Sports Equipment Industry - Analysis of Nike

Nike is the world`s leading athletic and sports gear and merchandise manuIacturer and
distributor operating in US, Europe, Middle East, AIrica and Asia PaciIic and it remains the
largest and most dominant player in the athletic Iootwear and apparel category. Nike recorded
revenues oI USD 20.8 billion in 2011 with a revenue increase oI 10 over 2010 where
company had recorded revenues oI USD 19 billion ('Datamonitor, 2011). Also Nike enjoys
market leadership built on high quality product development capabilities and well known
brands which are recognized worldwide and strong Iooting in many oI the global markets
('Morningstar, 2011) while 'Hoover`s First Research (2011) puts the sports equipment
industry as generating USD 100 billion in annual sales globally. 'The Iirm sells to more than
50,000 retail accounts, through a network oI more than 700 company-owned stores, and
through independent distributors and licensees in more than 170 countries ('Morningstar,
2011).
Understanding the Iorces which impact the company requires a tool like SWOT.
'Datamonitor (2011) puts Nike as one oI the leading players in the market with strong
presence in most areas oI its operation helping Nike to sustain leadership position. In 2010
Interbrands put Nike on 25
th
place amongst top 100 global brands, with a brand value oI
almost USD 13.7 billion. Nike has a string oI athlete and team sponsorships as well as
organizational commitment over cost management leading operating margin expansion over
the coming years. Nike`s brand equity is buoyed by technical innovation and helps company
maintain its leadership in design oI apparel, athletic equipment and Iootwear. As economist
(2010) mentions events like Iootball world cup in South AIrica led to increased sales oI
Iootball related products at Nike beIore the tournament even began. This presence was part oI
Nike`s bid to gain larger share oI USD 11billion global Iootball apparel, shoe and equipment
market as well as increasing its presence in emerging markets. In 2009 more than 25 oI
Nike`s revenues came Irom developing countries and Nike has ambitious plans to add on
additional USD 3 billion sales Irom these countries by 2015. 'Datamonitor (2011) mentions
that Nike has a pool oI research committees and advisory boards which has memberships
Irom athletes, trainers and other linked players Ior product improvement and Iurther athletes
are engaged directly or indirectly to evaluate products during design and development phases.
Global sales are managed through retail accounts through Nike owned retail stores,
independent distributors and licensees. International market is handled through 14
distribution centers located worldwide wide distribution channel helps in ensuring regular
deliveries around the globe and eIIicient management oI inventories. Price competitiveness is
managed through emphasized low cost manuIacturing. In May 2010 the sales had just
dropped by 1 compared to 2009 as Nike laid oII 5 oI its workIorce to reduce costs as well
as introducing newer products with more improved Ieatures to retain its customers. Further
orders Ior Nike products improved by 7 globally and up to 30 in emerging markets.
Amongst other Iuture plans are stronger Iocus on retail trade with many new shops planned
and increasing Iocus on online sales ('Economist, 2010).
As'Datamonitor (2011) mentions pension Iunds remain one oI the largest obligation within
the organization. Changes in the equity markets and hence changes in the Iunds` assets
impact on the magnitude oI the liabilities. In FY2010 the unIunded portion rose to USD 113
million which was almost 37 increase over previous year. Such beneIits would thus Iorce
organization to make regular committed contribution Ior bridging gap diIIerence and would
thus reduce cash Ior Nike`s growth and acquisitions. The importance oI Europe and United
states as the key market segments exposes Nike to economical conditions especially recession
and decreased consumer disposable income and Iurther stresses on development oI emerging
markets. Negative image is created by poor working conditions in overseas Iactories. Apparel
Iactories in Malaysia speak oI Iorced labour. Direct sales to consumers are creating conIlict
with its own retailers. Footwear dominates business income which makes company
vulnerable to Iluctuations in Iootwear market. Retail sector is very price sensitive and since
Nike`s main business is derived Irom retailers Nike`s margins are squeezed when retailers try
to push price competition onto Nike.

