ECO 201 Final Submission Nike Research Paper PDF

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NIKE, INC. MARKET ANAYSIS

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Nike, Inc. Market Analysis Monique Santee Final Submission: Research Paper Southern New Hampshire University

NIKE, INC. MARKET ANAYSIS

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NIKE, INC. “Just do it”, Nike’s trademark motives all athletes throughout the world to strive to be the best. Nationally and internationally known, Nike, Inc is a main supplier for sports and athletes with its check mark looking logo “swoosh”. Herein microeconomics research paper, I will delve into the Nike, Inc market analysis by evaluating trends like supply and demand with the market demands for footwear and athletic apparel industry. Moreover, assessing Nike’s price elasticity will correlate to pricing products, consumer responsiveness to price changes, and in what way the demand impacts Nike’s decision to confirm product prices. Subsequently, I will analyze the different costs that Nike faces and how trends over time impact Nike’s profitability, and fixed and variable costs through cost of production. I will discuss Nike’s market share and it’s top competitors by providing data for all companies, any barriers to entry and structure that may influence the overall market. and future recommendations for this company. Lastly, I will make recommendations for what Nike can manage in its future production its position in the market with data I obtain. FOUNDATION OF NIKE During the Blue Ribbon Sports in 1964, coach Bill Bowerman requested Phil Knight, a track and field athlete for the University of Oregon, to provide him with a pair of his running shoes to modify them with a superior design. Phil liked the shoes so much that even his teammate Otis Davis wanted a pair for himself which lead Otis to win the 1960 Olympics gold medal for the 400-meter dash. Once Phil Knight graduated from the University of Oregon, he went for his masters at Stanford and “wrote a paper theorizing that the production of running shoes should move from its current center in Germany to Japan, where the labor is cheaper.”

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(Meyer. 2019) Phil Knight ventured on a trip to Japan after he graduated in 1962, to test his theory which landed him a deal with Japanese businessmen to export a popular shoe design. (Meyer. 2019) Although, coach Bowerman felt at the time that the German shoes were the best on the market, he supported Knight’s endeavor by splitting the new company, Blue Ribbon Sports in 1964. HISTORY OF NIKE After returning from Japan, Knight was selling his sneakers from his car and realized that the “demand existed for these cheaper but still high-quality alternatives to Adidas and Puma that dominated the market.” (Meyer. 2019) Bowerman proposed a shoe design to the Tiger shoe company which created conflict between Blue Ribbon Sports and its Japanese supplier. In 1967, the shoe Tiger Cortez dropped which was very popular and successful. During this time, a wedge was created between Blue Ribbon and Tiger which according to Knight led the Japanese wanting a way out of the exclusivity deal. “Tiger claims to have discovered Blue Ribbon Sports selling their own version of the Tiger Cortez under a new line of shoes called Nike.” (Meyer. 2019) Eventually, they split in 1971 after a lawsuit from Tiger, in which the judge stated that both companies would be able to sell their own version of shoe which were the Nike Cortez and the Tiger Cosair. Blue Ribbon Sports is now known as Nike and Tiger is now known as Asics. One of Knight’s, employee’s Jeff Johnson proposed the Nike as the brand name after having a dream about the Greek goddess. Carolyn Davis was a college student at Portland State University that provided different sketches to Phil and Jeff who decided on the swoosh logo.

