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Nike, Inc.

Nike, Inc. A Research Paper by Joseph Pilc Business Policy & Strategy Fordham University Graduate School

A Research Paper by Joseph Pilc

Business Policy & Strategy

Fordham University Graduate School of Business

Professor Dr. Rubina Mahsud

December 9, 2013

Nike

Nike, Inc. (Nike) is a leading designer, marketer and distributer of sports apparel, footwear,

equipment and accessories. Geographically, Nike operates in more than 170 countries through its retail

stores, independent distributers and online. i Nike is headquartered in Beaverton, Oregon and employs

roughly 44,000 people. ii Today, Nike prides itself on always being on the offensive, with a relentless

drive to innovate, inspire and grow. iii

Origin

In 1962, Philip H. Knight, a former track star at the University or Oregon as well as an alumnus

of Stanford Graduate Business School, realized that Japanese running shoes were not being utilized in the

US market and were being outperformed by lower quality German-manufactured Adidas sneakers. As a

result, Knight purchased roughly 200 pairs of sneakers from Onitsuka Tiger Co., a Japanese firm that

manufactured high-quality and low-cost running shoes, which he stored

in his basement and showcased at local track meets in his hometown of

Portland, Oregon. In January 1964, Knight went into business with his

former track coach at Oregon, Bill Bowerman, and named their

former track coach at Oregon, Bill Bowerman, and named their budding company Blue Ribbon Sports. i

budding company Blue Ribbon Sports. iv Throughout the late 1960’s Blue Ribbon saw sales drastically

increase as their distribution expanded.

By 1971, the relationship between Blue Ribbon and Onitsuka Tiger had begun to deteriorate.

Blue Ribbon was not receiving the cash required for expansion of the US market. Furthermore, Knight

and Bowerman were ready to transition from distribution to design and manufacturing. Blue Ribbon and

Onitsuka split later that year, and with financial backing from the Japanese trading company Nissho Iwai

Corporation, Blue Ribbon was able to start its own line of overseas manufacturing through independent

contractors. It was at this time that Knight decided to name his new product line Nike, named after the

Greek Goddess of Victory v , and commissioned its now-iconic “Swoosh” logo from a Portland State

University graphic design student for $35. vi

In 1972, their first year of distribution, Nike sneakers generated

$1.96 million in product sales. Much of this early success can be

attributed to effective marketing and product promotion at the 1972 U.S.

Track & Field Trials in Eugene, Oregon where Nike gave their sneakers to

Trials in Eugene, Oregon where Nike gave their sneakers to top-tier athletes, such as Steve Prefontaine,

top-tier athletes, such as Steve Prefontaine, a track and field record holder

who had attended the University of Oregon. vii

Throughout the 1970s, Blue Ribbon continued to expand sales of Nike branded sneakers through

partnerships with superior athletes in their respective sports. It also capitalized on the popularity of

jogging in the late 1970s. viii The company changed its name from Blue Ribbon Sports to Nike in 1978,

and by 1979, Nike had accounted for almost one half of all running shoes purchased in the US. ix

In 1979, Nike leveraged its growing brand name to move into other similar markets, such as

athletic apparel, shoes geared towards other sports including basketball and tennis, work and leisure shoes

and children’s shoes. This proved to be an excellent strategy as the jogging craze in the US started to

subside. Nike also looked to expand their international presence through partnerships with Japanese

distributors, marketing relationships with European soccer clubs as well as the creation of manufacturing

plants in Ireland, Austria and England. x

While Nike’s entrance into Japan proved to be successful, its entrance into European markets

wasn’t as fruitful. Domestically, Nike also began to struggle, seeing an 11.5% drop in sales in 1984.

Combined with the expenses it incurred to increase their global presence, Nike’s profits were down

roughly 30% by the end of 1984. xi A change in their marketing campaign towards a more global brand

than their traditional method of promoting star athletes and major events didn’t do much to reverse the

decline in sales.

