Drapers investigates the dominance of Nike and Adidas in the sportswear industry as they both shift toward direct-to-consumer strategies.
Nike and Adidas have thrown the future of several independent retailers into doubt by cutting their supply of product, as the world’s two most powerful sportswear brands take greater control of their distribution.
The ramifications of the duo’s switch to a direct-to-consumer model are also hitting multiple and online retailers. Mike Ashley’s Sports Direct called for an investigation in October into the tactics of certain “must-have” brands, such as Adidas, in controlling and withdrawing the supply of products.
Although unpopular with retailers, many industry experts believe Nike and Adidas cannot be blamed for wanting to improve margins and control over their relationships with customers. It is by evolving their strategies, as well as innovative products, effective marketing and powerful collaborations, that these giants outperform other sportswear labels.
Nike reported a 7% year-on-year rise in revenues to $39.1bn (£30.2bn) in the year to 31 May. Net income for the year was $4.0bn (£3.04bn), compared with $1.9bn (£1.44bn) the year before – primarily related to the impact of the Tax Act (prepayment of corporate taxes), which offset strong revenue growth.
For the past two years Nike has only been delivering 20%-25% of orders we’ve placed
Adidas posted record results for the year to 31 December 2018, when sales were up 8% to €21.9bn (£18.43bn) and net profit was up 20% year on year to €1.7bn (£1.5bn).
Research conducted for Drapers by analyst Kantar showed their combined market share in Britain, across clothing footwear and accessories, totalled 5.7% in the year to 22 September. Their combined market share of trainers was 54.9%.
|Clothing, footwear and accessories||Trainers|
|52 weeks to 22 Sep 2019|
|Combined share %||5.7||Combined share %||54.9|
As both brands plan to grow this presence by shifting toward direct-to-consumer strategies, Drapers investigates whether they already hold too much power.
The swoosh strategy
In June 2017, Nike outlined a new direct-to-consumer strategy to drive growth, called “Consumer Direct Offense”. Spearheaded by former Nike CEO, chairman and president Mark Parker, who stepped down in October, the pillars of the plan include: focusing on key cities; ramping up its innovation pipeline; editing its product catalogue while offering a deeper selection of its best-performing styles; and enhancing digital with mobile as the primary channel.
The company said the aim was to generate 50% of sales through own stores and its ecommerce platform to help boost profits and margins, as well as have more control over distribution.
In October 2017 Parker announced a shake-up of the sportswear giant’s retail network of around 30,000 retailers and 110,000 points of distribution worldwide to “focus” on 40 key retail partners, including JD Sports and Footlocker.
Drapers has heard from retailers who last year were told they were not allowed to trade online with Nike products, and there was an additional restriction against selling across European borders.
Then in April Nike notified other independent retailers across the UK – many of whom had stocked the brand for more than two decades – that it would be terminating their supply agreements in 2020. Drapers spoke to eight distressed independent stockists who have been affected.
One of the letters seen by Drapers says: “Following a comprehensive review of Neon’s [Nike European Operations Netherlands] distribution strategy, Neon has decided that your business strategy does no longer match with the Neon business plans and needs. In this respect, we wish to inform you that Neon has decided to discontinue its business relationship with you.”
Another letter reads: ”The decision has been taken as a result of changes to our distribution strategy. Our decision has been made for understandable and legitimate commercial reasons.
“We note that such changes are within our rights as a business. We believe that [date redacted by the retailer] months’ advance notice should be sufficient to adapt your business to the new situation, working with new or existing suppliers of other well-known and popular brands.”
Several independent stockists say they were “not surprised” as Nike had already been restricting orders.
[Nike] are making retailers’ lives difficult by restricting access, not delivering goods on time and providing incomplete ranges
Manager of a worldwide sports retail group
One store owner says: “For the past two years Nike has only been delivering 20%-25% of orders we’ve placed. It’s always been the bestselling shoes they aren’t delivering. Even if we order, they don’t deliver it – even when we’ve paid.” Drapers understands that in this situation the payment was credited back.
