Nike Business Model: Demand Generation As Core Asset - FourWeekMBA (2024)

Nike follows a wholesale strategy combined with a very strong direct distribution. The company makes money primarily from footwear. As of 2022, over 62% of revenues came from footwear and 29% from apparel. The most successful Nike brand is the Jordan Brand, which in 2022 generated $5.2 billion in revenue. Nike is the master of demand creation and generation through its influencer campaigns, where athletes become an inspiration for everyday people.

Nike Vision and Mission

Nike’s main ability was creating an empire out of running shoes.

That might sound like a trivial statement. Yet, before Nike, no major US brand had done that.

In addition, Nike created a whole business ecosystem around shoes.

And it all starts by creating demand!

As the pandemic hit the world, Nike highlighted in its 2021 Shareholders’ Letter:

This was the year we brought to life our Consumer Direct Acceleration strategy. As part of CDA, we successfully realigned our organization and began investing in our highest-growth areas. Part of that investment is our new consumer construct of Men’s, Women’s and Kids’, which aligns us against the biggest opportunities we see ahead of us. We’re putting resources behind our end-to-end digital transformation across the value chain as we unlock more growth and efficiency for the business.

And it further highlighted:

Our momentum is driven by the underlying strengths we enjoy – the competitive advantages that allow us to navigate whatever dynamics we face. Those strengths include our commitment to innovation, our digital advantage, and three brands in Nike, Jordan and Converse that create deep and meaningful connections with consumers across the globe.

What products does Nike sell?

Nike has nine essential categories:

• Running,
• NIKE Basketball,
• The Jordan Brand,
• Football (Soccer),
• Men’s Training,
• Women’s Training,
• Action Sports,
• Sportswear (our sports-inspired lifestyle products)
• and Golf.

Men’s Training includes baseball and American football product offerings.

Nike also markets products designed for kids, as well as for other athletic and recreational uses such as cricket, lacrosse, tennis, volleyball, wrestling, walking, and outdoor activities.

Nike distribution and manufacturing

NIKE has six significant distribution centers located in Memphis, Tennessee, two of which are owned and four of which are leased.

Nike is supplied by approximately 127 footwear factories located in 15 countries. The largest single footwear factory accounted for about 8% of the 2017 NIKE Brand footwear production.

All of Nike’s footwear is manufactured outside of the United States by independent contract manufacturers who often operate multiple factories.

In 2017 Vietnam, China, and Indonesia manufactured approximately 46%, 27%, and 21% of total NIKE Brand footwear, respectively.

Nike revenues breakdown

Additional revenues also come from brands Nike managed independently, like Converse, which generated over $2.5 billion in 2022.

Nike distribution is divided across wholesalers and sales to its direct stores.

For a bit of context, Nike generated over $25 billion in 2022 by selling directly to Wholesalers, while it generated almost $19 billion through NIKE Direct.

In terms of distribution, 61% of shoes were sold through Wholesalers, while 39% were through NIKE Direct.

Global Brand Divisions revenues are primarily attributable to NIKE Brand licensing businesses not part of a geographic operating segment.

NIKE Brand wholesale equivalent revenues consist of:

• Sales to external wholesale customers.
• And internal sales from our wholesale operations to our Direct to Consumer operations, which are charged at prices that are comparable to prices charged to external wholesale customers.

Others include all unisex products, equipment, and other products not allocated to Men’s, Women, and Young Athletes.

Men’s sales represent most of Nike’s total revenues.

While the Jordan brand is by far the most successful, with over $5 billion in revenues in 2022.

In 2022, North America represented the central geography for sales.

The most successful segment is still footwear, which was the fastest growing and represented 66% in 2021.

Nike spending on-demand creation

One key ingredient of Nike’s success seems to be demand creation.

Demand creation expense consists of advertising and promotion costs, including costs of endorsem*nt contracts, television, digital and print advertising, brand events, and retail brand presentation.

Demand creation passed the $3.8 billion mark in 2022.

As the footwear, Nike’s segment recorded a massive leap in sales.

