New DTC toolkit   //   August 27, 2020

Nike’s all-in bet on going direct is a blow to the middle tier of wholesalers

Nike’s full-blown digital strategy is beginning to take shape.

Earlier this week, analyst Sam Poser wrote in a research note that the brand was cutting ties with a number of retail partners — including Zappos, Dillards and Bob’s Store.

“As part of our recently announced Consumer Direct Acceleration strategy, we are doubling down on our approach with Nike Digital and our owned stores, as well as a smaller number of strategic partners who share our vision to create a consistent, connected, and modern shopping experience,” wrote Nike in a statement to Business Insider.

Most of these retailers are on the smaller side, but the overall move points to Nike’s overall digital ambitions. The company is cutting out wholesale partners it doesn’t need and is instead trying its best to move sales and engagement to its own channels. It’s a move nearly every brand wants to make, but Nike is in one of the most advantageous positions to actually execute.

Nike’s digital intentions are nothing new. Over the past few years, the company has been trying to rely less on retail partners and focus more on its DTC channel. Slowly but surely it’s cut many of its wholesale partners in an attempt to focus more of its business to its direct-to-consumer channel. Last year, for example, the brand cut ties with Amazon, saying it wanted to focus more on its direct connections with customers. Thus, it’s not terribly surprising that Nike would ultimately decide to stop doing business with the Amazon-owned Zappos.

Still, the decision to cut wholesale fat could send a jarring message to retailers. “It’s become pretty apparent that the B class of department stores are just not cutting it in terms of wholesale,” said retail analyst Rebekah Kondrat. The whole point of a brand like Nike being in another store is to get exposure and increase customer acquisition. Foot traffic has dropped dramatically and nearly ever department store is ailing. Companies like Nike traded off worse margins — often as much as 40% — for placement at stores like Dillards. Now, the luster is fading.

Indeed, a conversation many brands are having is around whether or not pursue wholesale partnerships. “As I’m talking to these founders of DTC brands, they’re really not interested in wholesale — like at all,” said Kondrat. These companies are seeing the downfall of stores like Macy’s and JCPenney, and are opting to go another route. Many are looking into owned retail opportunities — like pop-ups in smaller cities — that are likely cheaper now due to the pandemic, said Kondrat.

Meanwhile, what Nike has — that many other brands don’t — is a powerful and growing DTC business. At its last earnings report, the company disclosed a 38% sales decline, but digital sales grew 75% — representing 30% of the brand’s entire revenue.

The company’s overall strategy it seems is to capitalize on growing demand for digital sales while increasing its own footprint. Nike’s president of consumer and marketplace, Heidi O’Neill, told Modern Retail last May that building out digital experiences was a big focus. Long before the current situation, we had been building a platform of connected experiences, services and apps; this has just been core to business strategy,” she said.

This move works in concert with Nike slowly cutting off retail partners. “Nike is in a power position to start pulling back the reins [on some channels],” said Andrew Lipsman, principal analyst at eMarketer. “It can stack rank the various channels,” he said, to figure out “which ones dilute [the brand] the most — which ones aren’t producing the most profits.”

Now would be the time to make such a move. More consumers are buying things online and relying less on ancillary retail channels. Still, it’s a difficult strategy to execute if the proper groundwork hasn’t already been laid.

Nike is a brand uniquely situated to make such a move. “They have a level of affinity and loyalty,” said Lipsman. “They can — and probably should — control the experience.”