped them retain their category lead in this fast-changing world of lifestyle.
The mystique of Campari is well known. Bond was charming the audience with Campari in his famous From Russia With Love (1963)—and this 150-year-old brand continues to charm millions, protecting its iconic image, style as well as its business practices.
So has Evian, a Roman era water from the Alps, first bottled in the 17th century. Iconic brands have held tenaciously to their core, resonating with all the subsequent generations. All these brands have maintained their mystique and emotional appeal among their ever-evolving consumers. Some studies show how Gen Z may actually value the old.
Iconic brands are driven by the founder’s vision and purpose. Successive generations keep the fire burning through a meticulously planned strategy that maintains the core with great success while adapting to the technological changes. Like Gucci, Louis Vuitton, or Hermes. Did Tag Heuer give up its sports association with the advent of digital and the perception that the new generation does not wear a watch? No. On the contrary it has over the 150 years of its existence kept up its appeal with its strong commitment to extreme sports, sponsoring Formula 1 and other such sports like surfing and sailing. It stayed away from the temptation of getting into the rat race of modern smartwatches, yet developed a technological marvel like Tag Carrera, a connected watch that has become one of the hottest selling luxury watches in Europe. In 2023, Tag Hueur had one of its best ever years. It holds a vital lesson for Nike.
Iconic brands have to make a choice—whom to target and whom not to target.
They cannot stand for everything. They have to stay focused, not give in to floating narratives and mass hysteria around new technology. Having created a culture of their own, they need to figure out ways and means to further that culture, bringing in newer customer segments through deep insight and an ability to stay relevant to the new era.
When L’Oreal bought The Body Shop, it pushed the latter decisively into online sales much like Nike, only to alienate its long-standing culture of highly engaging showrooms.
ITC’s iconic Wills Filter brand found a way to maintain and grow its core in the 1980s through its legendary “Made for Each Other” platform, unimaginable at that time. So has Marlboro, keeping its core alive, even to date. In order to bring in new smokers in its fold, ITC made Wills more aspirational by associating itself with its more evolved users. The Polish joke book print campaign featuring the Nawab of Pataudi and his wife Sharmila ran for years imbuing the brand the much needed aspirations feel. It also created one of the most coveted surrogate “Made for Each Other” couples contest and leveraged the concept of MFEO holidays.
A study by Bain Consulting shows that organisations that strengthen and stick to their core have a far greater ability to sustain growth in periods of uncertainty. (It is thus surprising that a former CEO of Bain in his new role at Nike made the same strategic error that his firm advised others against.)
Core builds unshakable loyalty
Nike had a strong platform of “athlete inside you” appeal that espoused tremendous loyalty both with the athletes and non-athletes alike, like Tag Heuer. By further strengthening its association with sports and athletes, Nike could have easily appealed to the new generation of customers as well, given the surging demand for outdoor activities. It forgot one important rule of marketing: Loyalty must not be understood only as a retention tool, but as a great acquisition tool as well.
When new CEO Hill takes over on October 14, he might soon realise that Nike’s position in the athlete community is still very strong. Nike spent billions of dollars to build that position. It will be difficult for someone to appropriate it in the foreseeable future. Wholesale distributors, who are typically small businesses, work wonders in planting your foot firmly on the ground, derisking your business, and building a vital customer connect.
An all-digital format can fall woefully short of expectations when product experience is what you aim at. Nike’s superbly curated in-store experience is an integral part of the success story and should remain so. Donahoe’s focus on D2C with its online and its own stores limited the access to a broader target that the wholesale had the ability to do. Its decision to broad-base its appeal to the lifestyle segment by downplaying sports not only compromised its core, it also missed the opportunity to appeal to the growing segment of casual sports enthusiasts. Its assumption that sports shoes do not connote design, hence lifestyle, may have been misplaced.
Sticking to the category concept
Towards the end of his tenure as CEO, Donahoe did try to go back to the original Nike by rebuilding its relationship with wholesale, bringing back categories, albeit with a new name—‘fields of play’—bringing sports back to its life by being a sponsor at the Paris Olympics.
[The Nike Athlete House at the Paris Olympics—a dedicated space for preparation, celebration, rest and recovery for athletes. Towards the end of his tenure as CEO, John Donahoe did try to go back to the original Nike. Being a sponsor at the Paris Olympics was one such attempt. Image from Nike]
The new CEO has a tougher job to do: get all the wholesale back on track, winning back their loyalty. That won’t be easy, especially since most of them felt abandoned by Nike and realised the need to diversify their merchandise and brands.
Leveraging the power of sports
There are so many dimensions to lifestyle today. Under the new leadership, Nike has to choose which part is important and dominate it. Nike is a sports brand, period. It has invested 40 years of its life building this huge franchise among sports enthusiasts and athletes the world over. It has become an integral part of the athlete community. The best known names swear by it. It will be sad that they lose this franchise.
And let us not underestimate the power of sports in people’s lives. A great example of brand evolution is the game of cricket itself: how it has evolved from a five-day test, to a one-day format and now the T-20. Over the last 60 years, it has evolved its formats to touch the lives of a whole new generation. It has also embraced digital in a manner which complements its original game. There’s much to learn from sports.
For Nike, it is kind of going back to the future: Bringing the Nike experience back at the store level, winning the trust of wholesalers and redoubling on sports. All this with a touch of technology. Brand turnarounds are not uncommon, but when an icon falters it takes time and a lot of effort to get back to its original glory. Ask Coke. It has taken it more than 20 years to shake off the Pepsi challenge.
