Shift to Ecommerce Means Need for Lots more Consumer Direct Fulfillment Capacity

Sports shoe and apparel giant Nike has dramatically changed its strategy over the past two years – and it seems to be paying off.

In 2019, Nike announced that over the next few years it would dramatically reduce the number of retailers it would sell through globally, from about 40,000 down to maybe just a few dozen, sending a seismic shock to thousands of store chains.

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In June of 2020, Nike announced its Consumer Direct Acceleration, an aggressive digital strategy to grow its ecommerce business.

Announcing its fiscal Q2 results in late December, Nike saw total revenue growth of 9% globally, even as sales through retailers dropped. But Nike Digital sales were up 80% in the quarter worldwide.

"This holiday season also was highlighted by the record-setting digital sales we saw during Black Friday week, which has shown the power of our digital transformation all over the globe," said CEO John Donahoe on the Q2 earnings call. "Digital is now woven into everything we do as a company. It's how we operate and prioritize, from how we engage with members, to how we operate our supply chain, to how we serve consumers in the marketplace."

Donahoe added that "we are growing the pie and taking share from competition. This is the sharp point of our strategy. The consumer shift to digital is permanent, and our digital penetration will only increase in years to come."

Investments in supply chain technology are also key to the Nike transformation.

CFO Matt Friend noted, after Nike has rolled out item-level RFID its North American store to improve inventory accuracy and visibility, that "We also continue to scale RFID capabilities across our stores in EMEA, enabling better product allocation and replenishment."

Friend notes Nike it seeing return on its technology investments in North America, where it ramped up a new regional distribution center in Los Angeles.

He said inventory planning for the site was aided by capabilities from Nike's acquisition of Celect, an analytics and demand sensing vendor, in August of 2019.

"As a result, we delivered over 100% Nike Digital revenue growth in Q2 in North America while lowering digital fulfillment cost per unit versus the prior year," Friend added.

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Friend added that the underlying benefits from the company's business shift towards ecommerce sales are becoming increasingly clear, and these investments will enable Nike "to move faster towards our long-term strategic vision of Consumer Direct Acceleration."

Due to its strategy and the impact of the pandemic, Nike saw a 14% decline in wholesale [retail channel] revenue, while traffic in Nike-owned stores remained well below prior year levels. But Nike was still able to grow North American sales 1% overall due to more than 100% growth in Nike Digital business.

Nike Digital now represents nearly 25% of the company's North American revenue.

On the pullback from retail, Friend said Nike has reduced the number of  "undifferentiated accounts" in North America by roughly 30%, yet is still delivering mid-single-digit total growth on average.

And Friend confirmed reports earlier this year that Nike was reducing inventory allocations to some retail chains.

Friend said that in Q2 "Nike took further steps towards account and channel consolidation by reprioritizing product allocations to benefit our strategic partners and Nile Direct. As a result, undifferentiated wholesale revenue declined at an even faster rate compared to total wholesale."

In other words, for many current retailers their fate with Nike is largely sealed, and it isn't a good one.

But a real challenge for Nike is to add enough consumer direct fulfillment capability to match the larger strategy.

For the huge Chinese "Single's Day" volumes in October, Fried said "We implemented several initiatives to maximize flexibility and responsiveness in our supply chain."

That included multi-node network fulfillment and employing robot delivery, and also use of Green packaging. Nike ultimate shipped out all units within 48 hours and delivered nearly half with same-day or next-day delivery.

In the QA section of the earnings call, CEO Donahue said consumer behavior has dramatically and permanently changed.

"Consumers actually, they don't differentiate digital and physical in the same way they used to," he said, noting "So, they may want to buy on-line, pick up on store. They might buy on-line, have it shipped from store. They may want to go try it on and then have it shipped home."

The CEO also weighed in by saying "Don't underestimate the impact of this digital on translating our supply chain. Matt talked about we've done in Greater China. 300% increase in digital fulfillment capacity in North America, 400% in EMEA. Robots played a huge role. Over 1 million boxes shipped by robots and the productivity that comes with that."

SCDiges thinks he really means "picked by robot," but you get the idea.

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