The manager of one worldwide sports retail group says: “[Nike] are making retailers’ lives difficult by restricting access, not delivering goods on time and providing incomplete ranges. The restrictions on product access have cost many of our stores their identity and credibility.
“Nike wants to control its own destiny and brush aside everyone who helped them get to where they are now. In one swipe, this action could remove so many little businesses.”
Other independents claim Nike has been raising retailers’ minimum spend. Drapers understands minimums vary, and some stockists have reported a minimum of around $50,000 (£38,000) per financial year has doubled to $100,000 (£77,191) in the last few years.
Nick Mavrides, owner of Ace Sports in London’s Kentish Town, received a letter on 29 June 2018 closing his account after he could not meet an annual minimum purchase of €10,000 (£8,547). He says there had been no minimum spend until around three years ago.
The letter reads: “Our data shows that for Neon [Nike European Operations Netherlands] fiscal year 18, the total value of your invoiced purchases is €8,550 [£7,307]. This means that you have not fulfilled the minimum annual purchase obligation … we will proceed with the closure of your Neon customer number and account, ending the commercial relationship with your company.”
Mavrides, who has traded with Nike for more than 30 years, took Nike to the small claims court in July this year. He claimed the account closure cost him a loss of profit for an order he had received from an “important client” amounting to £8,394, representing a loss from this single order of £4,022.
Nike paid the claim in full on 4 December (inclusive of the full court fee), “by way of commercial gesture”. Mavrides hopes it has set a precedent for other indies.
Nevertheless, a handful of independents say they have been able to restore their accounts after Nike allowed them to appeal face to face. Those who were successful say they were willing to “go the extra mile” by aligning their stores with Nike’s strategy – for example, by providing “the best” product presentation and experience at the point of sale.
A Nike spokeswoman said: “Nike continues to respond to a fast-changing marketplace. We’re committed to working with the right partners to elevate the presentation of our brand, create the best possible experience and serve the consumer better. Like many businesses, from time to time we do make adjustments to our sales channels.”
Drapers understands Nike is providing advance notice of up to two years and a transition period when ending wholesale relationships, which it believes gives retailers enough time to find replacement brands.
Three stripes and you’re out
Adidas introduced its “Creating the New” direct-to-consumer strategy in 2015, with the aim of getting closer to consumers “than ever before” by 2020. It has three elements: speed, cities and open source.
The brand has not announced that it is closing wholesale accounts or focusing on key retail partners. However, several independents tell Drapers their accounts have been cut by Adidas or it is raising their minimum spend.
One says that because JD Sports has opened in his town, he is losing both his Adidas and Nike accounts.
“There are only two [sportswear] brands in the premier league: Adidas and Nike. The amount of business we do with those two accounts is 50%-60% of turnover. It means we won’t be able to carry on trading.”
The managing director of one independent says: “A while ago [Adidas] started increasing the minimum spend level.” He would not disclose by how much.
Retailers are now fearful that Adidas will follow in Nike’s footsteps.
“Adidas are always playing catch-up to Nike,” another independent MD says. “It would not surprise me if they go down the same route.”
Shilpa Patel, owner of Euro Sports on London’s Finchley Road, says it would be devastating if both brands cut their accounts: “Because we belong to [retail group] Intersport, we can still access goods. Smaller indies like us rely on Nike and Adidas. To pull out of accounts is playing with people’s livelihoods.”
However, one store owner believes Adidas is unlikely “to go down the route as brutally as Nike, unless perhaps their agenda changes in the future”, as the fallout from Nike’s actions is likely to deter it from taking the same approach.
An Adidas spokeswoman says: “The consumer is at the heart of our strategy and everything we do has the objective in mind to even better serve our consumers. In an increasingly digital marketplace, the consumer decides where to go for information and where to purchase. We want to enable seamless consumer journeys. A strong partnership with retail partners is important to reach this objective.”
Nike and Adidas’s tussle for power is not just affecting independent retailers – but multiple and online retailers, too.
Last month, Nike announced that it will stop selling its products on Amazon, ending a trial that began in 2017, as it focuses on “elevating consumer experiences through more direct, personal relationships”.
