14 June 2018
By Ethan Morgan
Ethan is in the marketing team at Volo, and specialises in writing about retail trends and news for our blog, white papers and reports.
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Nike has been investing heavily in in its direct-to-consumer sales – they’re now worth 29.6% of overall revenue or just over $9 billion in 2017, per Nike’s FY17 financials. That percentage has grown from just 16% in 2011. In this article, we'll be looking at what Nike's direct-to-consumer project looks like and what it means for other apparel brands.
The US-based sportswear giant made headlines when it signed up to Amazon’s Vendor program, allowing Amazon to act as its retailer on Amazon.com, limiting the reach of third-party merchants looking to sell the brand through the marketplace platform.
The ripple effects were rapid – Nike’s share price shot upwards by 12%, and shares in retailers of its products such as Dick’s Sporting Goods and Foot Locker tumbled. Foot Locker is set to see a net loss of 70 stores in 2018, and Dick’s Sporting Goods has had to reign in its expansion plans, planning to open just over a quarter of the number of stores it added in 2017.
While analysts are far from calling it game over for either of these massive retailers, it’s clear that Nike’s bet is not on their side, as the brand is forecasting over $16 billion in direct-to-consumer sales by 2020.
Let’s step back for a second and cover the basics: what is direct-to-consumer?
The short answer is that it involves a brand connecting and selling directly to its customers, whether online or offline, through branded stores, in-store concessions, or pop-ups. Instead of wholesaling products to retailers for them to do the job of selling on to the customer, the brand takes responsibility for the whole chain from production to the customer having the goods.
For Nike, the rationale behind their investment and business focus on direct-to-consumer is multifaceted, but there are several key outcomes they’re able to achieve through direct sales that their existing wholesale business was unable to do.
Firstly, their connection and relevance to millennial customers was limited and mediated by their retail partners. For the brand to grow and retain its dominance, Nike needed to find ways to connect with customers more directly. The cornerstone of modern retail and brand best practices is customer data – without it, the brand cannot personalise, adapt locally, develop the best products, test pricing strategies, et cetera. In short, customer data is the lifeblood of a consumer brand.
When a shopper picks up a pair of trainers or a running top in Dick’s Sporting Goods, Nike gets less information less quickly about that transaction than if the same customer purchases in one of Nike’s branded stores, where the information is available to Nike immediately and is more likely to be relevant from a strategic perspective.
The same principle applies to online shopping, perhaps moreso because of the nature of ecommerce where data about page visits, items added to the bag, and items purchased can reveal all kinds of useful patterns of consumer behaviour.
Secondly, a major reason for the deal with Amazon specifically was the fear that Nike’s brand image was endangered by third-party retailers selling through the marketplace platform, and additionally by the ever-present challenge of counterfeit items making their way into the supply chain.
By signing up to a pilot with Amazon’s Vendor service and wholesaling a limited selection of inventory to Amazon, Nike was able to negotiate stricter controls on who is permitted to list Nike brand items.
The third reason for Nike’s DTC emphasis is the bottom line. Margins in their direct-to-consumer business were estimated by Merriman analysts to be 62%, compared to 38% in the wholesale business. Also included in this line of thinking is the shakiness of specific forms of offline retailers. Undifferentiated experiences and offerings no longer appeal to consumers, and as department stores and other retailers are becoming less valuable as sales drivers, major brands are rethinking their reliance on wholesaling to such businesses.
As mentioned, Nike established a pilot deal with Amazon to offer a limited selection of the Nike product range through Vendor. This gives consumers the option to buy Nike goods straight from Amazon and benefit from Prime’s free 2-day shipping, Amazon’s customer service and accessibility.
The Nike.com site offers a fluid ecommerce experience with free shipping for NikePlus members (more on that soon) and 30 day free returns. At the same time, it’s a place where the brand is able to tell its story and emphasise its creative collaborations and releases.
3. Branded Stores
Nike’s extensive store reach is another key angle to their direct to consumer focus, and again the emphasis in these environments is on brand storytelling and engaging their millennial customers. The stores offer features like a running stride analysis to help customers pick out the right product for their unique style, and open early for NikePlus members.
Nike’s social platforms have garnered an impressive reach and the brand’s famous eye for visually arresting images combines with its sponsored athletes to create impressive imagery and a level of brand storytelling that most can only dream of. With 78 million Instagram followers, Nike posts a blend of product-led and athlete-fronted aspirational content and generates massive engagement – at the time of writing, a post one day ago featuring Rafael Nadal has accumulated half a million likes.