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By 1980, Nike was growing steady and Phil Knight was a millionaire with shares worth $178 million. Ad campaigns helped Nike to grow, one in particularly continues to be a huge trademark. In 1988, Nike ad campaign “Just do it” supposedly comes from “the last words of American murderer Gary Gilmore before firing the squad, Let’s do it.” (Meyer. 2019) Another way that Nike continues to grow is through endorsements with athletes by signing huge deals with “athletes like Tiger Woods, Kobe Bryant, Lebron James in the early in their career.” (Meyer. 2019) One of the biggest collaborations Nike has ever done is with basketball legend Michael Jordan. Michael Jordan “had never worn a pair of Nikes” and was waiting on endorsements from Adidas but decided to go with Nike with a deal of $500,000 a year for five years, Mercedes cars, and customized shoes upon his request. Michael Jordan not only became one of the best NBA players of all time but got his own shoe line Air Jordan’s which ended up making over $100 million in revenue by the end of 1985. SUPPLY AND DEMAND CONDITIONS According to Nike, Inc. website, they considered themselves a company that grows by establishing new products for the demand of its consumers and strive to ensure that consumers have great experiences when purchasing via store or online. With the demand of athletic shoes and athletic gear, Nike continues to be consistent for their consumers with their ability to deliver innovation year after year. Additionally, we need to be able to analyze the pricing alongside with revenue growth to be able to see how it will influence on how a consumer would respond by using the price of elasticity of demand. Over the last five years, Nike continues to grow their revenue which leads us to believe that the demand is constantly growing every year.

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. As shown in the graph beneath, Nike, Inc has exhibited incredible expansion in sales throughout the last 5-years and considerably support of its growth from “a nearly 10% price increase that was phased in over the last couple of years.

Millions in $

Revenue and Cost of Goods Sold $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 Revenue (in millions) COGS (in millions)

Year

Figure 1. 2019 Annual Report. (n.d.). Retrieved March 26, 2020, from https://investors.nike.com/investors/news-events-and-reports/?toggle=reports

According to Forbes article, Nike, Already World’s Largest Sneaker Maker, Proves It’s Still A Growth Company, “Nike’s revenue minus currency impact in its greater China business jumped 31%, its 18th straight quarter of double-digit gains, Andy Champion, Nike’s chief financial officer stated. In North America, Nike’s largest market, the company saw strong demand, with sales up 9%, led by demand for both its shoes and its apparel. More importantly, sales of its key Jordan line rose in the “double digits,” returning to “healthy sustainable growth in North America.” In Europe, sales rose 14% as Nike said it gained "significant" market share. Total companywide revenue in the quarter ended Nov. 30 rose 10%, to $9.4 billion, on gains across all regions and would have climbed 14% minus currency translations impact. The Swoosh brand's constant-currency sales jumped 14%, to $8.9 billion. In another sign of full-

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priced demand, gross margin widened by almost 1 percentage point, to 43.8%, helped partly by higher average selling prices and growth in Nike’s own direct-to- consumer retail and online business. Digital sales surged a combined 41%, driven by mobile orders. In fact, at a pace far outpacing the retail industry average, Nike’s mobile demand has exceeded more than half of its e-commerce sales, Campion said.” Being one of the largest international corporations that provide sportswear in the world, it maintains different pathways for consumers to create influence and requirements on their supply and demand. As people all over the world continue to follow trends and fashion, Nike can see the increase in supply and demand. Nike, Inc appeals to all consumers all over the world from, casual clothes, to athletic uniform for sports team, and sports footwear for fashion and or athletes. By Nike consistently making major improvements for their brand will anticipate profits for catering to their consumers. In these last five years, the growth in sales proves that consumers will buy Nike products regardless of their current financial situation. Growing up and even people I know now, will still get a ticket number to get a spot in line for the latest Jordan’s to drop every month, whether they have the money or not. It is safe to say that if consumers were to have a raise in their income, the demand would increase, which will lead to more profits. Nike, Inc must be aware of the demand in order to provide the supply. Some of the factors that need to be evaluated are as follows: production cost, material cost, price of good. These will impact how Nike will decide to price out their items for sale to their consumers. Therefore, if supply increases in price it will cause increase in supply while decreasing in price will decease supply. For example, Air Jordan’s have release dates which creates a higher demand with limited supply, yet the supply will increase with this higher demand. The right supply chain

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can truly make a difference in costs of labor and production which can improve profit margin and make sure that consumers are receiving quality products for reasonable prices. Nike, Inc is repeatedly improving their supply chain year after year. Nike, Inc has 744 third party factories worldwide, in about 43 countries, mainly in the United States, China, Thailand, and Vietnam. Having factories in multiple countries helps the operation costs of production to stay low while delivering high quality products to their consumers. If Nike ever decided to only manufacture their products in the United States, the costs would increase significantly which may increase the price of merchandise which in turn would decrease the demand. The graph below shows how the total revenue continues to climb in the last five years.

