Nike’s Market Share Decline: Strategic Missteps and Future Prospects

Introduction

With over $50 billion of annual revenue, Nike is the largest athletic footwear and apparel brand in the world by far. It’s one of those brands you kind of take for granted; they’ve been the top athletic brand for as long as you can remember, and it would be hard to imagine this will change at any point in the foreseeable future. But nothing lasts forever.

Over the past 3 years, Nike’s share price has fallen by almost 60%, wiping out well over $100 billion of market capitalization. They’ve been losing market share to innovative new competitors like On Running and Hoka. For the fiscal year of 2025, they’re projecting that their revenue will decline by a mid single-digit percentage.

Excluding the pandemic, this will be the company’s first revenue decline in well over a decade. In this video, we’ll look at the strategic missteps that put Nike on the back foot and why the world’s most popular athletic brand no longer looks so bulletproof.

Nike’s business model

On the surface, Nike’s business model is straightforward. They design new shoes and clothing, which are then sent to contract manufacturers primarily located in China and Southeast Asia. The final products are distributed through three main channels. Firstly, there’s the wholesale channel where Nike sells products to third-party retailers like Footlocker or Macy’s.

Secondly, Nike operates over 1,000 stores globally that exclusively retail Nike products. Lastly, Nike utilizes e-commerce via its website and mobile app, allowing customers to purchase products directly.

Among these channels, wholesale typically yields the lowest gross margins due to lower prices compared to retail. Retailers must cover store operating costs and seek profits themselves. In contrast, Nike’s own stores enjoy higher margins as they retain profits that would otherwise go to third-party sellers.

E-commerce provides even higher margins as Nike keeps all profits and avoids brick-and-mortar operational overhead.

A crucial task for any consumer brand is convincing consumers to purchase their products. This involves two main aspects: first, designing shoes that are attractive either in terms of functionality or style; second, ensuring continuous brand visibility. Nike invests billions annually in sponsoring hundreds of professional athletes globally, securing some of the largest celebrity endorsement deals ever.

Notably, they reportedly paid Michael Jordan over $1.3 billion for using his brand likeness, while a 2015 deal with LeBron James is valued at approximately $1 billion. These endorsements in sports leagues ensure Nike remains a prominent brand in consumers’ minds. When superstar athletes endorse Nike, it subconsciously solidifies Nike as the default choice for athletic footwear.

Nike maintains its dominance as the largest athletic brand worldwide, notably generating $51 billion in revenue in the most recent fiscal year, more than double its closest competitor, Adidas, which reported $23 billion in annual revenue. With its substantial revenue stream, Nike has unparalleled resources to invest in athlete sponsorships and other marketing endeavors.

This formidable financial position cements Nike’s dominance in terms of brand recognition and consumer mindshare within the athletic footwear industry.

Digital strategy

This gives them a seemingly insurmountable advantage versus any smaller competitor. In 2020, Nike appointed John Donahoe to be their new CEO. On the surface, he was a bit of an odd choice for the job. He lacked experience in sportswear or fashion. Instead, he was a technologist, having previously served as a CEO of eBay and the enterprise software company ServiceNow.

So why would Nike want to hire an e-commerce and software executive as their new CEO? From a product and brand perspective, Nike already had things figured out. Given their established and ubiquitous brand name, it shouldn’t take a huge amount of expertise just to maintain their position at the top. Instead, Donahoe’s main focus was on Nike’s digital strategy and how they could leverage technology to maximize profits.

Nike currently has four apps. The main Nike app and the Sneakers app are e-commerce storefronts where you can order Nike products directly. The Nike app targets the average consumer. The Sneakers app targets hardcore sneakerheads—think of people who spend thousands of dollars on shoe collections, which they display on their walls, or even people who try to buy and sell valuable sneakers for a profit. We’ll talk more about the Sneakers app and hardcore sneakerheads shortly.

The second two apps are the Nike Run Club and the Nike Training Club. The Run Club helps you keep track of your running, while the Training Club gives you pre-made workouts you can do at home. Both apps are free. Nike doesn’t generate any revenue from them directly. The idea is that if people spend time using Nike’s fitness apps, the Nike brand will stay top of mind. The users of these free apps will hopefully convert to paying customers.

