A Nike case study - lessons for real estate investors

Some of the wholesalers that were not entirely cut off, such as Footlocker (+2,500 stores globally), received reduced Nike allocations, particularly in its ‘high heat’ styles (i.e. its best products)^[2] For brand agnostic customers that were looking for a new pair of shoes, they were unknowingly comparing Nike’s ‘reserve graders’ to its competitors’ ‘star players’. Without wholesaler and store relationships, the brand was at risk of becoming a commodity.

In the US, the wholesale exodus was not offset by a material increase in Nike stores.

What can’t be found, can’t be bought

Predictably, as ‘government mandated shop closures’ were removed post-COVID, consumers flocked back to the malls, and physical stores captured wallet share.

As consumers returned, Nike products were much harder to find. While some loyalists were pushed to search online, the majority were driven one shelf over to competitor offerings. Nike rapidly began to lose share.

It was becoming clear to Nike (and others) that most physical storefronts do not compete with online channels, rather they drive traffic toward them. The omnichannel approach enables customers to touch, feel and compare a product in-store – then purchase it online at their convenience.

The influence of physical stores on retailer web traffic is referred to as the halo effect. The halo effect can nullify the margin improvements that are flaunted by DTC / e-commerce proponents.

Over the past 18 months, Nike’s DTC revenue growth has flatlined due to a combination of the halo effect, the base effect, and the macroeconomic backdrop of normalised online retail spend. As expected, cutting its partners (abandoning the physical stores) crippled the growth in Nike’s wholesale segment.

Nike’s earnings profile was tarnished, and the share price has since collapsed ~50% from the November 2021 peak. Worse is the loss of brand value. The June 2017 decision to withdraw from its store and wholesaler relationships perfectly aligned with the slide of Nike’s brand rank from 26th in the world to 62nd.

To attribute all of Nike’s recent underperformance to its shift in focus towards DTC would be misleading. It had various other commercial issues, including significant supply chain disruptions, oversaturating the market with previously exclusive products, and a failure to successfully innovate.

However, nothing quite says, ‘we got it wrong’ like the Board of Directors directly reversing the major decisions from a few years prior. In recent times, Nike has:

• cut ties with its tech pedigree, CEO John Donahoe;
• re-established partnerships with many of its ex-wholesale partners (and therefore stores); and
• removed the ‘digital revenue’ metric from the annual cash incentive for the executive management team.

When it comes to online retailing, if Nike can’t ‘just do it’, the challenge for smaller businesses with a fraction of the brand equity, market share and financial resources will be all the greater.

Store space is limited

As wholesalers and retailers re-evaluate their store strategy, they may find rebuilding their pre-Covid store footprint to be a challenge. The availability of retail space is getting tight.

Over the past decade, the delivery of new shopping centre supply has been below historic trend and is dwarfed when compared to alternative asset classes.

In the current environment, if you are a business re-negotiating your lease term (at an A+ mall), you might want to sharpen your pencil because the landlord on the other side of the table has an increasingly long list of people that want the space. This isn’t anecdotal; it’s in the data.

It’s this competitive tension during the leasing negotiations, fueled by retailers’ ‘fear of missing out’, that drives a shopping centre landlords’ top line income growth, not the month-to-month blips in national retail spend or online share of total retail sales. We wrote in more detail about recession resilience in our article, Why best-in-class mall rents are recession resilient.

Concluding thoughts

Hindsight is 20/20, however a case study like Nike reveals valuable lessons for consumer businesses and its brick-and-mortar footprint.

Nike’s experience is not unique. Many other retailers/logistics providers and their enthusiastic investors extrapolated the Covid trends. Meanwhile, the same groups overlooked the importance of physical stores and wholesale partnerships. Unwinding these mistakes will take time and will be expensive.

To be sure, e-commerce spend as a proportion of total retail sales is re-accelerating in the United States, however the lion’s share of this spend is concentrated towards:

• Online stores that accommodate consumers’ preference to compare brands (Amazon); or
• Deep value marketplaces (Temu/Shein)

The Nike experience is consistent with Quay’s long-held views on retail:

• Online retail is here to stay but will be largely the domain of Amazon or low-margin commodity merchandise.
• Without a store, brands risk losing value (and, with it, margin).
• Wholesalers and retailers will require less stores compared to pre-Covid.
• However, the strategically located stores that are retained will be mission-critical to the retailer’s brand positioning, profit margins and customer awareness.
• Finding and leasing these stores will become increasingly difficult as the delivery of new supply at the top end of the market remains negligible.

Apple (and the Apple store) got it right 20 years ago. It’s a shame few noticed.

Managed Fund

Quay Global Real Estate Fund (Unhedged)

Global Property

View

Managed Fund

Quay Global Real Estate Fund (AUD Hedged)

Global Property

View

Download this article here.