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TRANSCRIPT
Peter:
Peter Crosby coming to you from the digital shelf institute's Cape Cod office as always. And Rob, of course, is in the Berkshires. Hey, Rob.
Rob:
Hello there
Peter:
And just as a quick reminder to everyone again we're doing a whole series on D2C and for manufacturers go to digital shelf institute.org for the latest there's such cool stuff. Coming up lots of executive conversations, recordings of the ones we've had are up, go for it. But in the spirit of direct to consumer let's talk Nike, Rob, like they are realigning towards digital and direct in a huge way. They're an intimidating brand for other brands that are trying to figure this out. But I want to talk a bit about the kind of news that happened this week, plus a bunch of the moves they've made over the past several months and figure out, is there a path for other brands in this? So are you ready?
Rob:
Yes, I am excited.
Peter:
Yeah. So the big swoosh of news this week, excuse the pun. They are reportedly closing nine of their wholesale accounts, including Dillard's Fred Meyers and Zappos. According, this was an analyst note from Susquehanna Financial Group. Sam Poser, one of their analysts, called the decision positive for Nike as it takes control of more of its own destiny. And so, Rob, what's your, what's your feeling about, about this?
Rob:
So this is, I know it's news this week, but there's a trend that's been going on for a couple of years now where Nike's been really cleaning up their distribution channels. So this is, these are not the first distribution channels that Nike has shut down in the last couple of years. And in fact, this is a smaller set than what was 18 months ago. They shut down 44 channels in North America. And I mean, they've really been doing a lot of cleanups,
Peter:
Including Amazon is one November, right?
Rob:
Including Amazon. Yeah. I think this is, this is really smart. I've said it all along. I'm a huge fan of this big picture. A brand in the future depends on its branding more than ever in a world where consumers have an absolute choice on where they shop, where there's private label choice, where there are tons of upstart brands to compete with. It's a lot easier to substitute one purchase for another. And in that world, you've got to protect the brand. The premium nature of Nike is what makes Nike valuable. So they clean up their distribution channels and enable them to ensure that everywhere Nike shows up, it shows up as Nike wants it to show up and they can keep their reputation as a premium brand. They can keep consumers engaged with them as a premium brand. And so all of this is about protecting the brand, the fewer distribution channels. They have the least chance there is that one of those distribution channels embarrasses them either in-store or as a 3P seller on Amazon, the less chance they have of their distribution channels breaking price and reducing nap and reducing the premium price that Nike can command and all that type of stuff. And so I just think that the big picture, the distribution channel cleanup makes a ton of sense given their strategy.
Peter:
So Rob, how does that conflate with our advice that we often give, which is that brands need to show up everywhere that our consumer is, is this saying that Nike's consumer is not Dillards?
Rob:
Yeah. It's different for a premium brand or, you know what I mean? This is a really interesting bit of tension here. You know, those rules in grammar school where they say, look, you've got to follow grammar until you really understand it. And then you can break the rules intentionally for style, right? But first, he first met after the rules before you break the rules. But I think that this is an example here where, you know, Nike is one of the foremost recognizable brands on planet earth and people perceive them incredibly positively. They're always perennially one of the most admired, most respected brands in consumer research reports. And so they're flexing from a position of strength that, you know, frankly, most other brands can't flex from in this particular way. So, you know, for most brands, well, we talk about consumers using the Amazon search bar as the way to discover products and whether or not you're going to sell every single product on Amazon in volume. You want to make sure that the product detail pages, the images, the plus content, the branding information is all that you read, what you want consumers to see. Right. Um, and so make sure that you're, that Amazon is cleaned up, make sure that it is accurate and more than accurate, make sure that it is great branding for you. Nike has tried this, you know, in, in the past and what they found is that there's too much counterfeiting on Amazon and too much, you know, duplicitous work on the marketplace for them to really stay on top of every last little thing that happens on Amazon and it's brand damaging for them. And so they, by making these big statements, they're telling consumers, look, if you want a real Nike and you want to make sure that it's not counterfeit, you got to get it from Nike or, or like a very small set of approved distributors. And, and, you know, they can do that because they're Nike, right. And they can do that because they had the luxury of being one of the top brands on earth. And most, most companies can't do that. Most companies cannot ignore the branding potential of Amazon and the branding risk of ignoring Amazon.
