Playing offence - Why Nike is pulling product from Amazon while investing in direct and data...

Playing offence - Why Nike is pulling product from Amazon while investing in direct and data...

According to marketing science icon/zealot Byron Sharp, one of the most important ways to drive brand growth is by improving physical availability -  growing the breadth and depth of your distribution both online and offline.

The biggest brands tend to dominate both the physical shelf and the digital shelf.

Making your brand easy to buy by having wide distribution is clearly critical for big CPG brands in particular.

So why then would the world's biggest sportswear brand make the choice to limit their distribution and pull their products from some of the world's largest retailers?

In an effort to build its 'direct to consumer' business, Nike has recently cut ties with 9 large US retailers like Zappos and Fred Meyer. Of greater interest is the decision to remove its products from Amazon, the world's largest e-commerce platform, ending a two year pilot project.

What's the strategy behind this?

Why has Nike sought to decrease its physical availability and distribution on purpose?

And why has the drive to direct led to a consistent surge in Nike's share price since it was announced in 2018?

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Shift to direct

In the last five years we've seen the rise of 'D2C'. Companies like Casper, Dollar Shave Club, Warby Parker, Glossier are the poster boys for this movement, which is rooted in avoiding middlemen or third parties and selling only direct to the consumer, mainly online. These companies fight to control every touchpoint. They use owned data to target specific segments.

Despite not many reaching profitability, this new model has shaken up some huge categories, frightening large incumbents into either adopting some of the tactics or acquiring some of these challengers.

As we know, for the majority of Nike's existence, they've relied predominately on selling through third parties. Indeed in the brilliant book 'Shoe Dog' founder Phil Knight goes into great detail explaining his struggles to get the product stocked in independent sporting goods retailers across the US in the 70s and 80s.

But in 2017, Nike changed tack, launching its 'Consumer Direct Offence' strategy, a clear strategic plan with the ambition to make...

'a very deliberate shift away from operating models of the past and acceleration toward the operating models of the future that leverage digital to serve consumers more personally at scale.'

This plan is based on avoiding wholesale or third parties where possible and pushing direct sales, particularly online, while creating brilliant, personalised experiences for customers.

The reasons for this company wide shift in emphasis are, in my mind, three fold. It all comes back to a greater desire for control.

 1) Data ownership & media efficiency

The most 'in vogue' reason for Nike's shift to direct is rooted in 'taking back control' of their creative, data and media.

'Firsty party data' is the big buzzword in marketing land at the moment. While it's not a panacea, it's clear that Nike are enamoured by owning their customer's data through a more direct relationship.

Ownership of first party data gives Nike far greater insight about their customers. At the moment, just like an FMCG brand selling through a supermarket, when Nike sell through a third party like Amazon, they receive very limited understanding of who that customer is. They basically outsource that knowledge to a third party.

But by building a direct relationship, Nike can capture unique IDs, receive the customer's email and other pertinent information about them (location, site behaviour, previous purchases etc). Nike can then go deep on figuring out what products are selling to what audiences. This creates a fertile opportunity for segmentation, up-selling/cross selling and NPD.

A direct relationship also allows Nike to gain more control over their media spend and creative optimisation. While there's still a lot to be said for broad, loosely targeted brand building media (Nike are still heavy investors in video content), when it comes to more targeted 'performance' spend, it's cheaper and cleaner to activate using your own data rather than having to rely on another source. This direct approach means Nike can avoid some of the murkiness of the digital media value chain and don't have to rely on third parties or other platforms for data collection.

Nike has the scale to immediately own hundreds of millions of unique IDs globally through its CRM, social, e-commerce and app ecosystem, and this also means that they can better personalise digital creative and use more targeted messaging.

Eventually, this will lead to Nike taking digital media buying and creative development in house. In fact, they've already dropped digital media agency Razorfish and begun the process of taking back control of media and social through 'in-housing' - building these capabilities within the company.

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2) Ability to control and personalise the buyer experience end to end 

The second major reason is the ability for Nike to control the end to end experience for customers. When you sell on Amazon, or through any third party, your ability to “own the customer relationship” is hampered. As we know, the retailer holds both the data, but also owns the pricing, delivery and store/site experience.

The experience of shopping on Amazon might be simple and cheap, but that's certainly not the experience Nike wants to create. The algorithms are not swayed in their favour, the visual merchandising and UX isn't in their control and there are many fakes floating around Amazon's vast ecosystem.

Personalisation is critical to Nike’s D2C efforts and its statement about wanting to create “more direct, personal relationships” with customers highlights one of the biggest complaints Amazon sellers make about the retail giant: Amazon controls and ultimately owns the customer relationship, as well as all of the things that come with that, including customer data. Companies selling on Amazon get only what Amazon gives them.

That makes meaningful personalisation and customer experience innovation difficult if not impossible.