Figure 2. Author(s) Unknown. Nike Inc Worldwide Revenue). Retrieved April 26, 2020, from https://statista.com/nike_revenue

PRICE ELASTICITY OF DEMAND

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Price elasticity of demand, an economic measure of the difference in the quantity demanded or purchased of a manufactured good in relation to its price shift. When you express price elasticity of demand mathematically, its Price Elasticity of Demand= % Change in Quantity Demand/ % Change in Price.

(Kenton. 2020) When manufactured goods demand

fluctuates in response to an elevated or decline in pricing, manufactured goods are elastic”. If manufactured goods demand only changes slightly due to pricing, that manufacture goods is “inelastic.” Products can either be consider elastic or inelastic demand but are based of factors like availability of close substitutes, passage of time, whether it’s a necessity or a want, definition of the market, and the budget of the consumers. As one of the top selling athletic footwear and apparel, Nike has competitors like Adidas, Under Armour, and even Puma that sell athletic wear and footwear. Depending on the sport, the cost per shoe can vary between $60-$400 and even though Nike has many competitors, they continue to have the demand which leads them to gross profits year after year. The five determinants that tells us whether the demand is elastic or inelastic are availability of substitutes, pass of time, luxuries versus necessities, define the market, and consumer budgets. There are less substitutes for the exclusivity of Nike’s Air Jordan line which would make this product line inelastic. No matter how much time has passed over the years, consumers continue to want to purchase the latest Air Jordan’s that get released, regardless of the price. Athletes need footwear for the sports that they play, so having a company like Nike to supply the demand of these teams around the world can be considered a necessity for the franchise. According to O’Connell, the states that the United States is the core market for Nike, with the company generating approximately 41 percent of the overall revenue in 2019. Shoe

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fanatics, that love Air Jordan’s could careless if it’s in their budget because of the shoe itself and what it represents in the basketball culture. The annual reports illustrate that Nike has an inelastic demand. Nike comprehends the market and the consumer trends so raising in their price would not drop the demand enough for it to be considered elastic demand. As sports apparel company, Nike offers athletic wear and footwear to all types of consumers. With Air Jordan line being super exclusive to Nike, they can set the price as they see fit with the demand of the latest and greatest Jordan style. According to the history of Air Jordan on the Foot Locker website, back in 1985, when the original Air Jordan was releases to the market was retailing for $65.00 which at the time was very expensive for an athletic shoe. Furthermore, the importance of the relationship between an elastic demand and total revue is significant in understanding the direction Nike’s annual profits. According to the text, the total revenue is calculated by multiplying the price per unit by the number of units sold. (Meyer.2019) Since Nike is an elastic demand, the price and the total revenue will continuously move forward with a consistent trend. Since Nike is growing year after year, increase in price essentially increase the total revenue for their athletic wear and footwear. By the definition of an inelastic demand, with a popular shoe line like Air Jordan have increased in price over the years which helps with has help contribute to higher total revenues each year. COST OF PRODUCTION Internationally known, Nike, Inc will encounter several kinds of risks versus a domestic only base company yet does not affect their annual profits yearly. Throughout Nike’s the first and fourth quarter, those quarters surpasses their second and third quarter when it comes to

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revenues. In the past five years, hottest profit expansion occurred from the 2014 fiscal year to the 2018 fiscal year. Nike’s fiscal year starts in June and ends in May. During this period, Nike observed an increase of profits of 10.48% or 2.91 million dollars. (Wall Street Journal, 2019) “As one of the largest and most recognizable sports brands on the planet, it is of no surprise that Nike invests significant sums into its promotional campaigns each year. In 2019 alone, Nike's advertising and promotion costs amounted to approximately 3.75 billion U.S. dollars.” (Statista) Inclusively, Nike’s sales and revenue performance increase year after year.