Peter:
I think part of being Nike is that they're also doing the incredible investment. They're doing the work to be a brand that connects with its consumers that personalizes them. Like, I want to go through some of the lists that, you know, in 2017, they put up this consumer direct offense initiative, which was, they had a goal of hitting 30% digital penetration by 2023. And in their call, they just hit that in the second quarter. And now they're saying they expect to achieve that, you know, as an ongoing basis by 2021. So now they've upped it through there, at their last earnings call. They announced their consumer-direct acceleration initiative. And that's to further separate the Nike brand from the competition, grow digital revenue to 50% of the business, and deliver better profitability while doing all of that. And, and that, and the initiatives that are underneath that, that they've been working are really where it gives them the ability to do these things. It's not just because they, you know, the consumers love the brand, it's because they've invested in data science, right? They bought select C L E C T and they said, essentially, it gives them a team of data science wizards who use analytics to predict retail demand. So their Nike plus membership program is using those analytics to better reward active members, utilize demand, sensing technology to keep product and supply. That's given them the insights they need to be able to be more than.
Rob:
Yeah, I think, I mean, let's just unpack that a little bit, cause that's a lot to take in first and foremost, Nike's been going direct to consumer and building relationships with the Nike plus program. They've also had customized shoes available on nike.com for purchase too, as a way to incentivize direct relationships with Nike select is another Boston startup CEO. John Andrews was another Endeca guy. And the technology for selecting his high-fidelity statistical model created by a couple of MIT professors. So Robbie is really cutting edge stuff. And Nike AF because they've been investing in the consumer relationship for years now, I mean, this is not something that they just decided to do yesterday. They've been collecting data for years. That's the first party Nike owned data. At some point, you have enough data that it makes sense that investing in AI, statistical models, data science makes sense. And you can use that data in order to drive merchandising, drive marketing, drive, product strategy, and so on and so forth. So, that select purchase, you know, a manufacturer making a technology company acquisition was really, really smart given all of the investment Nike had already made to that point. Now, you know, you hear us sort of over and over again, talk about the benefit of first-party sales as a manufacturer is that you get first-party data, that data isn't valuable the first month you're doing it. It's not valuable the second month you're doing it. It's not valuable the six months you're doing it almost there, there's a snowballing effect where you have to be at it long for the dataset to be large enough for it to really, really materially matter. And Nike plays the long game. They've got, they've had the conviction about this for years. And so they're getting to a point now that the owned consumer relationship and the first-party data combined with statistical modeling, I mean, you're right. Like they can make these bold decisions that to the outside people will say, Oh my gosh, you know, could Nike do without, Dillard's like, isn't that going to hurt their top line? Even, you know, they, they, they know better than the outsiders. Right? Right.
Peter:
And at this moment where store sales are suffering anyway, they were down for them as for everyone else in the, in Q2. It's kind of the time to say, we're going to take these hits anyway, let's realign. So that our top line is being driven more and more by our direct. And they've done a bunch of strategic leadership shuffling to do that. The second thing that they've invested in just supporting all this is the supply chain. So they're using RFID, digitally tracking products, which allows them to track them through the production process until the item is sold to the customer. And because of that and getting materials in place faster, they were able to cut Jersey lead times in half when LeBron James moved from Cleveland to LA last year in half rough.
