Nike’s Secret for surviving the Retail Apocalypse

Why struggling retailers should be studying Nike’s pandemic strategy in China.

By guest author Rob Walker from Marker Medium

Graphic courtesy from Marker Medium

The fallout from the coronavirus pandemic is laying waste to a retail sector that was already shaky — from struggling traditional players like Macy’s and the Gap (now announcing massive layoffs and furloughs) to widely hyped direct-to-consumer startups lately exposed as far weaker than they appeared (which, like Everlane and Rent the Runway, have been adding to the layoff carnage).

So does any consumer-facing brand that’s not selling groceries or other essentials have a convincing plan for surviving this grim era? Maybe Nike.

In its most recent and keenly awaited earnings call on March 24, Nike reported surprisingly good numbers — despite the company’s heavy reliance on a Chinese market that had been walloped by the coronavirus. In fact, Nike’s CEO John Donahoe declared that, having made it through to “the other side of the crisis in China,” the company now has “a playbook we can use elsewhere.”

That’s a bold claim. And it may prove exaggerated. But the Nike Covid-19 “playbook” deserves the deeper scrutiny of pretty much any retail brand trying to figure out how to survive the months ahead.

The main lesson may be that a robust digital sales and marketing strategy isn’t an add-on. It’s a must. Traditional brands and retailers have paid lip service to that idea for years, but now they’re learning the hard way that half measures aren’t enough.

Here’s the short version of what happened with Nike: When the virus sparked store closures across China, Nike embraced a hard pivot to digital sales and marketing. It reopened physical spaces strategically as the crisis there eased, its decisions guided in part by sophisticated monitoring of its distribution and supply chain. While sales still took a hit, the company’s ability to tap into, and even build on, its robust digital channels eased the pain and, the company says, aided with a quick bounce-back.

Weekly active use of Nike’s fitness apps rose 80% in China.

The quarter that closed at the end of February included the most drastic economic effects of the virus in China, and the closure of, at one point, 75 % of all retail stores selling Nike products in the country. Meanwhile, Nike’s digital sales rose 30 % in China during that period. To be sure, there was still damage: The brand’s overall sales in China fell by a bit more than 5%. Still, as one Wall Street analyst put it in a research note: “The impact from the coronavirus in China was more muted than anticipated, and business there has begun to normalize,” adding that Nike’s rebound looks like “a good proxy” for recovery in Western markets.

A Nike spokesperson pointed to specific details in the company’s recent earnings call, which went into some depth on Nike’s playbook. The first step is “containment”: a given market essentially shuts down or reduces the hours of physical retail and the company must rely on, and heavily promote, digital alternatives.

That does not mean just having a perfunctory online store. Nike pushed its fitness app and digitally connected “expert trainer network” to give Chinese consumers help staying active while cooped up; weekly active use of Nike’s fitness apps rose 80% in China, the company said. “The strong engagement of Chinese consumers with our activity apps translated into strong engagement with our Nike commerce app,” Donahoe said. Also important: Nike’s ability to divert inventory intended for physical stores over to direct-to-consumer distribution.

The second step in the playbook is a “recovery” period. As physical retail stores began to reopen, foot traffic returned gradually — but digital sales, in China, have remained strong, Nike says. (Executive vice president and CFO Andy Campion said in the earnings call that Nike’s Chinese digital sales are “approaching triple-digit growth” over pre-crisis numbers.) Donahoe said the Chinese market is getting back to normal, and he expects sales in the next quarter to be flat. The same pattern held in South Korea and Japan, he added.

In the U.S. — with many retailers closed — the brand has launched a “play inside” marketing campaign tied to its Nike Training Club fitness app, which it has made free. The premium version, offering 185 workouts, normally costs about $15 a month. And (like many brands lately) it’s offering deep discounts and free shipping on some of its products. Nike said usage of the NTC app has surged more than 100% in the U.S.

The catch is that Nike did not dream all this up in response to the current crisis. It has been heavily focused on digital for years, “building a massive digital advantage,” as The Motley Fool put it in April 2019, doing much more than “throwing up a website” or a basic shopping app. In addition to NTC, there’s a Run Club app, which lets runners track their activity and compete with other users. Another app, SNKRS, is designed to clue hardcore sneakerheads in to new Nike releases. Plus, Nike’s core shopping app can be personalized to offer “more tailored” experiences, creating “direct” relationships with consumers through custom product recommendations, as Nike’s Campion put it last year.

This was all the result of a deliberate shift to adding a more robust direct-to-consumer alternative to Nike’s existing relationships with traditional retailers. Embracing a “consumer direct offense” was, at the time, controversial, involving major budgetary shifts, narrowing its number of physical-retail partners, and even layoffs. Donahoe’s background includes running ServiceNow (a cloud computing giant) and eBay, and his ascendency to the CEO role last year — while perhaps marking an end to a more creative era in the company’s leadership — was seen in part as a doubling down on e-commerce.

While Nike’s global status helps in many ways, it also makes the company unavoidably vulnerable.

Clearly it is much harder for a retail brand to make a major shift toward a deeper set of digital offerings and alternatives on the fly. And there are caveats here. Nike’s playbook is far from proven, as the U.S. and European retail markets differ from China’s, and the pandemic’s economic effects may differ, too. Moreover, Nike has a solid balance sheet, and one of the most recognizable global brands in the history of capitalism. It has classics (the Air Force One, introduced roughly two decades ago continues to be top seller) and it innovates (the Vaporfly is the most talked-about athletic shoe in years). And, it has performed well in prior recessions. (Donahoe also noted Nike’s obligation beyond its customers: While closing stores, it pledged to continue paying retail workers, and the company is one among many design and manufacturing firms working on medical garments such as face shields.) Nike is also vertically integrated, with control over its supply chain and distribution partnerships, able to sell directly or through vendors.

These are company attributes that cannot be ginned up overnight; they are built and earned over time. For legacy retailers that have been in denial about the implications of digital, itis pretty late in the day to try to pivot. And, for direct-to-consumer upstarts that postponed sound financials in favour of short-term growth schemes — it’s time to find out whether such brands really mean anything to consumers.

Finally, it is important to underscore that even Nike’s playbook acknowledges that the company will absorb further hits to revenue and earnings. There is no way to simply sidestep a challenge as monumental, far-reaching, and life-altering as the coronavirus pandemic. And while Nike’s global status helps in many ways, it also makes the company unavoidably vulnerable; its share price has rallied lately, but is still down since the markets peaked back in February.

That said, at a moment when pretty much every retail brand looks precarious, Nike has a story to tell that is pretty unusual: one that at least claims to point toward a better future. It may not be a perfect playbook, but it is the best we have seen so far.