AnalysisU.S.

Nike’s business model: How Nike makes money

If you love reading stories on how an underdog overcame all odds and finally emerged as a champion, Shoe Dog is the book for you. It’s a memoir written by Phil Knight, the co-founder of Nike, which takes you through his journey of how he went from a Japanese shoe importer to building one of the largest and most iconic sportswear brands in the world today.

I highly recommend you this page turner. Not only is Knight a great entrepreneur but he is also a gifted storyteller. Through his journey, you get to learn about his thoughts that went into building Nike from the ground up, Nike’s culture, and how things have changed for Nike over the years.

Business model

Nike is primarily in the business of selling footwear and apparel for the following categories — Running, NIKE Basketball, the Jordan Brand, Football (Soccer), Training, and Sportswear. The company also owns the Converse brand.

Source: Nike annual report

In the past ten years, Nike grew its revenue at a compounded annual growth rate of 7.0% from US$19.0 billion in 2010 to US$37.4 billion in 2020.

The sportswear company places a strong emphasis on innovation — spending a great deal of time and resources working with their stable of athletes to develop technologies to enhance the comfort and performance of their sportswear. Dri-Fit was one of their earliest innovations that is now a part of our daily lives. The fabric is made up of polyester fabric that transports sweat, heat and, moisture away from the skin to the outside of the garment where it evaporates, keeping you dry. Along with that, Nike has also created Nike Air, Zoom, Free, Flyknit, Flyweave, FlyEase, ZoomX, React, and many others.

Once the design is finalized, Nike sends it to independent manufacturers around the world to manufacture them. Their footwear is supplied by 122 factories from 12 countries while their apparels are supplied by 329 factories from 12 countries — mostly from Vietnam, Indonesia, China, and Cambodia. Through their 81 distribution centers worldwide, Nike sells products to wholesalers and consumers on their e-commerce platform.

Nike’s business model.

Economic moat

When we think about sportswear brands, the top three that come to our minds are Nike (revenue: US$37 billion), Adidas (US$20 billion), and Under Amour (US$5.5 billion). Nike’s success since its inception has been built on the company’s brand equity using a combination of innovation, athlete endorsements, and marketing campaigns.

Consumers are willing to pay a premium because of the high perceived value of the brand. Because it generates the most revenue in its industry, Nike has the financial firepower to compete and endorse the top athletes in their respective fields, signing billion-dollar contracts with Cristiano Ronaldo and Lebron James.

Source: Nike

Nike will then work with Cristiano Ronaldo to create his signature CR7 boots and create a brilliant marketing and advertising campaign around it to sell their products. Because for most people, it is not just about purchasing a pair of soccer boots. Instead, it’s about the association with the player believing that they could bend it like Ronaldo (sorry Beckham!) in the final minutes of the game and emerge victorious.

It is moments like these that make history (and money) for both Nike and their coveted athletes long after they retire. This is where players become ‘products’, with the potential for Nike to replicate their success with the Jordan brand that raked in US$3.6 billion alone in 2020. Over the years, the Jordan brand has turned into a lifestyle brand that has attracted a cult-like following. Consumers are willing to wait hours for the release of a new pair of Jordans and even pay US$615,000 for the red, black, and white Nike Air Jordan 1 sneakers that were worn by the man himself during a 1985 exhibition game in Trieste, Italy. That, my friend, is the power of a brand!

Risks

Counterfeit products could significantly damage Nike’s brand image. Consumers who unknowingly purchased a fake Nike product made up of low-quality materials from retailers might think that the sportwear company is ‘losing it.’

Aside from that, Nike is entrenched in a highly competitive industry that’s subjected to changes in trends. The company has to keep its eyes and ears on the ground and constantly spend money in innovating and designing high-quality products that appeal to their customers.

The fifth perspective

Sport apparel and equipment can be fickle market in part due to fashion trends and consumer behaviour (anyone remember Reebok?). But Nike has managed to remain on top of the roost for more than 30 years due to its innovative products, brand power, and exceptional marketing.

As long as people around the world continue to witness the glory of sport and worship its heroes, Nike is likely to remain one of the biggest players in due to its dominance among top-tier athlete endorsements that their financial might gives them.

Kenny Quek

Kenny Quek is a research analyst at The Fifth Person. He graduated from Drexel University in Philadelphia, PA with a major in finance and previously managed a fund in the U.S. before returning to Singapore.

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