Rob:
There's, there's a couple, there are a couple of things in there that I think are worth disentangling. First, is the RFID tracking Nike because it's a premium brand and, you know, brands like the Canada goose or a Montclair, or, you know, you, you're talking about really premium, respected brands. They're not easily substitutable with private labels. They're not easily substitutable downmarket the brand, the brand, actually the patch, and the solution all that matter. Nike suffers from counterfeiting. There's a lot of bad actors out there that make fake Nike shoes and try to sell them for real Nike prices. And that's a problem. And so Nike has worked on solving that problem on their own because Amazon has not done enough, in Nike's eyes to solve it. So they've got this system where they can track shoes all the way across the supply chain, almost at the individual shoe level. And that's one type of investment, which is a really interesting thing. You see other luxury brands doing that. And Nike is the price point. You know, they're, they're a premium brand, but they're not really a luxury brand. It's not a multi-thousand dollar purchase to buy a pair of Nike's. So it's interesting that they've taken that technology and process down marketing. It's another indication of how much they care about their brand. The second thing you said is investing in supply chain agility, and the ability to pick and pack and ship each to create custom shoe on-demand for individual consumers. And the ability to, as you said, switch out jerseys when LeBron James changes teams, those are all related to each other. Those are all reflections of big capital investment that Nike has made on its supply chain over the years to get supply chain agility. That is in my view, a huge competitive advantage for the digital shelf and the fast-changing nature of everything that happens this, in this modern digital era where the consumer is in charge. So again, just like the data, this is not Nike waking up overnight and doing these things that we're talking about as news items today, it's like an overnight success that took 10 years. Nike has been doing this for so long that all of a sudden when the world changes, they're in a great position to take advantage of it.
Peter:
Yeah. When Chris Perry kicked off our D2C strategy series, he was talking about the sort of thing every company needs to find its value prop for D2C. Like, why are you doing it? What is it you're going to do that will make it differentiated and interesting and worth the consumer investing in journeying to you directly rather than one of your partners. And, and what, what he talked about is that personalization is one of those things. Like if you can pull off personalization, you know, just the M and M's example, as sort of as simple, you know, as sort of simple as that for M and M is that didn't change there, you know, their top-line business all that much, but it created a relationship and start getting their data. So finding your way to what that is for you as a brand is super important. And I just, yeah,
Rob:
I went to a direct to consumer thought leadership summit with the mid-ocean private equity group out of New York. They own like a kid craft and a Nutri bowl, Hunter fan, a bunch of mid-market manufacturers like that, that produced quite good products. And one of the discussions was what type of brand is safe from Amazon competing with them, or say from Walmart, competing with them or Kroger competing with them, or, you know, in the world of private label and easy substitution. And one of the key areas was this area of personalization. And if a brand can do that, it's, it's not like the personalized product is the product that saves you. Cause you know, you can't sell millions and millions and millions of them for all kinds of reasons, but you know, personalization is not going to be the thing that saves you exactly what saves you is the fact that a person who has one personalized item on your product is more loyal to your company. So there's a customer loyalty customer engagement branding, part of this plus data collection to test and learn on what people are personalizing and what's going to become popular. What designs mattered, where people gravitated towards and all this sort of stuff that makes these strategies really sound when, when, when you invest in them over a long period of time. I think Chris Perry covered a lot, a lot of this stuff, but it's yeah. It's, I mean, this is, this is, this is what, this is what the game is becoming, right?
Peter:
Yes. Yeah. And I have to drop one additional little fact in this sort of supply chain thing, just cause we were content geeks, Nike recently digitized its a full pallet of 6,000 footwear materials. So that's that allows them to have their digital design teams to coordinate across all the design teams. And when consumer trends come up, they can respond faster, than, rather than dealing with it in its analog form. And I just think that centralized sort of capacity, it makes a big difference and brands should be thinking about what of their, what of their March to market can be digitized so that it just is, can be, can be,
Rob:
Yeah, there's, there's a, there's a startup in Boston called three XR. And it was founded by the folks that built the AR program at Wayfair. Mike Festa as the founder CEO. And one of the things that they do is they provide a material library that enables folks to build really photorealistic, 3D models of every all kinds of things, cloth, Teddy bears, chairs, couches, things like that, where you basically can't tell the difference between something that's computer-generated and an actual photograph. Right. And that's what Nike is doing here. Nike is building their own digitized library of what the texture models look like. So for folks that are inside Nike, the designers can basically use you know, 3D rendering to create new shoes and mess around with shoes and do those types of things. And then also once they create shoe prototypes, they can actually get those shoes using computer technology into the world before the shoe even exists.
