This is an excerpt from ArcBest’s Point of Sale retail supply chain newsletter, which was published on Monday (6/28).
Executives in the retail apparel industry are certain that their companies will emerge stronger and better positioned than when the pandemic began, but I’m not sure how many of them believe it. “The headline is that Macy’s (NYSE: M) is a better business coming out of the pandemic than we were going into it,” Macy’s CEO Jeff Gennette said during his video keynote address at the NRF Retail Converge last Thursday. While addressing at the same occasion, Kohl’s (NYSE: KSS) CEO Michelle Gass made similar remarks about the company’s ability to recover from the epidemic.
In the midst of a spending boom that is lifting practically every garment shop, it’s impossible to tell which companies are stronger right now, and the rise is exaggerated when compared to last year. When spending growth returns to more typical levels, the true test will be put to the test. Both Macy’s and Kohl’s are attempting to increase direct sales through owned brands, and both are investing in online and omnichannel capabilities, but I believe that when demand normalizes, many of the pre-pandemic concerns at department stores will become more obvious.
Macy’s and Kohl’s makeovers are turnaround stories of bloated retailers who were slow to adapt to changing consumer habits. Nike’s (NYSE: NKE) revamp is quite different. And after listening to Nike’s fiscal Q4 results call on Friday, I’m confident that CEO John Donahoe and CFO Matt Friend believe Nike is in a stronger position now than it was before the pandemic. Nike brought in a record $12 billion in revenue in fiscal Q4 (ending May 31), including a(nother) record $5 billion in the United States alone.
This is beneficial: Nike was negotiating substantial supply chain snafus at the close of Q3, which held its highly sought-after inventory in route. Nike’s North American inventory was up 31% year over year in February, but much of it was stranded in containers. Nike’s distribution center inventory was really down 20% year over year at the time. The company is still dealing with supply chain issues, according to CFO Friend, although delayed revenue from the third quarter was regained in the fourth quarter.
Nike isn’t the only company pushing for more direct sales. This is something that nearly every business and retailer is striving for. Brands are opening storefronts but undifferentiated retailers are being cut off. Retailers are developing private label and digitally native direct-to-consumer (DTC) brands at an alarming rate. And one look at Nike’s numbers explains why: Gross margin increased by 850 basis points year over year. Indeed, Nike is coming off one of its worst quarters ever, one in which the firm had to take drastic measures to manage supply and demand in the face of the COVID-19 pandemic, but the growth is astounding.
How? According to Donahoe, Nike’s direct business is now approaching 40% of overall NIKE Brand sales. Nike achieved this milestone “many years ahead of our prior plan,” according to Donahoe. Nike has used the pandemic disruptions to push its shift to a more digitally connected, direct-to-consumer brand during the last 15 months. It has severed connections with dozens of merchants and intends to open full-size and concept locations. Nike’s digital brands, with which I have personal issues (damn you, SNKRS), are blazing hot. Nike Digital grew by 37% year over year, even as traditional stores reopened.
The fight over direct-to-consumer vs. wholesale is raging in every brand’s boardroom. The answer is clear for Nike, which has decades of supply chain and operational excellence to expand on:
Having complete control over the sales channel allows you to:
The average selling price is higher.
A larger profit margin.
Keeping 100 percent of the data under your control (the experience).
The financial advantages are clear: Cut away the middlemen and retain the money and margin in-house by selling directly to consumers. The data, on the other hand, will only grow in value. Building digital supply networks necessitates the use of data. This is something Amazon is aware of. Nike intends to use the data in a similar way as Amazon (NASDAQ: AMZN). Nike has the data it needs to develop a digital supply chain since it owns the process from manufacturing to purchasing (and delivery).
What is the definition of a digital supply chain? “Having the intelligence to know,” Donahoe says, “having the appropriate product in the right place at the right time, so that we can provide that product in a low-cost, easy, and rapid manner while also being environmentally responsible.” He continued, “Last but not least, that knowledge — consumer knowledge aids in product development. I mean, the more we know about our customers, the better we can provide products that they desire and need.” Do you think it’s a bit Amazonian?
It should, and it does. Shifting to a higher mix of business through NIKE Direct is only now revealing its strategic and financial benefits. Nike can optimize inventory to promote better full-price sales and minimize digital fulfillment costs by employing increased data and analytics. Despite rising product prices and supply chain investments, Nike plans to increase margins by 125 to 150 basis points this year. Nike predicted that gross margins will reach the high 40s by fiscal 2025.
The value of customer data is multiplied throughout the supply chain. Nike is allowing demand to outstrip supply because it is so tuned into consumer behavior. (If you’ve ever tried to win an SNKRS draw, you’ll know what I’m talking about.) It’s setting sales records and keeping stocks cleaner than ever. Inventory is down double digits across Nike, Jordan, and Converse compared to this time last year. The company is still dealing with broad delays and lengthier lead times, and in-transit inventory is still high, but sales are outpacing expectations across the board. Nike said it anticipates supply chain delays and greater logistical costs to continue for the majority of fiscal year ’22, but it also expects sales to reach a new high of $50 billion.
Finally, some thoughts. Nike’s strategic decisions have already taught us a lot, and the benefits are only now beginning to be realized. Nike, like everyone else, is dealing with supply chain interruptions, but it’s focusing only on two areas it can control: how and how much of its product is sold — i.e., its sales channels and inventories.
Nike began reestablishing its brand as the world’s foremost sporting line when it severed connections with Amazon, and it has since reduced its availability at wholesalers, off-pricers, and undifferentiated shops. It has maintained its world-class brand by developing best-in-class digital stores and applications that provide customers with unique and personalized experiences. Even if the encounter doesn’t result in a sale, as mine usually does, the data gathered is essential, which Nike uses to improve products, optimize inventory, and reduce fulfillment costs.
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Pixabay image by PublicDomainPictures
One of our external writers wrote the previous article.
It has not been modified and does not represent Benzinga’s perspective./n