CEO John Donahoe saw the potential of these apps. Through the apps, Nike can advertise and sell shoes directly to the consumer. They can own the entire customer relationship. Remember that of Nike’s 3 distribution channels—e-commerce, Nike-owned stores, and wholesale—e-commerce and Nike-owned stores have higher profit margins, while selling wholesale has the lowest profit margins.

While wholesale offers the lowest profit margins, the advantage is that you get access to the retailer’s customer base. For instance, if a customer visits Foot Locker without a specific brand in mind, the presence of Nike shoes might lead them to purchase a pair that they hadn’t initially considered. John Donahoe reasoned that Nike’s brand value was so strong that many consumers would specifically seek out Nike stores or use the Nike app to purchase their products.

Shortly after taking over as CEO in January of 2020, Donahoe decided that Nike could reduce its reliance on the wholesale channel. Nike began severing ties with several longstanding retail partners, including Bel, Dillards, Eilins, and Zapo. Even for retailers that they didn’t cut off completely, Nike decreased the quantity and selection of what they would sell to them by cutting back on distribution through third-party retailers.

Pandemic boom

Nike aimed to drive consumers to purchase directly from them, thereby achieving higher gross margins. Donahoe’s shift to e-commerce came at the perfect time; within months, the pandemic struck, greatly disrupting the traditional retail model. Many brick-and-mortar stores were forced to close their doors due to pandemic-related restrictions.

Nike was deprioritizing their relationships with these retailers anyway. This hurt Nike to an extent because their own retail stores also had to be shut down. But remember, the highest-margin sales channel is e-commerce. Thanks to the pandemic, this high-margin sales channel increased massively.

In fiscal year 2019, Nike generated about $3 billion of revenue from e-commerce. By fiscal year 2022, this had tripled to $11 billion, representing 24% of total revenue. Nike has a fiscal year ending May 31st, 2022.

At first, you might think a pandemic would be bad for Nike; with people forced to stay at home all day, there’s not much need to buy new sneakers. Nike indeed suffered a slight decrease in revenue in fiscal year 2020. But in fiscal year 2021, they generated record revenue of $45 billion and a record operating profit of $7 billion.

The pandemic inadvertently caused two big benefits for Nike. Firstly, stimulus checks and enhanced unemployment insurance put more cash in consumers’ pockets; much of this went to purchasing Nikes. More importantly, the zero-interest-rate policies of central banks caused speculative bubbles to form, not only in the stock market but also in alternative asset classes.

One such alternative asset class is Nike shoes. Nike regularly creates limited-edition trims of its shoes; certain colors and trims may only be sold for a limited period and in limited quantities. This scarcity often means the value of certain shoes is significantly greater than the retail price.

There are large secondary markets, such as StockX, where people can resell valuable shoes. Many people buy Nike shoes not because they want to wear them but because they want to flip them on StockX for a profit. The height of this insanity is best exemplified by a report published by CNN Inside in October 2020.

They interviewed a 16-year-old in Singapore who is making the equivalent of $20,000 per month buying shoes on Nike’s website and flipping them on the secondary market. Demand for limited-edition models was so great that new releases would sell out within seconds. So people created software programs to place orders autonomously.

This is against Nike’s terms of service, but with enough computer skills, many scalpers were able to get around the guardrails.

While Nike doesn’t directly benefit from secondary market transactions, they certainly benefited from the hype and increased demand. With such a strong secondary market, their limited-edition shoes were almost guaranteed to sell out. Nike knew that demand outstripped supply for limited-edition drops.

On the Nike SNKRS app, they have lottery systems where you can enter a drawing for a random chance to be allocated a pair of shoes. They also have shock drops where you’ll randomly be given the opportunity to buy a difficult-to-find shoe for a limited time. This kept sneakerheads glued to their phones. If they got the opportunity to pay $200 for a new pair of Jordans, they’d happily take it because those shoes could be worth even more on the secondary market.

Nike could see which types of shoes generated the most interest from collectors. Typically, new variations of classic shoes such as their Dunk Lows or Jordan Retros were the most sought after on the resale market. To take advantage of this, Nike started flooding the market with hundreds of new variations in color schemes.

Nike’s success during the pandemic appeared to vindicate CEO John Donahoe’s strategy. With e-commerce now representing a quarter of their sales, de-emphasizing their wholesale channel seemed like a wise decision.

