Nike Faces Serious Competition in Footwear Market

Last updated on February 16th, 2024

Nike shoes on feet

Upon assuming the role of CEO at Nike, John Donahoe encountered a company that dominated the running industry, its most significant sector. Presently, however, Nike faces the possibility of lagging behind its competitors.

Seventeen Nike athletes achieved individual gold medals in running events during the 2019 World Athletics Championships, while all other brands combined only had five winners. The remarkable technology of Nike's Vaporfly 4% running trainers was so impressive that rival brands allowed their top athletes to wear Nike shoes in races, even if they had to conceal the logo.

After four years, the rest of the running community has closed the gap. The innovation of the Vaporflys, which featured a carbon-fibre plate in the midsole, has now been embraced by other brands in the market. At the 2023 World Athletics Championships, athletes not sponsored by Nike achieved more individual running gold medals, with a total of 12, compared to Nike's 10.

During Donahoe's time in charge, the sportswear industry has undergone significant changes, particularly in the running footwear market. Nike now faces competition not only from traditional rivals like Adidas, but also from smaller, more agile shoe companies that are gaining a larger portion of the market.

Nike Market

Sports stars like Tiger Woods, who were once the driving force behind sales in the early 2000s, are now approaching the end of their careers. Additionally, Nike, being a global giant, has faced challenges due to various macroeconomic factors such as the pandemic, inflation, and disruptions in the supply chain.

During a recent earnings call, Donahoe informed analysts about the company's second major restructuring under his leadership. This decision was made in light of the global decline in demand for their products.

"We know we must be faster, increasing the pace of innovation, increasing the pace of market to consumer and increasing our agility and responsiveness. The 'everyday running category' is the area where we have the most work." - Donahoe

Nike's financial performance has become a cause for concern among Wall Street analysts. They are particularly worried about the tightening margins and slowing sales growth. Although the company experienced a 10% increase in revenues for the fiscal year ending in May 2023, profits declined by 16%. To put it into perspective, Nike's margins on earnings before interest and taxes are currently at their lowest point in a decade, excluding the impact of the pandemic. In December, the company revised its outlook for 2024, projecting a mere 1% growth in sales, a significant decrease from the previously anticipated mid-single-digit growth.

Nike stock

The discrepancy between the most recent predictions and previous revenue estimates is causing doubts about CEO John Donahoe's credibility, according to Jim Duffy, who serves as the managing director of consumer and retail at Stifel.

Without a doubt, Donahoe wasted no time in making swift changes. As a former CEO of ServiceNow, eBay, and Bain & Co, he immediately took action upon assuming the position. In the initial stages of the pandemic, he executed a massive restructuring, deviating from Nike's previous approach of organizing by sport categories like running, basketball, and football. Instead, he opted for separate divisions for men, women, and children.

The alterations were implemented partly to expedite Nike's shift away from depending mainly on retail stores for product sales and towards a greater emphasis on direct consumer sales, particularly online. The most recent reorganization, disclosed in December, aims to reduce costs by $2bn within the upcoming three years.

Nike has announced to the Financial Times that the money saved from these job reductions will be used to further develop its running, women's, and Jordan brand departments. The Alphafly3, their latest running shoes, made quite an impact at the 2023 Chicago Marathon, where Kelvin Kiptum broke a world record while wearing them.

Kelvin Kiptum wore Alphafly3

"We've proven in our labs that Nike racing shoes provide measurable benefits and we will continue to deliver breakthrough innovations for elite athletes and everyday runners alike. It would roll out newer models in the lead-up to the Paris Olympics." - Nike

Upon Donahoe's arrival at Nike, the industry and the world at large were experiencing significant upheaval, according to John Kernan, managing director at TD Cowen. This disruption affected even the major players with global recognition. Recently, Nike's main competitor, Adidas, issued a warning to investors about the possibility of incurring its first annual loss in thirty years. This warning came after Adidas severed ties with Kanye West, the renowned US rapper and designer of their Yeezy brand.

The rise of social media has opened doors for emerging brands to expand their reach. Hoka and On Running, in particular, have seen success through increased direct sales and strategic endorsements. They have also taken advantage of the growing desire among major retailers to lessen their dependence on Nike, as Donahoe focuses on boosting direct sales.

Foot Locker's CEO, Mary Dillon, highlighted Hoka and On Running as the brands experiencing the highest growth rate. In the latest quarter, sales from non-Nike brands accounted for 36% of Foot Locker's total sales, a rise from 32% in the previous year. The company aims to reach a 40% contribution from non-Nike brands by 2026, and this trajectory seems promising.

Nike competitor growth

Once a lesser-known brand specializing in shoes with thick soles, Hoka has emerged as the Deckers Outdoor Corporation's most rapidly expanding brand. Surpassing the popularity of Ugg boots and Teva sandals, Hoka has recently gained even more recognition by sponsoring a prestigious high school cross-country running competition in the United States. This move has effectively increased its visibility among its desired young audience.

In 2019, On Running, a Swiss company established in 2010, gained international recognition when tennis star Roger Federer became an investor. This resulted in the company going public and securing endorsement deals with renowned tennis player Iga Świątek and Hellen Obiri, the victor of the New York City and Boston Marathons in 2023. Prior to this, both athletes had been sponsored by Nike.

Woods, who recently ended his 27-year partnership with Nike, may find inspiration in Federer's impact on On Running. Like Federer, Woods achieved remarkable feats in his sport while sporting the iconic swoosh logo throughout his professional career.

"It is still a great company, but the industry is much more challenging and there is only so much management can do. Brands cannot be all things to all people anymore." - Kernan