('Sports Equipment in the United States, 2010)

There are tremendous opportunities Ior the organization to grow. Nike was named US
National Football league licensed partner in 2010 Ior whole slew oI apparel which included
uniIorms Ior both on and oII Iield. This was a major coup Ior Nike which contract to supply
apparel until 2016, starting Irom 2012. This contract will have almost 3 positive impact on
earnings in 2012 as well as providing exposure to company`s products to million oI Ians
around the world encouraging spectators and audience to shop Ior Nike brand. Nike can use
this opportunity to leverage additional mileage Irom these events and upgrade its market
share in US. Nike also launched a massive reorganization in 2009 to align itselI with six
regions with reduced management layers. Nike has integrated high technology gadgets with
Nike`s products to enable its customers to track their exercise regimens better Iurther
emphasizing Nike`s image as an innovative product design company. Nike`s ability to
procure its raw merchandise Irom low cost countries in Asia and in Latin America enables
company to maintain better margins. Web sales grew by 31 to about USD 341 million in
FY 2011 sliding past the increase percentage Ior Nike`s total revenue (Brohan, 2011). Global
Iootwear market is growing as burgeoning population and increased aIIluence in third world
countries increases demand Ior branded products. Nike had over halI oI its revenues derived
Irom Iootwear in FY2010, so this would present a major opportunity to capitalize on the
growing market.
unlLed SLaLes
33
Aslaaclflc
32
Lurope
28
8esL of Lhe
World
7
Sports Lqu|pment Market Segmentat|on

('Morningstar, 2011)
Competition is intense in US and elsewhere, Nike`s has number oI sportswear and athletic
Iootwear and apparel competitors with diversiIied range oI portIolio that Nike must contend
with in order to maintain its distinctive edge and leadership. The competition is not only Irom
established brands like Adidas, Puma and Callaway GolI but also Irom cheaper alternative
Iootwear imported Irom countries like India and China. Competitors` products are becoming
oI higher quality that customers increasingly preIer because oI price sensitivity. Nike`s
margins are thus threatened Irom both ends oI the value chain. We see that Nike is well
poised in terms oI its close US competitors with higher revenues and better market
capitalization than the other three Nike`s market capitalization as reported by
'Morningstar (2011) was USD 44.6 billion. Also its net proIit margin is the better oI the
three and much higher than the market median and industry median. Its ROE is amazing 22
compared to industry and market medians. This was coming out oI recession so in the Iuture
years Nike is expected to perIorm even better and thus Nike has the potential to generate
additional capital through equity iI required Ior expansion into developing countries, and iI
Nike is Iorced to give Iactories where labour laws and blatantly Ilouted. Nike has limited
ability to dictate work conditions on its Iactories where several incidents oI labour laws
violation and Iorced labour have been reported. Also cases oI child labour have been cited
against workers in several Asian Iactories. Nike`s reputation gets aIIected with each case oI
reported violations. CounterIeit products have been growing and many counterIeits are quite
close to originals hurting Nike`s reputation and sales Low quality products erode consumer
conIidence in branded wear diluting Nike`s brand image. Operating international subsidiaries
and Iactories opens company to risk oI currency Iluctuations.


Company/Median Name
AnnuaI SaIes ($
M)
TotaI
EmpIoyees
Market
Cap($ M)
Gross Profit
Margin (%)
Pre-Tax Profit
Margin
Net Profit
Margin (%)
Return on
Equity (%)
adidas 15,889.15 41287 13,554.91 47.78% 6.97% 5.07% 13.73%
NKE 20,862.00 34400 35,031.92 44.87% 13.51% 10.19% 22.69%
Callaway Golf 967.66 2100 519.76 35.86% -9.28% -16.51% -23.35%
PUMA AG 3,586.52 9697 4,923.46 49.45% 10.57% 7.25% 14.13%
ndustry Median -- -- -- 45.79% 10.03% 3.41% 7.69%
Market Median -- -- -- 30.57% 10.96% 3.29% 5.28%
2010 PROFITABILITY 2010 KEY NUMBERS

eferences

Brohan, M. (2011) 'Nike runs up a 31 growth rate in e-commerce |online|

http://www.internetretailer.com/2011/06/28/nike-runs-31-growth-rate-e-commerce |13th
Nov, 2011|