The Confluence of Internet with Brick and Mortar, and Notes from Nike’s 10Q
Nike filed its 10Q for the quarter ended February 28th on April 4th. You can see it here. An actual analysis of their financial statements seems like a waste of time. I’ll mention a few comments I pulled out, but then I want to get on to what they are saying about e-commerce as it seems to be consistent with what other companies are saying.
The first thing about Nike’s 10Q and conference call is what’s conspicuous by its absence. I can’t claim to have read every word, but nowhere did I see “skate,” “skateboard,” or “skate shoe.” I assume those sales are just part of footwear. Hardly a surprise. As I’ve discussed, skate shoe sales were never going to move Nike’s earnings per share. Their goal was to become credible with a piece of the market that didn’t see Nike as quite legitimate. Mission accomplished I’d say. And it doesn’t hurt Nike that the skate shoe market has evolved towards casual footwear, because they are pretty good at that.
Next, here’s the little bit we find out about Hurley. Nike’s “other businesses” are Converse, Hurley and Nike golf. Revenues for the quarter of those businesses totaled $615 million, around 10% of total quarterly revenues of $6.187 billion.
“Excluding the impact of currency changes, total revenues for these businesses increased by 9% and 8% in the third quarter and year to date periods, respectively, reflecting growth in Converse and NIKE Golf.”
I read that to say little if any revenue growth in Hurley.
“On a reported basis, EBIT for our Other Businesses increased 23% for the third quarter and 18% year to date, driven by improved profits at Converse and Hurley.”
So even if Hurley’s revenues didn’t increase, it’s being managed a little more rigorously to improve operating profitability. You know I like that approach.
Meanwhile, here’s what President and CEO Mike Parker says about their online business:
“In Q3 our online business grew 33% – outpacing the growth in our total DTC business and for total NIKE, Inc. We’ve delivered strong double-digit results in our e-commerce business every quarter for the last 5 years.”
He continues:
“That said, I’m not satisfied. Right now e-commerce is a relatively small portion of our total revenue. There’s a pretty big gap between where ecommerce is today and where we can take it. So we’re driving more innovation into the shopping experience, elevating the level of service and expanding customization online. At the same time we’re simplifying the user experience making it easier to find and buy our products. I can assure you given the size of the opportunity; everyone on the leadership team shares my sense of urgency around e-commerce.”
We’ve all watched a lot of companies get big percentage increases from their e-commerce business though sometimes those big increases were coming from small bases. We’ve wondered (or at least I’ve wondered) just what the mix of online and brick and mortar was going to be and how the two would influence each other. I think I’m getting an inkling.
The two channels are supporting mutual growth, but I suspect that online is going to mean fewer brick and mortar stores. That doesn’t mean there won’t be total brick and mortar revenue growth, but the number and purpose of actual stores will change.
Zumiez alluded to this in their last conference call where they talked about the need for new metrics to measure comparable store sales and discussed how growth in the number of stores no longer translates in the same way into revenue.
It’s not that stores still won’t be opened (and closed). But the decisions may be more strategic. That is, there will be more to that decision than what sales that store can generate. The question is becoming, “How can opening a store here contribute to our reaching our customers through all available channels?
I don’t know how to measure that, but lots of companies are no doubt working on it. As they figure it out, I expect it to have implications for store size, location and inventory. There isn’t any doubt that e-commerce sales cannibalize brick and mortar sales to some extent, but that doesn’t mean there can’t be growth in the combined channels as well as some potential cost savings in the brick and mortar channel. I assume everybody who’s doing both (which is basically everybody) believes that.
We’ve also noted that brands are becoming retailers and retailers are becoming brands. We noted it, however, without really explaining why. Now we’ve got a clue. The internet and the need to be at all consumer touch points (Omni channel to use Zumiez’s phrase) requires it.
Uh, am I saying here that branding is becoming more important at a time when product is everywhere, it’s hard to create meaningful differences among a lot of products in a category, and the consumer knows everything and is picky? That implies high marketing costs but not always great margins and would seem to favor larger players.
Yeah, I guess I am saying that. I’ll be back to you after I’ve thought about it some more.
Jeff- well put as usual. What I find interesting is the wide difference between how the big brands in the industry manage and see e-commerce vs the small and medium sized brands and to a greater extent how the big vs small retailers/etailers work with the big brands who are now both partners and competitors. It also surprises me that brand like Nike barely mention ( I did not see it the in report but only skim read it) mobile as a e-commerce/sales channel. Lots of talk of mobile website and engagement but much less or none about actual mobile in store or online sales. Keep up the good work and helping us non finance folks understand trends and finances of the industry.
Jeff,
Thanks for the Nike assessment and your thoughts. I’ve been telling both brands and retailers that there is already a new consumer paradigm. The customer is our ultimate responsibility and they decide how and when to buy. We must provide them with the opportunity when the mood strikes them. Everyone involved in the sale should be compensated to the degree to which they participate.
I recently tried to explain this to someone in the Cycling industry who insisted that they could not function without the IBD and Distributors. I agreed that they were integral but tried to make the case that this brand needed to take responsibility for the sale rather than wringing their hands after sending the product to their distributors.
They make great innovative product but they just couldn’t see the future.
Looking forward to your presentation at IASC Summit. See you soon.
Regards,
Glenn
Hi Glenn,
Love to argue with you, but can’t see where we disagree. The question about the roll of the distributors is an interesting. If they are nothing but order takers they may actually be dangerous, because they are a major point of consumer contact that the brand isn’t in control of. In skate, of course, even if that’s true, the brands probably need the distributors for cash flow. That’s an interesting problem.
See you in a few weeks,
J.
Jeff,
Great point of view.
Whether you are a retail or wholesale brand, the ultimate goal of creating a seamless marketing, e-commerce and brick & mortar experience is the future. I also agree that this favors big business and vertical platforms,
but there will be opportunities for small retailers and brands if they create a niche or have a proprietary product. Perhaps someone will develop a platform that allows small retailers and small brands to develop a profitable partnership and compete. Or maybe not.
Best Regards,
Jurgen
Hi Jurgen,
You know, it’s funny- I very nearly wrote some more on small retailers and brands creating niches. What I was going to talk about was that niche building is back with a vengeance, as it may be the only choice a small player has. I guess it never went away, but it wasn’t as urgent as it may be now.
Thanks,
J.
I guess the smaller retailer will be using slightly different criteria when chosing distribution partners in the future. A shared sense of purpose right across the supply chain must now be vital if a brand want to demonstrate authenticity throughout the customer experience.
Are you seeing any change of strategy amongst distributors Jeff?
Rob,
The issue of the distributors has just come up since I posted this recent article. Honestly, I hadn’t thought about it much until now. What I’m thinking is that it’s not an issue for the retailers so much, but for the brands. They lose a lot of control when they sell through distributors. See what Glenn wrote and how I responded below. As I understand it, the role of distributors in Europe is different than it is here in the U.S. But the point is still that brands have to control all their touch points with consumers.
Thanks,
J.