As sales continued to drop through 1985, Nike made a number of strategic changes. First, they

reduced the size of their product line and cut back on inventory. Second, they vastly reduced

administrative costs by consolidating a number of their different divisions that had been spread out not

only within the US but also internationally. Nike also closed a number of manufacturing plants and laid

off about 10% of their full time employees. Towards the end of 1985, Nike closed is last two US

manufacturing plants, resulting is all manufacturing being done overseas. xii

It was around this time that Nike must have realized that they had no real strategy. They had

relied on the success of a good product, but didn’t have a clear vision as to how they would distribute

their product and who they would distribute it to. As a company, Nike had the mentality of a sprinter;

they wanted to get to the finish line as quickly as possible. But as they started to learn, the athletic

apparel and footwear industry would be a long marathon with hills and valleys along the way. To

succeed, they had to structure their company to withstand the changing markets.

To combat the change in consumer preference from jogging to a vast array of activities including

aerobics, weightlifting and golf, Nike create a New Products Division in 1985 to keep pace with the

evolving industry. They also made a commitment towards aggressive and abundant marketing

campaigns, featuring ads with influential individuals including basketball star Michael Jordan and

director/actor Spike Lee. xiii To differentiate themselves from their closest rival, Reebok, Nike portrayed

its products as fashion accessories by promoting the person wearing the product rather than the products

themselves. Their brand slogan, “Just Do It, has been heralded

Their brand slogan, “Just Do It, has been heralded by Advertising Age as the fourth best

by Advertising Age as the fourth best advertising campaign of the

century. xiv In 1989, Nike’s marketing budget reached $45

million, it’s largest to date. Nike sold 41 million pairs of Air

Jordan sneakers in 1990, and they had surpassed Reebok as the

market leader in the US.

Growth and Expansion

As Nike’s presence in Europe finally began to take shape, they captured second place market

share behind Adidas, with Reebok and Puma close behind. As the growth of the US market began to

flatten, companies within the industry looked to expand into new areas. Nike and Reebok tried to

capitalize on Adidas’ lack of identity in the 1990s when they had too many products diversified across too

many industries, causing their share of the US market to shrink to 7%. xv

In 1992, Nike aimed to capture the women’s athletic shoe and apparel market, of which it had

only owned a 20% share, by appealing to activities such as walking

and aerobics and emphasizing the beauty and emotional rewards of

exercise. xvi The same year, Nike opened its second NikeTown location

in Chicago, the first of which opened in Portland two years earlier.

NikeTown was a retail space that enthralled sports enthusiasts similarly

a retail space that enthralled sports enthusiasts similarly to how a theme park captured a thrill

to how a theme park captured a thrill seeker. xvii This was a vertical forward integration strategy that

enabled Nike to distribute their products directly to consumers.

One year later, Nike entered into two new markets; event promoter and athlete agent. As an

event promoter, Nike would organize and manage sporting events. And as an agent, Nike would handle

all of an athlete’s business related actions, including contract negotiation and licensing agreements. In

1996, Nike would eventually withdraw from this venture under intense scrutiny claiming that they face

motives other than that of the best interest of the client. xviii From a business perspective, event promoter

and agent were never good ideas as they are too far from Nike’s core competency – athletic footwear and

apparel. Just because they featured athletes in their marketing campaigns doesn’t make them qualified to

manage their daily lives.

In 1994, Nike acquired Canstar Sports Inc., the world’s largest manufacturer of ice skates

and hockey equipment, for $400 million. Nike leveraged the expertise gained from the acquisition of

Canstar (later named Bauer - Nike) to move into the sports equipment industry. xix

Setbacks & Recovery

In 1997, Nike started to face intense scrutiny around its global workforce. Protestors claimed that

the international factories in which Nike outsourced the manufacturing of its shoes and apparel, most of

which were located in Asia, had problems related to child labor and worker abuse. While Nike claimed

that it had little control over these outsourced factories, protesters boycotted Nike products nevertheless.

It wasn’t until 2002 that Nike began to take critical steps towards regulating its global workforce. It

helped start the non-profit Fair Labor Association which establishes

and monitors a code of conduct amongst international

manufacturing plants, which includes a minimum age and a 60-hour

work week, amongst other things. Between 2002 and 2004, the Fair

Labor Association had conducted over 600 audits of Nike contract

factories. By 2004, human rights activists had acknowledged that

progress had been made but issues still remained. xx

that progress had been made but issues still remained. x x In 2002, Nike invested in