Nike currently has 7 apps available on the app store, including the retail app “Nike”, several fitness related apps, a Jordan Keyboard featuring branded emojis, and the SNEAKRS app which features behind-the-scenes content related to shoe design, as well as draws for the latest releases and of course the ability to purchase sneakers.
NikePlus is a membership programme that furthers both the relevance and immediacy of Nike with customers by becoming part of their exercise routines & shopping habits. Membership is free, but requires a sign up, where the brand captures age, gender, email, location, et cetera.
Members get access to the apps mentioned above, early release information and access, exclusive NikePlus events, and free shipping and returns.
Nike’s approach is unified across all these channels – it all comes back to focus on why they’re investing in them to start with. Their “Customer Direct Offensive” press release announced the creation of a dedicated DTC division – Nike Direct. This organisation encompasses Nike.com, stores, and NikePlus, all in pursuit of connecting more deeply with customers, controlling the brand experience as carefully as possibly, and leveraging that brand experience to increase margin-rich sales. Of course, this also makes them less reliant on their wholesale partners and more resilient to market shifts in offline retail.
All of those objectives are relevant to other brands today – connecting with the customer, controlling the experience, leveraging additional sales with higher margins, and becoming more independent of partner organisations and businesses.
Looking at Nike’s deal with Amazon in light of these aims, it is perhaps most notable that Nike has ended up using the Vendor platform rather than the Seller Central platform which would enable them to sell as a third party directly through the marketplace.
Amazon Vendor / Vendor Central
Vendor is Amazon's buying programme. Through Vendor, they place wholesale orders of products from manufacturers and brands in order to sell them through Amazon Retail.
Vendor Central is the online portal where a manufacturer's account with Amazon is managed. From here, businesses manage onsite advertising, content, orders and payments.
Seller Central / Third party
Selling on Amazon as a third party means creating a standard seller account on the marketplace portal - Seller Central.
The business behind the seller account becomes the merchant of record responsible for any transactions through the marketplace. In this model, the third-party business becomes the retailer and manages their own listings, orders from customers, and so on.
Arguably, the latter option is a better fit in terms of controlling the experience, which was the primary driver in doing the deal with Amazon. Amazon’s Brand Registry scheme is available to brands selling directly through the marketplace, which would help control the information and copy on any Nike product listings, regardless of seller. It would also give them total control of pricing and inventory, which is not possible through Vendor.
Also worth highlighting is the depth and breadth of Nike’s direct consumer connection, working across channels, through offline stores and events, their website and social channels, Amazon, and through apps which add value to the vital sportswear demographic – athletes and would-be athletes.
The guiding philosophy is to put the brand in front of the customer no matter where she is, rather than simply relying on drawing her to the brand. Nike will have analysed where their target markets are spending time online, where and how they shop and what value different channels could have for them; Nike has aggressively moved to establish footholds in all of these areas.
Social commerce is a significant upcoming opportunity, especially for apparel brands. Instagram is trialling a buy button in the U.S. currently and the platform is expected to become increasingly commerce-friendly. Currently users buying from an Instagram post have sub-par, friction-heavy experiences, but if and when this changes, expect to see the volume of goods traded on Instagram skyrocket. Nike is well ahead of the curve with an established and engaged following. Brands in general have a significant opportunity to join them in leading the field as far as social commerce goes – by creating engaging and inspiring content, brands can attract potential customers now and sell to them later when the technology is fully integrated.
NikePlus ticks a number of boxes when it comes to DTC connection. Clearly, it embeds the brand in customers daily lives with its apps and bonus features, and adds value through free returns and shipping offers. Most importantly, the value it offers is more than enough to convince customers to submit their personal data for marketing and analysis purposes.
As we touched on earlier, customer data is the lifeblood of direct-to-consumer projects and indeed the whole business. Brands should be looking to diversify their efforts towards capturing this data. Too many are reliant on capturing email addresses with newsletter signups and one-off 10% discounts, et cetera. Providing a valuable service to the consumer is a much more rewarding experience and one which generates more brand loyalty. Today’s customer is quite aware that the 10% discount means a lifetime of emails regardless of their level of interest and engagement with the brand, and is increasingly unlikely to remain subscribed.
In summary, while most brands don't have the reach and budget of Nike, they don’t need it to learn the valuable lessons that Nike’s direct-to-consumer model can teach. The rules and objectives are very much the same for brands of all sizes in the consumer goods space, and these practices are becoming more common in the market generally. Direct-to-consumer channels are increasingly less of an option for getting ahead and more of a requirement to keep up.
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