This is still the key ingredient secret, for Nike, as Steve Jobs explained many years ago:

How does it work? Nike explained:

The Company records demand creation expense for these amounts when the endorser achieves the specific goal. Certain contracts provide for variable payments based upon endorsers maintaining a level of performance in their sport over an extended period of time (e.g., maintaining a specified ranking in a sport for a year). When the Company determines payments are probable, the amounts are reported in Demand creation expense ratably over the contract period based on the Company’s best estimate of the endorser’s performance.

Yet the extent that actual payments to the endorser differ from the Company’s estimate due to changes in the endorser’s performance, and increased or decreased demand creation expense may be recorded in a future period.

Other contracts provide for royalty payments to endorsers based upon a predetermined percent of sales of particular products.

Through cooperative advertising programs, the Company reimburses customers for certain costs of advertising the Company’s products.

Key takeaways

• NIKE is a massive footwear powerhouse comprising Nike, Jordan, and Converse brands.
• The company followed a wholesale distribution strategy. However, it has strengthened its direct sales channel, playing a more critical role in recent years. The company is moving toward direct distribution.
• Footwear is the main engine for the company, together with the Jordan brand, which generated over $5 billion in 2022!

Key Highlights

• Nike’s Business Strategy: Nike employs a combination of wholesale and direct distribution strategies. While it traditionally followed a wholesale approach, it has been increasingly focusing on its direct distribution through NIKE stores and its e-commerce platform (SNKRS) since 2020.
• Revenue Sources: The majority of Nike’s revenue comes from footwear sales, accounting for over 62% of revenues in 2022. Apparel contributes about 29%, followed by equipment and other categories.
• Jordan Brand Success: The Jordan Brand is a standout success, generating $5.2 billion in revenue in 2022. It operates on a demand generation business model, leveraging the iconic brand to boost the sales of footwear and apparel.
• Distribution Centers and Manufacturing: Nike has several distribution centers, and its footwear is manufactured primarily outside the United States through independent contract manufacturers. Major manufacturing countries include Vietnam, China, and Indonesia.
• Global Revenue Breakdown: In 2022, North America was the leading geography for Nike sales, followed by EMEA, Greater China, and the rest of the world.
• Demand Creation Strategy: Nike is known for its demand creation strategy, spending significant amounts on advertising, endorsem*nt contracts, and promotional events. This strategy helps create consumer interest and drive sales.
• Revenue Growth: Nike’s revenues have continued to grow, reaching over $46 billion in 2022, driven by demand creation and the popularity of its footwear offerings.
• Mission and Vision: Nike’s mission is to expand human potential through innovative sports products, sustainable practices, a diverse global team, and positive community impact. Its vision is to bring inspiration and innovation to every athlete in the world.
• Nike’s Impact: Nike’s influence extends beyond its products, as the company focuses on innovation, digital advantages, and meaningful connections with consumers through its brands, including Nike, Jordan, and Converse.
• Converse Brand: Converse, an independent brand under Nike, generated over $2.5 billion in revenue in 2022. It follows both wholesale and direct distribution strategies.
• Product Categories: Nike offers a range of products in categories such as running, basketball, football (soccer), training, action sports, sportswear, and golf, catering to various sports and lifestyles.
• Commitment to Innovation: Nike’s strengths include a commitment to innovation, a digital advantage, and deep connections with consumers through its brands.
• Endorser Contracts: Nike’s demand creation expenses include costs related to endorsem*nt contracts with athletes. Payments are made based on specific goals and performance levels achieved by endorsers.
• Creating an Empire: Nike revolutionized the sportswear industry by creating a massive empire out of running shoes, with footwear as the driving force behind its success.
• Direct-to-Consumer Approach: Nike’s Consumer Direct Acceleration strategy involves investing in its highest-growth areas, including a focus on men’s, women’s, and kids’ product segments, as well as enhancing its digital transformation for more growth and efficiency.
• Continuous Growth: Nike’s direct sales have shown steady growth, increasing by over 50% from 2020 to 2022, emphasizing the company’s evolving distribution strategy.
• Emphasis on Footwear: Footwear remains a central focus for Nike, being the fastest-growing segment and contributing significantly to the company’s overall revenue.
• Wholesale and Direct Sales: Nike balances its sales between wholesalers and direct stores, aiming to strengthen its direct distribution channel while maintaining relationships with wholesalers.

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