The digital strategy allowed Nike to maintain connections to their customers even when brick-and-mortar stores were closed. This perceived success caused the company’s share price to surge in 2021. At its peak, Nike’s market capitalization reached $280 billion. It was shocking that a shoe company could be worth more than a trillion dollars.

On an earnings call in June 2021, Donahoe proclaimed that the pandemic-induced shift in consumer behavior towards digital engagement and e-commerce was permanent.

Lack of innovation

He targeted for 50% of the company’s revenue to come from digital channels by 2025. Donahoe grossly overestimated the importance of e-commerce in a post-pandemic world. Once people were vaccinated, many of them returned to shopping malls and department stores. Nike’s e-commerce revenue peaked at 26% of total sales in fiscal year 2023. In fiscal year 2024, e-commerce declined slightly to 25% of revenue. The company’s previous target of 50% e-commerce revenue by 2025 is clearly not going to happen.

In 2023, Nike started increasing wholesale distribution to third-party retailers. This was an embarrassing reversal and showed the limits of a direct-to-consumer business model. As their e-commerce charges slowed down, their total revenue flatlined. Even more concerningly, the company recently announced that they expect revenue to decline by a mid-single-digit percentage in fiscal 2025.

Back in 2021, investors were willing to pay a premium valuation for Nike stock because of its strong revenue growth. Now that revenue is shrinking, investors’ enthusiasm has collapsed. Nike’s share price has fallen almost 60% from its highs.

So what went wrong? As the Federal Reserve started raising interest rates, the amount of speculation in the sneaker resale market decreased substantially. The days of 16-year-olds making $20,000 a month flipping shoes are long behind us. At the peak of the speculative bubble, new Air Jordan Ones would sell for more than double the retail price on the secondary market.

Seeing the massive demand, Nike started increasing prices and the number of shoes they made for each limited-edition run. By 2023, they had saturated the market, and now most Jordans sell for a discount to list price.

A large part of Nike’s digital strategy relied on scarcity value. The shock drops and raffles on the SNKRS app are only interesting if the shoes are difficult to obtain. With the resale market now saturated, there’s no reason to check the SNKRS app for new releases. With declining usage on their apps, Nike had no choice but to go back to their old retail partners to start moving inventory.

Over the past few years, Nike focused primarily on making slight variations and changes in color scheme for their limited-edition releases. This is what collectors wanted during the resale crazes of 2020 and 2021, but this caused them to take their eye off the ball in terms of product innovation.

They were no longer making improvements in the functionality of their shoes. By overly focusing on collectors and resellers, they neglected the people who just want a good quality pair of running shoes. This created an opening for Nike’s smaller competitors.

Over the past few years, two new shoe brands, Hoka and On-Running, have seen a massive surge in popularity. Technically, neither brand is new as both were founded more than 10 years ago, but until recently, they were niche brands that very few people would recognize.

Over the past 6 years, Hoka sales have grown eightfold. Over the past 5 years, On-Running sales have increased sevenfold. To be clear, these brands are still minnows compared to Nike. In the most recent fiscal year, On-Running’s and Hoka’s combined revenue equals only 7% of Nike’s. While that isn’t huge, it’s also not insignificant.

So what are Hoka and On-Running doing right? Both brands focus on functionality as their main selling point. Hoka’s shoes, with their absurdly thick soles, are more comfortable than most other shoes. This can be useful both when you’re running and when you’re just standing around.

Future outlook

On Running’s main selling point is their patented CloudTech soles, which they claim give a sensation of running on clouds. With Nike having failed to deliver groundbreaking innovations in recent years, consumers are willing to try out new brands with novel designs.

Nike’s main problem is arrogance; they thought their brand was so dominant that they could sell overpriced retro designs to sneakerheads indefinitely. The reality is, in the fast-moving athletic shoe industry, you need to innovate constantly just to remain relevant. With their share price tanking, Nike’s CEO finally understands the flaws of his previous strategy.

In his recent media appearances, he’s no longer bragging about their digital strategy like he used to; instead, he’s talking about new innovations. For example, this past May, they launched the Pegasus 40, which supposedly has some design innovations compared to the previous version, but it hardly seemed like a game-changer. Nike is going to need bolder innovation than this if they want to reinvigorate revenue growth.

With all that being said, it’s important not to overstate Nike’s problems. It’s still the largest sportswear brand in the world by far. However, even the top dog is not invincible.