Rob:
Right? So that you can create 3D models of the shoes. You can put those 3D models on, on actors or on athletes. You can put them in for a fortnight. You know, there's, there are all kinds of things that you can do once you have the true digitized 3D version of the shoe. So Nike is looking forward to AR they're looking forward to VR. They're looking forward to the metaverse and they're investing in the core capability, the texture modeling now. So, you know, is AR going to be a big deal in a month? No. In two months, no. In four months. No. How about virtual reality? No, but in five years or whatever timeline, it absolutely will be. These are inevitable changes. And Nike's looking ahead, they're looking out five years, they're playing the long game in their inner thinking. What are the things that I need to get good at right now for when these things matter? It's aimed as they did with the direct to consumer relationship and data. It's the same that they did with the supply chain agility. And now they're doing it with the 3D rendering capabilities for the future. I mean, it's just, I mean, I really, I'm not to be like a Nike fanboy, but they're doing a lot, that's life.
Peter:
In the meantime, while they're doing that, this digital cap blog takes the airtime so much airtime time out of each sort of step to market. And as you said up to, and including the time where I can start getting this product to market before it's to be shipped before we have the physical product in our hands to take photos of like, it just, it's so smart. And, and every brand has the capacity to do some version of that within their supply chain and their go-to-market strategies.
Rob:
It takes, you know, the thing that it takes more than anything else is a lot of these things are expensive investments, but not that expensive. You know, it's mostly the courage of conviction of leadership. It's mostly looking out of the future, making a strong statement. This is what's coming and saying, we're going to prioritize working towards it. We know that the ROI is not this year, but we're going to do it anyway because we know that that's what's coming. Not all, not all companies have that type of leadership. There's a lot of folks that are run by more operational leaders or sales leaders that came up that are, you know, came up in a world pre-digital shelf that are mostly playing a lot of the same playbook that they've been seeing for years and years, and Nike is not. And so you see the differences in all the news that that's happening today is news. That's been in process for years.
Peter:
Yeah. And you see digital happening in retail at Nike, they have the new Nike rise store format. The first one, uh, debuted recently in gangs, you China. And it's a digitally enabled journey that reacts to data from members of the app when they hit the store. And to real-time sports moments in the city that the store is like right next to a sports arena has a Nike by you personalization bar, a new app feature called Nike experiences, which turns the city into a digitally enabled playground for members like, and so they're going to get that format and it's a smaller store format than what they have now. So it's actually less of an investment, but it's a more interesting experience for their members. That's connected to their passions, right?
Rob:
Yeah. That's great. Yep. Hats off.
Peter:
Another thing that we're seeing is how they're thinking about their digital teams and by teams. I mean, not only there in the house, but also their, their digital partners and agencies and stuff like that in July, Nike dropped poopless this ratio Razorfish as an, as a digital media agency. And they're talking about in-housing, they're not looking for a new partner and we've been seeing that trend, Rob, that to cut costs and provide greater control and to simplify cost structure while, while building their own digital capabilities in house, there's a lot of brands that are starting to do that.
Rob:
Well, first I'm just going to push back on one thing you said there, this is not about costs. Companies have done comparisons on, you know, working with agencies and going in the house and the cost isn't materially different in one way or the other. And a lot of cases here. I think this shift though, is a really, really important shift. And if you allow me to stand up on a soapbox for a second, people in large corporations spend too much damn time in meetings, you try it. You try to talk to a bunch of folks that are in the eCommerce team or the media team or the branding team. And they're in meetings eight hours a day, five days a week, you can't get anything done. And so the people that do a lot of the real work and these companies are not the employees, they just run out of time and they just outsource it to agencies at the end of the day. If you're Nike though, and you're looking to control your brand, and you're looking to control your brand experiences, and you're investing in the future, you want your own employees to be the ones with their hands on the work and expert in what they're doing. And you want to have that capability and experience and, you know, alignment with your cultural values and all those types of things in the house. That's what this is about. It's not about cost. It's not about the cost structure. It's not about savings. It's not about any of that stuff. It's about Nike bury, intentionally wanting to control their destiny. I mean, can you imagine another, another brand that's very controlling like this? Can you imagine Apple having any outsourcing that the next iPhone designed to, I don't even care who it's like pick the number one design agency on the idea, right. Can you imagine Apple saying, Hey, IDEO, I don't, I don't have time. Why don't you design this iPhone for me, dude? It's like, no, they're not going to do that. Apple is going to do that themselves. Nike, bringing this stuff in the house is just a realization that this is no longer business as usual and Nike have their own expertise on this as a competitive advantage versus using the same agency, a bunch of their competitors uses. So I think that's what this is about. Even if it's more expensive to do it in house. I think that that is the right move for them.
