Nike is feeling the limitation and high cost of the direct-to-consumer model
After trimming 50% of its wholesale accounts, Nike is done with "big account pivots," an exec said.
The shift comes as more direct-to-consumer companies start looking for retail partners.
An analyst said investors should "remain wary of perceived margin benefits behind the DTC shift."
After four years of aggressively cutting the accounts of retail partners and accelerating its direct sales, Nike says it's entering the "next phase" of its business plan. That's coinciding with a growing sense of the limitations of direct-to-consumer efforts.
On a quarterly earnings call in March, Nike's chief financial officer, Matt Friend, said the company had cut 50% of its wholesale accounts since 2018, adding that Nike had finished with its "big account pivots."
At an investor day in 2017, a Nike executive said the company had 30,000 retail partners.
"We are now moving into the next phase of our marketplace strategy," Friend said in March. "And our go-forward plans are aligned with our wholesale partners. Wholesale partners play an integral role in our future marketplace, first, to authenticate our brands and then to create scale of distribution through a consistent consumer experience across a larger retail footprint."
The shift in Nike's direct strategy comes as more DTC-native brands seek retail partners, part of what Simeon Siegel, a managing director for equity research at BMO Capital Markets, calls the "de-DTC era."
In a recent note about DTC, Siegel told investors it's "not all it's cracked up to be," adding that the advantages of more data, better product showcasing, and higher revenue could be offset by additional costs.
“Despite widespread belief to the contrary, the push to DTC from wholesale appears to hurt, not help, overall company profitability”
He also expressed doubts about Nike's focus on direct sales.
"We see Nike's size and scale as long-term competitive advantages, but remain wary of perceived margin benefits behind the DTC shift," he wrote in a note to investors after Nike's March earnings report.
The note included Siegel's analysis of Nike's profit margins relative to increases in direct sales in four sales geographies. "Higher DTC didn't appear to necessarily drive improved regional GM/EBIT margin," Siegel wrote.
While Nike has cut ties with many retailers, it's become more intentional with the partners it's kept. A recent partnership with The Whitaker Group, which Footwear News named its retailer of the year in 2020, included a collaboration on Jordan and Dunk sneakers.
Friend said Nike was "committed to driving growth with partners like this as they create authentic, deeply connected consumer concepts in key cities and communities around the world."
Nike also recently announced it would link its membership program with Dick's Sporting Goods, a Nike retailer.
While wholesale offers Nike access to new customers, it requires a certain loss of control, something Nike tries to minimize.
"It's a great brand," Trent Out Loud, the founder of the sneaker boutique Exclucity, told Insider. "But I have some areas of concern that I would like upper management to hear."
He said Nike is asking retailers like him to spend too much on brick-and-mortar improvements while reducing product allocations. Exclucity has a Nike NBHD account, a designation that Nike gives its trendiest retail partners.
He said the least expensive store renovations he'd done cost $400,000. He added that lately there's been less back-and-forth with Nike about Exclucity's business needs.
"Years ago it was completely different," he said. "There was different leadership. It was also a different landscape. Ten years ago I would have had the vice president of sales' phone number. We'd be on speaking terms. Now it's hard for me to get my sales rep on the phone. All of their attention is being directed to the SNKRS app and DTC, and not their wholesale account holders."