In 2002, Nike invested in state of the art logistics and supply chain systems. They also

diversified their brands into different market sectors and price points making them less reliant on the

markets’ ability and willingness to purchase high-priced / high-performance shoes. Additionally, Nike

acquired a number of competitors in varying markets to further diversify the brand. Converse, a century-

old footwear company and maker of the historic Chuck Taylor All Star shoe, was acquired in 2003 for

$305 million. xxi Hurley International, a surf and action sports apparel company was acquired for $95

million. xxii Nike also purchased Official Starter LLC, an athletic apparel firm focused on low-priced

apparel and accessories. xxiii Correlating this diversification strategy to Porter’s Strategic Advantage

Approach, it allows Nike to embrace diversification as well as a low-cost strategy at the same time. By

operating under different products lines (Jordan, Cole Haan, Unbro, etc.) within the Nike umbrella, Nike

is able to offer a unique value proposition to varying types of consumers.

In August 2005, Adidas purchase Reebok for $3.8 billion. After the acquisition, Adidas

accounted for roughly 20% of the athletic apparel and footwear market, still trailing Nike who owned

roughly one third of the market. xxiv This was a smart move for Adidas as Reebok had a strong presence in

the US. In all likelihood, this is an acquisition that Nike wouldn’t have made. Nike and Reebok operated

in the same market and were both predominantly strong in the US. Nike’s acquisitions had concentrated

on diversifying their brand and not just getting bigger. There would have been no value behind a Nike

acquisition of Reebok.

In 2006, Nike began to bolster their presence in technology,

partnering with Apple and Google to create technology that syncs with

Nikes footwear, apparel and accessories. Today, this technology is known

as Nike+ Fuel, an armband that tracks your athletic movements, gives real

time feedback and promotes a healthy lifestyle. xxv At the moment, Nike+

technology represents Nike’s blue ocean of competitive advantage as no

Nike’s blue ocean of competitive advantage as no other company is able to duplicate Nike’s fusion

other company is able to duplicate Nike’s fusion of apparel and technology. Furthermore, this strategy has

a clear focus (association of apparel and health), is divergent from anything else and is extremely

compelling (“The smart, simple and fun way to get more active”).

(“The smart, simple and fun way to get more active”). The company undertook a large reorganization

The company undertook a large reorganization in 2009 when it restructured the Nike brand into a

model consisting of six geographic regions each with less layers of bureaucracy and more focus on the

strengths of each region. These six regions consisted of North America, Western Europe, Eastern/Central

Europe, China, Japan and Emerging Markets.” xxvi As long as this reorganization isn’t bound by the red

tape of bureaucracy and these six organizations are able to make decisions on their own, it presents a

smart way to keep pace with different consumer preferences around the world.

Market Overview

The sporting apparel and footwear industry is a $120 billion market that has been growing on

average 4% per year globally. That 4% increase is expected to continue through 2019. xxvii In 2012, the

industry increased at the following percentages throughout the world:

Middle East and Africa: + 15%

Asia: + 7%

Americas: + 4%

Europe: + 1%

The popularity of companies within the industry varies amongst geographic location.

Adidas, which originated in Germany in the early 1900s, is strongest in Europe and Asia. Nike, which

started in Oregon in the 1960s, is most popular in North America. Neither Nike nor Adidas, the two

overall market leaders, have a strong presence in South America which is dominated by second-tier

brands such as Fila, Puma and Diadora. xxviii

The following is a breakdown of the two market leaders’ (Nike & Adidas) regional

market share by percentage: xxix

 

World

North America

Europe, Middle East & Africa

Asia Pacific

Latin America

Nike

17%

32%

21%

18%

3%

Adidas

16%

23%

25%

22%

2%

Athletic Apparel ($100B)

adidas, 11.20% VF Corp, 4.90% Nike, 9.90% Gildan, 2.40% Billabong, Other, 2.30% 60.50% Hanes, Puma,
adidas,
11.20%
VF Corp,
4.90%
Nike,
9.90%
Gildan,
2.40%
Billabong,
Other,
2.30%
60.50%
Hanes,
Puma, 2.00%
1.80%
Under
Lululemon,
Armour,
Columbia,
1.60%
1.70%
1.70%

xxx

Nike Global Market Share: $19.9 Billion or 16.58% Adidas Global Market Share: $14.4 Billion or 12%

General Environmental Factors

Growing Obesity Rates xxxi

Athletic Footwear ($20B) New Balance, Other, 3% 25% Nike, 50% Asics, 3% adidas, Puma, 16%
Athletic Footwear ($20B)
New
Balance,
Other,
3%
25%
Nike,
50%
Asics,
3%
adidas,
Puma,
16%
3%

Obesity rates in the US have increased from 13% of the population in 1962 to 36% in 2010. The US

was the most obese country until it was surpassed by Mexico surpassed it in early 2013. Childhood

obesity (ages 6-11) in the US has tripled from 6.5% in 1980 to 19.6% in 2010.