Peter:
So Rob, with all of that, you know, we, as you said, we've been fanboying here, just because when, you know, when I was really researching for this, these number of things that pile up into a really intentional strategy, not surprising, but you know, if, if I put myself in the mindset of a lot of our listeners who are trying to figure this out and are some number of years behind Nike, and in thinking about this vision, what's a brand to do you know, what do you know, what is the, what is the more traditional brand approach?
Rob:
Well, It's a good question. I mean, you know, how do you eat an elephant? one bite at a time. I like it. You know, all you can do is one foot in front of the other, you know, there's another quote that I'm just going to absolutely butcher here, but you can drive 200 miles in the fog seeing only 10 feet in front of you and get to your destination. Right? The important thing is to know what your destination is. You might only know what the next 10 feet of the road look like, but then you'll have another 10 feet and then you'll have another 10 feet and then you'll have another 10 feet. So trying to do all this at once, I think is insane. Trying to do it over a long period of time makes a ton of sense, but you know, you gotta start now. What's the best time to plant an Oak is 20 years ago. The second best time is right now. You know, I don't know how many of these aphorisms you can, you can throw out there, but basically, it's just picking a future and get started. I think that a lot of brands, they look at these activities and they think, Oh man, if I can't do all of that in the fiscal year of 2020, or the fiscal year of 2021, then it's going to be a failure. I encourage them to look at the iconic essay, a thousand true fans. I don't care if you're a $50 billion global category captain, if you don't have a direct to consumer strategy, it starts with the first thousand. It starts with finding those folks that buy you over and over and over again, and love you and getting those relationships direct instead of through an intermediary. And you just build on that. And every day you come to work and you build on that. So I think the biggest challenge that brands have is, first of all, a vision like I said before, and then second of all, picking a small enough win and being content at the small wind is actually materially important in the big picture and not losing sight and not getting added, because it doesn't seem to impact the corporate bottom line this year or next,
Peter:
I hate to put an assignment on you, but I think you just found your next DSI blog post topic, which is taking that essay and putting it in this context. Cause I think that essay is brilliant, but B I think putting in this context will be really helpful. So if you don't mind, I just assigned you yeah.
Rob:
A thousand true fans of the brand.
Peter:
Exactly. It's where it begins. And, and, you know, thinking about that, one of the privileges of doing this DTC strategy playbook series is I get to talk to these executives who are actually in the seat doing this and on Wednesday, September 2nd, 1:00 PM Eastern James Sydell, VP of digital commerce, McCormick, and McCormick has this simple brand vision. It makes every moment shoppable. So McCormick is not going to go out and drop Kroger's or something. You know, that's not going to be their strategy, but however, they do have a direct to consumer strategy, there, their old Bay, hot sauce story. James is going to talk about that and sort of in a, be careful what you wish for a moment that just was successful beyond their wildest dreams. And they learned a ton of lessons, like to your point, sort of moving the 10 feet in front of you through the fog, but doing it intentionally and taking the learnings from it is what every brand needs to be doing right now. And making sure that they're getting more control over their own destiny.
Rob:
Yeah. Also, you know, fewer meetings
Peter:
Fewer meetings! I have to say. Yeah. And our organization, you know, largely from your leadership, the shift we've made to have at least two mornings a week dedicated to focusing time has transformed. I know at least my capacity to actually think creatively. I was one of those people that was in meetings every minute. And then go right now, all the work I got from these meetings. When, when am I going to do that? It's been transformative.
Rob:
So I'm going to do war on meetings. I'm going to be my Twitter handle from now on.
Peter:
"Stop talking to each other." Well, as we take on yet another war to change the world of commerce, manufacturing, and lives that's it for one podcast for the day. Again, please do join us on September 2nd. The link will be in the show notes, the recording will be available at the digitalshelfinstitute.org shortly thereafter. If you like this conversation, we'd love it if you left a review, bring more people to us. Thanks again for joining us, and thanks as always for being part of our community.