By pushing buyers from third party sites and stores to its own sites and stores, Nike can experiment with different visual approaches, tailor the experience and messaging and even engage in innovative mechanics like demand pricing. Nike have also made some notable acquisitions in data analytics, buying demand-sensing company Celect and illustrating the desire to deliver 'personalisation at scale'.

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Nike has also invested heavily in owned assets like NikePlus and SNKRS app, giving customers tangible reasons to share their data in return for benefits, and creating a stickier loyalty propensity amongst customers.

Two recent examples of innovative owned campaigns are SNKRS Stash, which unlocks access to exclusive Nike and Jordan product using mobile geo-locations; and Shock Drop, surprise alerts for coveted sneakers that allow consumers to buy instantly through the app or at their nearest Nike or wholesale store. There's no way Nike would be able to do this through an Amazon or Footlocker app.

3) Margin protection 

Finally, and perhaps the most attractive part of building a direct relationships is the margin benefits.

For many brands, e-commerce can actually be margin eroding unless you have huge scale. The cost of delivery and returns must be built into any business case for a move online, while sales through a third party can further diminish profitability. For example, Amazon takes anywhere between 6-25% of a cut from each product sold.

But as Nike described in the 2018 announcement, their direct business is significantly higher margin than their third-party wholesale business. As a result, this shift in mix has had a favourable impact on gross margin. One estimate has it that the gross margins in Nike's DTC business are an enormous 62 percent, compared with 38 percent in its wholesale business.

It also means that Nike can limit, or at least better control the amount of discounting applied to their products. In fact this number has been steadily declining over time.

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Calculated gamble?

While we've watched over the last five years as (mainly unprofitable) DTC brands extol the virtues of owning your relationship with the customer and the value this brings, there's clearly a calculated gamble within this approach.

Nike is leaning into its incredible brand power and 100% spontaneous awareness levels. It's betting that the brand is big enough for most people to seek them out directly. It's willing to risking losing some 'incidental' purchases on third party stores and sites by decreasing its physical availability.

For smaller, weaker brands without the scale of a global sportswear giant (and accompanying advertising budget), this approach may not work as well.

And this isn't to say that Nike products will only be available through Nike channels. Clearly retail distribution (both physical and online) will continue to be a critical part of the business. You'll still be able to buy the new Liverpool jersey in JD Sports or buy the latest Nike Air Max in Footlocker.

But the shift to 'direct' has clearly been paying off in some ways. Nike had original plans for digital to reach 30% penetration by 2023. Covid's shift of consumer behaviour has expedited this and the company now expects its business to reach 50% of sales coming from direct e-commerce by 2023.

Wall Street has responded. The strategy ticks all the right boxes for analysts - owning data, creating loyalty, increasing margin and pushing towards a more 'digital' future.

Nike is one of the first true mega brands to properly invest in this area, and so represents a fascinating live case study for brands looking to build direct relationship and take more control of their media, creative, pricing and shopper experience.

Amidst huge competition in the sportswear category, Nike is taking the approach that a strong offence is often the best defence.



Shane O'Leary

@shaneoleary1

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Alex Bone

MCIM & CMktr | Strategy & Branding B2B Companies | Freelance Marketing for Charities & Membership Organisations

3y

Thanks Shane, a great piece. It may not be as glamorous as Nike’s ATL stuff, but data management is vital. Your piece outlines why that’s the case.

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Shann Biglione

Head of Strategic Solutions | Signal AI

3y

I wonder how the Apple limitations might impact their business. A lot of the data they have is used for retargeting on Facebook style platforms. And I'd bet a decent portion of their buyers are Apple based.

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Ivana Begić

Project Coordinator at GroupM Germany

3y

All in all, it's a great experiment and they do have the power and knowledge to pull it out, I'm eager to see how it will fold out. Thanks once again for the brilliant analysis 😊

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Ivana Begić

Project Coordinator at GroupM Germany

3y

Great read, thank you! The concept of owning the data on the side (which is now obviously hot) I'm not quite sure what to think of this move 😁 If Amazon wanted to save this deal they could have lowered the margins or offer more insights on the consumer journey (maybe they did do that)...not quite sure what to think about the move to do everything in house also...there is a reason why companies go to and collaborate with outside agencies and there are quite lots of downsides when you are doing things in house, the subjective loss of perspective or I would call it brand blindness for example, didn't they have really good campaigns in the past period with Razorfish?...I mean, Nike's awareness levels are probably 100, but it's because of their presence everywhere literally...what about incoming generations and people who are new in sports who don't know about Nike or their quality? I mean, us old school people, back in the days, there were a couple of good brands to buy if you played sports and one of those 3 was Nike 😁 now it's more competitive then ever and to decide to make a decision like that. Don't know. Hope it goes well. You know, in the end, data isn't everything and marketing rules still apply...

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