This growing obesity rate vastly impacts the athletic apparel and footwear industry because it implies

that people are being less active, therefore requiring less athletic apparel and/or footwear. Companies

handle this issue in varying ways. Nike, for example, manufactures a large selection of items in an

abundance of sizes, including up size 22 for women, in order to appeal to the masses. Conversely,

Lululemon’s strategy is to only manufacture “healthy sizes” like up to women’s size 12. Although

this “healthy size” strategy doesn’t work for Nike who relies on mass production, it does work as a

differentiation strategy for Lululemon.

Changes in Athletic Preferences

Consumer preference in athletic activities is constantly changing. Jogging was immensely popular in

the US in the late 1960s, but became less popular in the 1970s as aerobics and weightlifting became

increased in popularity. xxxii Today, 20.4 million Americans practice yoga compared to 15.8 million in

2008, a 29% increase. xxxiii On the decline is football which has seen a 9.5% drop in youth football

participation between 2010 and 2012. This decrease can largely be attributed to growing safety

concerns amongst parents. xxxiv

Global Outsourcing

In an effort to reduce costs, most sports apparel and footwear companies outsource production to

independent third-party suppliers, primarily located in Asia. In 2012, Nike outsourced 98% of its

footwear production to three countries (China, Vietnam and Indonesia) and 99% of its apparel

manufacturing to 28 countries, including China, Thailand Vietnam, Sri Lanka, El Salvador and

Mexico. xxxv With outsourced manufacturing, companies have little control over the production

quality of the products as well as the safety and ethical treatment of laborers.

Economic Factors

Branded athletic apparel and footwear can be considered items consumers only purchase when they

have some degree of disposable income. If less disposable income exists, consumers are more likely

to purchase low-priced athletic gear, reuse apparel and footwear they already own or stop exercising

entirely.

SWOT Analysis

Strengths

Market Leader

Nike owns roughly 16.58% of the entire athletic apparel and footwear market, with its next closest

rival, Adidas, owning 12%. Within that market, Nike owns roughly 50% of the athletic footwear

segment which is a much greater percentage than their next closest competitor, Adidas, with 16%.

Strong Brand

According to Interbrand, a leading global branding consulting company, the Nike brand ranks as the

24 th strongest global brand, valued at $17 billion. xxxvi

Global Presence

Strong Research & Development Capabilities

Fast Company magazine recognized Nike as the world’s most innovative company in 2013. xxxvii Nike

employs specialists in biomechanics, chemistry, engineering, exercise psychology and other related

fields as well as utilizes research committees made up of athletes, doctors and industry specialists in

order to drive their R&D program. xxxviii This allows them to stay on top of changes in consumer

preference and requirements.

Weaknesses

Global outsourcing concerns

o

Worker safety

o

Product recalls

o

Over reliance

High Priced

Nike tends to be more expensive than its closest rival, Adidas.

Opportunities

Growth in Athletic Apparel

Although Nike dominates the global athletic footwear market, they trail Adidas in the athletic apparel

market (9.9% Nike to 11.2%Adidas).

New and Emerging Markets

Consumer spending in emerging markets is expected to outpace spending in developed economies,

especially in China and India. Global sporting events, such as the World Cup (2014 Brazil) and the

Summer Olympics (2016 also in Brazil) present a huge global stage for Nike to showcase their brand.