Figure 3. Author(s) Unknown. Nike Inc Cost of Goods Sold (Annually). Retrieved April 26, 2020, from https://ycharts.com/companies/NKE/cost_of_goods_sold_annual

Throughout the 2014 and 2018 fiscal year, Nike has witnessed the increase in cost of golds sold of 9.21 %, 7.38%., 7.70%, and 5.03%, respectively. During this same fiscal period, Nike’s operating expenses also progressively increased as well. In turn, the operating expenses increased 5.48%, 6.20%, and 7.94%. Cost of goods sold incorporates the expense of raw materials, costs of items purchase for resale, and cost of parts used to construct a product.

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Additionally, more costs are labor, supplies, shipping costs and overhead costs that are directly associated to the manufacture of the goods. The bulk of these costs in production are variable costs. Some costs that Nike have that are fixed costs are salaries of management, depreciation cost of the building, and even insurance expenses. Nike minimizes the manufacturing overhead by moving over 900 million units in a year which saves them a lot of money. Nike keeps overhead costs down is by possessing and managing its own factories by using independent contractors. (supplychain.com) Nike should have yearly budgets and reflect on the previous year to see the profit and loss of the company. Looking an annual budget will allow Nike to see what adjustments need to be made in the new year. For example, Nike can look at how to reduce production cost and any losses, or even increase salaries to management. Consequently, the trend of the cost of sold goods is too be projected to increase year after year.

Figure 4. Author(s) Unknown. Nike Inc Total Operating Expenses (Annually). Retrieved April 26, 2020, from https://ycharts.com/companies/NKE/total_operating_expense_annual

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OVERALL MARKET

Figure 5. Gould, Skye & Lutz, Ashley. (2015, May 22). See How Nike Dominates the Shoe Industry in one Chart. Retrieve April 1, 2020 from, https://www.businessinsider.com/see-hownike-dominates-the-shoe-industry-in-one-chart-2015-5 Looking at the graph above from Business Insider, it illustrates that Nike commands the lead with 62% of the brand share in this industry which is almost four times all the other brands combined. Athletic apparel and footwear are set to outperform the business for the next five years and will allow Nike to see its business grow since it leads the industry with $28 billion annual sales. (Skye & Lutz. 2015) As the leading brand of athletic wear and footwear, Nike’s competitors are Adidas, Reebok, New Balance, Converse, Puma, and Under Armour. Below in this chart, you will see the comparison between brands on their revenue and how they compare to Nike, Inc.

Company

Worldwide Revenue (in billions)

Brand Valuation (in billions)

NIKE, INC. MARKET ANAYSIS

Nike Adidas Reebok Converse

$33 $16 $3 $2

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$27 $7 $1 unknown

Barriers to entry assist Nike, Inc by safeguarding their earnings with tax benefits, brand identity, patents, and even loyal customers. Nike, Inc, considered to be a well know brand in this industry for their athletic wear, footwear, advertising, and even their endorsements with upcoming athletes. Subsequently, Nike is a household name throughout the world so that brings a lot of credible brand identity and loyal customers that leads the barrier entry to benefit a company like Nike. Competitors like Adidas, Reebox, Under Armour, and Converse do not have exact product lines as Nike, for example, the Jordan line. A monopolistic competition is depicted as being portrayed by product differentiation which is a difference in a product of the same industry. The Jordan line is well known, other competitors don’t have a line like it, so brand identity is highly recognized by loyal Nike consumers. With such a massive variety of designs, colors, products for athletic wear and footwear, chances are you and someone you known owns something with the Nike logo. By Nike have a monopolistic competition that permits the company to expand their profits which will help develop production causing marginal costs to the equivalent of marginal revenue. RECOMMENDATION Nike will achieve a constant increase in profits if they remain with growing trend worldwide. Nike will continue to grow annually by gaining consumers and having multi-million business deals with sports franchises and athletes. Since Nike holds the vast majority of brand share for the athletic apparel and footwear throughout the nation, they will continue to be on top

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since no other brand is close to the 62% in brand share. Nike truly understands the business model which has helped them grow their business year after year. Nike really recognizes that in order to stay as a top brand worldwide, keeping up with trends and upcoming athletes will generate more revenue over time. With social media outlets, Nike should consider partnering up with upcoming athletes in high school because this generation ...