When building a retail brand, the conventional wisdom has long been to get your products into as many stores as possible. This means selling through wholesale partners such as department stores, mom-and-pop shops and specialist retailers.
But Nike has shown why it pays to cut out the middle man. A decade ago, about 72 per cent of the sportswear giant’s sales came from third-party distributors. Nike’s direct-to-consumers trade — either through its own stores or online — amounted to less than 15 per cent of the business.
Fast-forward to the latest quarter. Direct sales — up 15 per cent over the year — now account for 42 per cent of group revenue.
Flogging sneakers and workout gear directly to shoppers makes plenty of sense, especially for a $215bn brand with sought-after products and a global fan base. Direct sales have allowed Nike to sell more products at full price. This has helped offset some of the squeeze from higher supply chain costs and drove a 100-basis points increase in gross margins to 46.6 per cent during the quarter, the most since the third quarter of 2015.
Flogging kit directly to consumers also provides Nike with plenty of valuable data about its shoppers. Still, concerns over rising input costs have knocked the company’s share price down a quarter from its November highs. At 30 times forward earnings, Nike still commands a punchy valuation, at a premium to rivals Adidas and Under Armour. But compared with its three-year average of 36 times, the current valuation looks like a buying opportunity. That does assume its supply chain tightness eventually unravels.
Nike has hardly trod on to virgin ground. Plenty of consumer start-ups boast a direct-to-consumer business model. Most of these — including eco-friendly shoemaker Allbirds and Warby Parker, purveyor of hipster eyewear — remain lossmaking. Nike, with $8.7bn in cash and equivalents on its balance sheet, has plenty of capital to invest into growing its direct sales channel. Challengers will struggle to keep pace.
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Source: Financial Times