o

China

The sporting apparel and footwear industry saw a

The sporting apparel and footwear industry saw a

7% overall growth in Asia in 2012. While Nike

owned a 12.1% market share in China in 2012

compared to Adidas’ 11.2%, the trend appears to

be reversing. As of August 2013, Nike saw sales

drop in five straight quarters compared to Adidas growth of 6% over the same period of

time. xxxix Adidas has been able to adapt to the changing of consumer preference from

performance excellence to style better than Nike. Additionally, Nike’s marketing strategy of

utilizing athletes to appeal to consumers is not resonating well with the Chinese consumer

who places a strong emphasis on academic importance. Adidas, by contract, has been able to

quickly shift their marketing focus from an intense sports message to one more focused on

fashion and lifestyle. xl Nike still needs to figure out how to best manage its brand in this $20

billion market which is expected to grow 7.8% per year through 2016. xli

o

India

When India removed its foreign direct investment (FDI) limitations in September 2012, it

allowed foreign firms to own and operate 100% of their business in India compared to

previously 51%. The $2.5 billion Indian footwear market expected to have a compound

annual growth rate of 15.1% over the next five years. xlii

o

Europe, Asia and Latin America

Adidas is currently the market leader in Europe and Asia. Latin America is dominated by

second tier brands such as Fila, Gola, Puma, Lotto and Diadora. xliii

Threats

Fierce Industry Competition

As a name brand, Nike is susceptible to generic brands capturing market share with low priced

goods. The athletic apparel and footwear market is overrun with competition, especially on the

apparel side where Nike owns only 9.9% market share.

Counterfeit Goods

Counterfeit goods not only move business away from Nike, but they place low-quality products into

the marketplace that can affect consumer confidence and tarnish the brand. Since 1982, the global

counterfeit market as a whole has increased from $5.5 billion to $600 billion annually. xliv Nike also

relies on its brand’s exclusivity, such as with its NFL apparel contract.

Economic Recession

In an economic recession where consumers have less spending power, they may decide to cut back

on high-priced sporting apparel and footwear, causing them to move towards Nike’s low-end brands

or to another company’s brand entirely.

Financial Comparison Nike & Adidas xlv

%

12

10

8

6

4

2

0

Profit Margin, Current & Quick Ratios

2008 2009 2010 2011 2012
2008
2009
2010
2011
2012

Nike Profit MarginCurrent & Quick Ratios 2008 2009 2010 2011 2012 Nike Current Ratio Nike Quick Ratio Adidas

Nike Current RatioQuick Ratios 2008 2009 2010 2011 2012 Nike Profit Margin Nike Quick Ratio Adidas Profit Margin

Nike Quick Ratio2009 2010 2011 2012 Nike Profit Margin Nike Current Ratio Adidas Profit Margin Adidas Current Ratio

Adidas Profit Margin2009 2010 2011 2012 Nike Profit Margin Nike Current Ratio Nike Quick Ratio Adidas Current Ratio

Adidas Current Ratio2009 2010 2011 2012 Nike Profit Margin Nike Current Ratio Nike Quick Ratio Adidas Profit Margin

Adidas Quick Ratio2009 2010 2011 2012 Nike Profit Margin Nike Current Ratio Nike Quick Ratio Adidas Profit Margin

With a much higher profit margin percentage (net profit/net sales), we see that Nike is more efficient

at turning revenue into actual profit.

With a higher current ratio (assets/liabilities), we see that Nike is more capable of paying back its

debts.

With a higher quick ratio ((current assets inventories)/ current liabilities), we see that Nike has more

liquidity than Adidas, and therefore can be considered to be in a better short-term financial situation.

% Return on Assets & Return on Equity 25 20 Nike ROA 15 Nike ROE
%
Return on Assets & Return on Equity
25
20
Nike ROA
15
Nike ROE
10
Adidas ROA
5
Adidas ROE
0
2008
2009
2010
2011
2012

Nike has a higher return on assets (net income/total assets) than Adidas which implies that Nike is

using its assets more efficiently.

Nike has a higher return on equity (net income/shareholder equity) than Adidas. Additionally,

Nike’s ROE has been consistent over the past five years which is much more appealing to

investors.

%

0.60

0.40

0.20

0.00

Debt to Equity Ratio

2008 2009 2010 2011 2012
2008
2009
2010
2011
2012

Adidas Debt to Equity% 0.60 0.40 0.20 0.00 Debt to Equity Ratio 2008 2009 2010 2011 2012 Nike Debt

Nike Debt to Equity% 0.60 0.40 0.20 0.00 Debt to Equity Ratio 2008 2009 2010 2011 2012 Adidas Debt

Nike has had a lower debt to equity ratio (liabilities/equity) than Adidas for quite some time. In

2006, Adidas’ D/E ratio was almost 1, so they have been getting better at utilizing equity to fund

their operations and reducing debt, but Nike’s ratio has been consistently low for a long time.

