Disclosure: I own shares of NKE
US sports gear maker Nike, Inc., did it again! It cashed earnings and sales expectations by a wide margin, sending its stock sharply higher.
What is Nike’s secret?
Answer: Multiple advantages that raise “moats” around the company, making it difficult of competitors to replicate its business model.
One of those advantages is branding, the creation of a strong image among its teenage customer base—a must have mentality that gives the company pricing power, the ability to charge premium price for its merchandise over competing products.
Another advantage is scale, the cost savings accompanying a larger corporate size. Nike has close to $30 billion in revenues, almost twice its closest competitor, Adidas AG.
| Company | Revenue (ttm) | Operating Margin (ttm) | EPS | Net Income |
| Nike | 30.25B | 0.14 | 3.50 | 3.11B |
| Adidas | 17.21 | 0.07 | 1.38 | 666.2M |
Source: Finance.yahoo.com
A third advantage is scope, the cost savings linked to offering different products by a single corporation for sale, rather than products by different companies. Nike offers a broad range of shoes, clothing, and gear, catered to men, women, and children.
A fourth advantage is customization, the benefits associated with offering customer-tailored solutions. NikeiD allows customers to customize some of the products they buy.
A fifth advantage is innovation, the discovery of new products that have a number of distinct features separate from those of conventional competing products – features that stir up emotion and desire, seducing consumer fantasy.
Nike’s products have all these characteristics, and then some—they usually carry the names of professional athletes like Nike Air Jordan Retro XI sneakers, modeled after the 1996 originals designed for Michel Jordan when he played for the Chicago Bulls.
This strategy adds an aura to Nike’s products. But there is a negative side to it these days. Professional athletes and celebrities are under constant scrutiny by the media, which sometimes reveals their dark side -- psychological deficiencies and unacceptable personal conduct that may end up tarnishing the Nike image even among loyal followers.
When this situation arises, positive buzz can quickly turn into negative buzz, and the sponsor has a serious marketing problem at hand.
That has been the case with a recent string of incidents of misconduct by some of the athletes sponsored by Nike. And that’s why utilizing professional athlete sponsorships has come to question -- even among company’s stockholders.
It may be time for Nike to adopt a new buzz model.
