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B y the late 1970s and early 1980s, Nike had wrested first place in the athletic
shoe industry from Adidas, the firm that had been supreme since the 1936 Olympics when Jesse Owens wearing Adidas shoes won his medals in front of Hitler, Germany, and the world. In the early 1980s, Reebok emerged as Nike’s major competitor, becoming No. in this industry by 1987. But Nike fought back, and three years later had regained the top-dog position. By the latter 1990s and into the new millennium, Nike deci- sively pulled away in revenues and profitability. By 2008, its revenues reached $16 billion a year, and no else could touch this largest sports footwear and apparel company in the world. But let us start 20 years ago when Nike had some tough competition, and see if we can determine how it so outdistanced its nearest rival, Reebok.
REEBOK
History
The ancestor to Reebok goes back to the 1890s when Joseph William Foster made himself the first known running shoes with spikes. By 1895, he was hand-making shoes for top runners. Soon, the fledgling company, J. W. Foster & Sons, was furnishing shoes for distinguished athletes around the world. In 1958 two of the founder’s grandsons started a companion company, which they named—fittingly they thought—after an African gazelle: Reebok. This company eventually absorbed J. W. Foster and Sons. In 1979 Paul Fireman, a partner in an outdoor sporting goods distributorship, saw Reebok shoes at an international trade show. He negotiated for the North American distribution license and introduced three running shoes in the United States that year. It was the height of the running boom. These Reeboks were the most expensive running shoes on the market at the time, retailing for $60. But no matter, demand burgeoned, outpacing the plant’s capacity, and production facilities were established in Korea. In 1981 sales were $1.5 million. But a breakthrough came the next year. Reebok introduced the first athletic shoe designed especially for women. It was a shoe for
Nike: A Powerhouse
C H A P T E R N I N E T E E N
aerobic dance exercise and was called the Freestyle. Whether accidentally or with brilliant foresight, Reebok anticipated three major trends that were to transform the athletic footwear industry: (1) the aerobic exercise movement, (2) the great embracing of women with sports and exercise, and (3) the transference of athletic footwear to street and casual wear. Sales exploded from $13 million in 1983 to $307 million in 1985.
Shifting Competitive Picture for Reebok
In 1987 Reebok’s share of the U.S. athletic footwear market surpassed archrival Nike’s as it racked up sales of $1.4 billion against Nike’s plateauing sales of $900 mil- lion. Somehow, Reebok’s sales growth then slowed, and in 1990 Nike overtook it, with $2.25 billion in sales to Reebok’s $2.16 billion. The margin widened as Reebok began to lose ground, not sporadically but steadily. Its meteoric sales increases of a few years before were no more, and stock market valuations and investor enthu- siasm reflected this decline in fortunes. Part of the shift in competitive position could be attributed to Nike’s savvy advertising and to its two well-paid athlete endorsers: Michael Jordan and Pete Sampras. But perhaps Reebok could blame itself more for the change in its for- tunes. Certainly as the 1990s moved toward mid-decade, the flaws of Reebok were becoming more obvious and self-destructing. Paul Fireman had purchased Reebok in 1984 and led it to more than a ten- fold increase in sales in only five years. But with such growth, directors felt they needed an executive with experience running a big operation. Fireman, who owned 20 percent of the company’s stock, didn’t object. He maintained that he was glad to give up day-to-day responsibilities. While retaining the titles of chairman and CEO, he turned his attentions to private pursuits, including building a golf course on Cape Cod. The new management proved inept. Amid mediocre performance, Reebok went through three different top executives in the next five years. Nothing seemed to stem the tide, and Reebok continued losing ground to Nike. Finally, in August 1992, Fireman again took active charge and he wasted little time bringing in a new management team. At the same time, he introduced aggressive plans for the com- pany to regain its competitive position.
Aggressive Thrusts of Reebok
Fireman first attacked Nike in the basketball arena. Nike’s share of basketball shoes was almost 50 percent, against Reebok’s 15 percent. But about this time, Michael Jordan retired from basketball to try baseball. “Nike’s success has become their albatross,” Fireman exulted. “Jordan is no longer on the radar screen.” 1 He signed up Shaquille O’Neal, “the next enduring superstar,” and planned to destroy the market dominance of Nike.
(^1) Geoffrey Smith, “Can Reebok Regain Its Balance?” Business Week, December 20, 1993, p. 109.
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endorsers, had eclipsed Chang. Shaquille O’Neal became unhappy with his $3 million Reebok contract and began looking around for bigger money. Reebok’s costs also were increased by expenditures to fi x distribution snags and to open a new facility in Memphis. Other Reebok problems stemmed from management turmoil, including the departures and resignations of top executives. Some shareholders questioned whether Fireman was too difficult a boss: “How do you attract first-rate talent when there’s been a history of turnover at the top?” 3 Adding to Reebok’s difficulties were price-fixing charges brought by the Federal Trade Commission. The government contended that Reebok had told retailers their supplies would be cut off if they discounted Reebok shoes too much. In May 1995, Reebok agreed to pay $9.5 million to settle the price-fixing charges, saying that while no evidence of wrongdoing was established, still it settled to avoid costly litigation. But the more serious Reebok problem was in its relations with the major retailer player in the athletic footwear industry—Foot Locker.