Other notable financial observations:

Both firms keep their inventory levels at roughly 20%. Because consumer preferences change

frequently, it’s important for both firms not to exceed the other by that much in this category.

Adidas was close to 30% inventory in 2003, but has since brought that number down. This

relatively low inventory level allows companies to capitalize on R&D product innovations. If a

new advanced technology were released to the market, it would make the existing product

obsolete and unable to sell.

While Adidas’ PP&E has been slowly increasing since 2003 (from 8.2% of the balance sheet to

10.9%), Nike’s PP&E has reduced from 20% to 14.5% over the same period. While the

explanation behind this is not clear, one can assume that Nike is either relying more on

outsourced production or managing their stores more efficiently.

Unlike Adidas, Nike doesn’t disclose their R&D spend on their income statement. I believe this

is because R&D is one of Nike’s major competitive advantages and they do not want competitors

to copy them in this respect.

Overall, the financial comparison between Nike and Adidas show Nike being stronger in just about

every category. Although Nike’s average revenue growth over the past ten years (9%) is slightly higher

than Adidas’ (8.6%), Adidas’ average revenue growth over the past 3 years (12.76%) is higher than Nike

(10.01%). Since 2012, Nike reported growth in every market except China. xlvi Conversely, Adidas’ sales

in China increased 15% in 2012 as a result of opening 800 new retail stores (12% increase) as well as

adapting a strategy that caters to Chinese consumers’ preferences. Adidas’ sports-casual high-fashion

brand Neo has been extremely successful with teens, as has their strategy of opening segmental retails

stores that focus on niche areas, such as basketball and kid’s apparel, rather than one-size-fits-all stores.

China’s growing market, with its increased quality of living, exposable income that is expected to double

in ten years and young demographics represents a huge market. xlvii Nike must quickly alter its strategy in

China or risk losing out on long term profitability.

Recommendations for Nike

1. Chinese Partnership

The success of Nike’s entrance into the Chinese market is still undecided. While they are still the

market leader, recently their lead has been shrinking as consumers are more attracted to

competitor brands that have done a better job of catering to the Chinese consumer’s preferences.

By partnering with Chinese apparel company Meters/bonwe, China’s leading casual wear

company that targets 18 to 25 year old males and females with their slogan “Be Different,” Nike

can operate with a company already successful at understanding the Chinese consumer and their

preferences. In turn, Nike will bring to the table its strong synergy with technology, a trait well

received by consumers within the 18 to 25 year old demographic. With Nike’s strong financial

status, they are one of the only companies currently in the market capable of making a big

acquisition/partnership within the Chinese market. Furthermore, this partnership fits with Nike’s

strategy of diversifying their brand without straying too far from their core competency.

2. Further Concentration on Physical Stores

Nike is the most innovative company in its market, through both its superior products as well as

its fusion with technology. It is consistently coming out with original products. The problem

with new technology is that people often can’t realize the value in it unless they use it. For Nike,

this means getting people to try your product. The best place for consumers to learn about Nike’s

new products is in one of their 756 retail locations worldwide. At these retail stores, customers

must be able to experience Nike+ technology, feel the comfort of Nike footwear, exercise in Nike

apparel, and so on. The benefits of these products cannot be relayed through online transactions.

If the benefits can’t be realized, then consumers will not be willing to pay the premium price that

Nike products typically call for. While Nike must look to optimize the number and location of

their retail stores, they must also make more of an effort to invite customers into the store,

similarly to Apple’s retail stores.

Conclusion

Nike’s core competency is the design, marketing and distribution of athletic apparel, footwear

and accessories. While that in itself can be a red ocean of competition, Nike’s blue ocean lies in

leveraging their strong R&D and powerful brand reputation to create products that adhere to the VRIO

framework of being valuable, rare, hard to imitate and well organized through Nike’s strong management

team.

the VRIO framework of being valuable, rare, hard to imitate and well organized through Nike’s strong

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xli “MarketLine Strategy, SWOT and Corporate Finance Report,” MarketLine.com, October 2013

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