It follows Sports Direct’s call for an investigation in October into the dominance of certain “must-have” brands in the sportswear market. The retailer claims the tactics they use include restricting bestselling products and withdrawing the supply of products.
Such practices may come under scrutiny from the Competition and Markets Authority as part of its ongoing inquiry into JD Sports’ £90m acquisition of smaller rival Footasylum. JD Sports has told Drapers that the rapid acceleration of brands towards a direct-to-consumer model is one of the biggest changes and challenges in the sports retail market over the last five years.
A source close to Sports Direct says: “Nike has [around] seven classes of sales: at one point, JD Sports had all seven and Sports Direct only had the bottom four. However, Nike did agree a couple of years ago that Sports Direct would be able to get all the available product.”
The managing director of a multiple multi-brand retailer agrees: “[Nike and Adidas] certainly keep the top product [for themselves]. We get access sometimes, but not a lot.” He cites restrictions on the different colourways and materials for styles such as Air Force 1 and Air Max.
Is it legal?
Stephen Sidkin, fashion law partner at Fox Williams, considers whether Nike is in breach of competition law
Could competition law be the saviour of independent sports retailers that are “no longer aligned” with Nike’s distribution strategy? Possibly.
Competition law has two concerns. First: is there an agreement between two or more parties that restricts competition? If it were the case that two suppliers decided to carve up the market in some way – for example, by co-ordinating their pricing or distribution – they could be infringing competition law.
Second: is the supplier in a position of market dominance and abusing its power? If a supplier has, say, 40%-50% of a market, any actions in the supply of its goods might be found to be an abuse.
But there is a further issue. Sports Direct is asking the Competition and Markets Authority to act. But the competition law regulator has finite resources that are outstretched by demand.
The alternative is for a party that feels that it has been wronged not to wait for the regulator but to bring a competition law infringement action of its own. But the outcome of litigation is uncertain.
So, do Nike and Adidas hold too much power? No, I don’t think they do – providing they’re delivering to their consumers within their law.
Yet he believes “if the government tries to get stuck in [and intervenes on the dominance of the two brands] it will make the situation even worse” because they could decide not to work with multi-brand retailers at all.
The Competition and Markets Authority declined to comment, while Sports Direct has not responded to requests for comment.
A smart move
Yet industry experts make the business case for Nike and Adidas’s direct-to-consumer models. Deloitte says they improve margins, broaden the customer base and allow the brands to have more control of its distribution.
Retail analyst Mark Pilkington explains: “The traditional supply chain has three problems: it is expensive, slow moving and [brands] are always one stage removed from their final customers.
“By selling directly to consumers [Nike and Adidas] can offer better prices and faster innovation, and develop closer relationships with consumers.”
The source close to Sports Direct concurs: “If you’ve got a brand that does fantastic product development, it’s no surprise that the world wants those products. When you’ve got two brands like this that absolutely dominate, that is the result of all their immense efforts.”
Indies are worried because it’s like going to the supermarket and choosing Heinz ketchup – everyone picks Nike and Adidas
Stuart Lorimer, fashion consultant and former clothing supplier
Meanwhile, several sources believe independents should find more niche brands to replace them.
Stuart Lorimer, a fashion consultant and former clothing supplier, says: “Indies are worried because it’s like going to the supermarket and choosing Heinz ketchup – everyone picks Nike and Adidas. However, the indies that are successful go out of their way to find new or really good heritage brands.”
Darren Hoggett, owner of menswear independent J&B menswear in Norwich, agreed: “Indies shouldn’t have their eggs all in one basket – they need to assess their portfolios [and] diversify more if they’re interested in margins.”
Alexandra Vanthournout, founder of sportswear independent Fashercise in Seven Dials, Covent Garden, agrees: “The consumer is ready for something else, especially in the luxury segment. The hype behind Lululemon, Sweaty Betty, Nike and Adidas seems to have faded over the past few years and with the ever-increasing activewear market, there’s now a lot of choice, which indies are here to offer.”
Withdrawal of supply by the two sportswear giants will hit the already challenged independent retail sector. Sports Direct adding its protestations may add to pressure on the Competition and Markets Authority to intervene. Ultimately, though, consumer demand will prevail.
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