Friday, May 06, 2005

Nike Swooshes into Diversification

Nike’s mission is “to bring inspiration and innovation to every athlete in the world.” And by “every athlete” they mean every person with a body. So why are they pulling their “inspiration and innovation” away from the athletes that shop at Sears? Good question.

According to some, like Nat Ives, there is agreement among analysts that Nike made the move in direct response to the Sears / Kmart merger. The claim is that it was aimed at protecting the brand from the possibility of Kmart carrying Nike merchandise, the way it has recently started carrying several strong Sears’ brands, such as Kenmore. Others, like analyst Anthony Chukumba, suggest that the move could simply represent a lack of trust in Sears’ Eddie Lampert coupled with the uncertainty of the strategic direction Sears has planned for its Kmart stores. Mr. Chakumba hypothesizes that the discomfort began to percolate because they “don’t know where the stores are going, so it’s not worth taking the risk of damaging the brand image.” Still other analysts claim that the move was not strategic in nature but that Kmart was used as a ploy to exit the relationship with Sears for non-strategic reasons.

Most likely, Nike does not wish to sell Nike-branded products in either Sears of Kmart. The fear that Nike merchandise carried in Sears will surface in Kmart, harming the brand, is certainly a reason to pull Nike from Sears. However, the desire to pull Nike merchandise from Sears itself, regardless of the Kmart association is an equally valid reason. There is evidence that Nike has never been completely comfortable with an association with Sears. In fact, the company has had excessive discounting issues with Sears in the past and pulled out its merchandise from 1987 to 1999. The Kmart “factor” provides Nike with the perfect excuse to end that association.

To a certain extent, this discussion misses the forest for the trees. The main significance of the move is that it is an important part of Nike’s diversification strategy. That strategy involves acquiring or developing new focused brands while also sharpening the focus of existing brands. While Nike has long positioned itself as a premium player, and has long been protective of its premium brand image, maintaining the purity of that position is more important than ever as Nike diversifies into new segments through new brands.

With growth in the US athletic footwear industry slowing, it is becoming increasingly important for Nike to broaden its customer base. In order to accomplish this objective domestically, Nike must reel in discount shoppers as well as the ever-growing number of alternative sports enthusiasts. Athletic shoes costing under $45 made up 70% of the athletic shoe market in 2003 and athletic shoes purchased at discount stores totaled $1.5 billion in 2004. The alternative sports snowboarding, skateboarding, and wakeboarding made up the top three fastest growing sports in 2000 according to American Sports Data, Inc. The Nike brand is too expensive for the discount shoppers and too commercial for the alternative sports enthusiasts. Thus to reach “every athlete,” the company must employ more brands than just Nike.

Of these two new segments, the discount shoppers are the less challenging to target. Nike set out to reach these consumers by purchasing the lower-end sneaker brand, Starter, and re-introducing it to Wal-Mart customers with a new “Nike-fied” version. This move is not at odds with Nike’s premium strategy because it is a completely differentiated brand. In addition, Starters are actually a “premium” brand of discount sneakers. Although most consumers shopping at discount stores are price sensitive, Nike is focusing on those that are also very brand sensitive. While the average price for shoes sold at discount stores is $20, Nike’s new version of Starter sneakers sells for $37.40. As industry analyst Jamelah Leddy explains, “It's fairly consistent with the Nike image. They're going to be the best in their class, regardless of whether they're competing in high-end fashion on Madison Avenue or in Wal-Mart.”

The second segment, the alternative sports enthusiasts, will likely prove more difficult to tap. Brands that are viewed as overly commercial or mainstream will likely fail. Alternative sports enthusiasts want to identify with a brand that truly embodies great knowledge and commitment to their particular area of passion. Product lines that succeed are often launched by people who are enthusiasts of their sport first and foremost and corporate managers second. Additionally, Nike’s strategy for penetrating this segment appears less focused than that for the brand sensitive discount shopper segment. The company has undertaken several different initiatives. Amongst the most prominent is the purchase of surf wear brand Hurley, a brand concerned less about status and more about “…positivity, achievement, looking good, feeling good, and acting good.” Like the Starter brand, Hurley is already very distinguishable and unique from Nike. Not only does that make the merchandise more appealing to surfing enthusiasts but it means that the move does nothing to dilute the Nike brand, and fits well with the company’s overall strategy.

Other initiatives however, involve attempts to tap into the alternative sports segment with the Nike brand itself, such as Nike SB (skateboarding), or with a brand that is only slightly differentiated from the core Nike brand, such as NKE6.0 (alternative sports in general). These brands are not in line with Nike’s strategy. NKE6.0, for instance, represents an over-extension of the Nike brand. Remember, there is a need in this market for a brand to be intimately familiar with its associated sport and to frequently communicate with the sport’s “community.” Because the NKE6.0 brand is a generic brand for all “action sports” as Nike calls them, it will be impossible to achieve an adequately close association between that brand and any single unique sport. Nike would be much better served to continue acquiring existing successful brands that had already created and continue to create very strong ties with one particular alternative sport.

While Nike was heading down the right path with the removal of Nike from Sears, the purchase of Starter, and the purchase of Hurley, it must be particularly careful with the development of the alternative sports segment. It should let those folks who know the nuances of each community launch new brands and attract members of their own community. It should not pretend to be an “insider” because in the end, this strategy will fail. Instead, Nike should stick to its strong suit, maintaining its premium status, and let the “insiders” drive the sales for the alternative sport market on its behalf. Although with some trepidation, we reluctantly say, “keep on swooshing Nike.”

Amit, Greener and Rosenfeld


Blogger Steve Dormanen said...

Didn't Nike founder and CEO Phil Knight recently step down? I wonder if this move might be the first step in a larger, long term strategy of the new CEO. Perhaps his/her desire is to position the Nike brand as an even higher end product than its current position to clearly differentiate Nike's target market from Starter's target market.

11:43 AM  

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