The Struggle to Win Foot Locker
By 1995, Woolworth’s Foot Locker, a chain of some 2,800 stores, had become the biggest seller of athletic footwear. It and related Woolworth units accounted for $1.5 billion of the $6.5 billion U.S. sales, this being some 23 percent. Nike had a winning relationship with this behemoth customer. In 1993 Nike’s sales in Foot Lockers were $300 million, while Reebok was slightly behind, with $228 million. Two years later, Nike’s Foot Locker sales had risen to $750 million, while Reebok’s dropped to $122 million.^4 The decline of Reebok’s fortunes with Foot Locker can be attributed to poor handling by top management of this important relationship. Fireman seemed to resent the demands of Foot Locker almost from the beginning. For example, in the 1980s when Reebok’s aerobics shoes were facing robust demand, Foot Locker wanted exclusivity, that is, special styles only for itself. The retailer saw exclusivity as one of its major weapons against discounters and was getting such protection from other manufacturers—but not from Reebok, which persisted in selling its shoes to anybody, including discounters, near Foot Locker stores. In contrast, Nike had been working with Foot Locker for some years and by 1995 had a dozen items sold only by the chain, including Flights 65 and 67, high- priced basketball shoes. While Fireman began belatedly trying to fix the relationship, little had apparently been accomplished by the end of 1995.^5 Adding to Reebok’s troubles in cracking this major chain, Foot Locker’s custom- ers were mainly teens and Generation-X customers willing to pay $80 to $90 for
(^3) Joseph Pereira, “In Reebok-Nike War, Big Woolworth Chain Is a Major Battlefield,” Wall Street
Journal, September 22, 1995, p. A6. (^4) Ibid., p. A1. (^5) Ibid., p. 6A.
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INFORMATION BOX
IMPORTANCE OF MAJOR ACCOUNT MANAGEMENT
Recognizing the importance of major customers has come belatedly to some sellers, probably none more belatedly than Reebok. These very large customers often repre- sent a major part of a firm’s total sales volume, and satisfying them in an increasingly competitive environment requires special treatment. Major account management should be geared to developing long-term relationships. Service becomes increas- ingly important in cementing such relations (as we saw in Chapter 14, the Newell Rubbermaid case). To this end, understanding and catering to customer needs and wants is a must. If this means giving such important customers exclusivity, and making them the absolute first to see new goods and samples, this ought to be done unhesitatingly. Such account management has resulted in changes in many organizations. Separate sales forces are often developed, such as “account managers” who devote all their time to one or a few major customers, while the rest of the sales force calls on smaller customers in the normal fashion. For a customer the size of Foot Locker, senior executives, even company presidents, need to become part of the relationship. Given that you think the demands of a major retailer are completely unreasonable, what would you do if you were Mr. Fireman: give in completely, hold to your prin- ciples, negotiate, or what?
shoes. But Reebok had given up that high-end niche with most of its products. Reebok’s primary customer base had become older people and pre-teens unwilling or unable to pay the high prices. Aggravating the poor relationship with Foot Locker was Reebok’s carelessness in providing samples on time to Foot Locker buyers. Because of the chain’s size, buying decisions had to be made early in the season. Late-arriving samples, or no samples, virtually guaranteed that such new items would not be purchased in any appreciable quantity. See the preceding Information Box for a discussion of the importance of major customers.
NIKE
History
Phil Knight was a miler of modest accomplishments. His best time was a 4:13, hardly in the same class as the below-4:00 world-class runners. But he had trained under the renowned coach Bill Bowerman at the University of Oregon in the late 1950s. Bowerman had put Eugene, Oregon on the map when year after year he turned out world-record-setting long-distance runners. Bowerman was constantly experimenting with shoes: He had a theory that an ounce off a running shoe might make enough difference to win a race.
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In the January 4, 1982 edition of Forbes in the “Annual Report on American Industry,” Nike was rated number one in profitability over the previous 5 years, ahead of all other firms in all other industries.^7 But by the latter 1980s, Reebok had emerged as Nike’s greatest competitor, and threatened its dynasty. A good part of the reason for this was Nike’s under- estimation of an opportunity. Consequently, it was late into the fast-growing market for shoes worn for the aerobic classes that were sweeping the country, fueled by best-selling books by Jane Fonda and others. Reebok was there with the first athletic shoe designed especially for women: a shoe for aerobic dance exercise. Figure 19.1 shows the sales growth of Reebok and Nike from their beginnings to 1995. Of particular note is the great growth of Reebok in the mid-80s; in only a few years it had surpassed Nike, which was at a plateau as it missed the new fitness opportunity. Then as can graphically be seen, Reebok began slowing down—a slow- down it was unable to turn around through the mid-1990s, while Nike again surged. Table 19.1 shows net income comparisons. Both firms had somewhat erratic incomes, but the early income growth promise of Reebok relative to Nike, as with sales, could not be sustained. This is confirmed with later revenue and income figures from 1995 to 1998, shown in Table 19.2.
(^7) Forbes, January 4, 1982, p. 246.
Figure 19.1 Sneaker Wars: Sales. Nike and Reebok 1976–1995 (billions of dollars). Source: Company annual reports. Commentary: Here we can graphically see the charge of Reebok in the later 1980s that for a few years surpassed Nike but then faltered by 1990 as Nike surged even farther ahead.
Reebok
Nike
.
1976 1983 1985 1987 1989 1990 1991 1992 1993 1994 1995
Sales (in billions of dollars)
Table 19.1 Sneaker Wars: Net Income Comparisons, Nike and Reebok 1985–1994 (billions of dollars) Nike Reebok 1985 $ 10.3 $ 39. 1986 59.2 132. 1987 35.9 165. 1988 101.7 137. 1989 167.0 175. 1990 243.0 176. 1991 287.0 234. 1992 329.2 114. 1993 365.0 223. 1994 298.8 254. Source: Company annual reports. Commentary: Note how much more profitable Reebok was than Nike in the late 1980s. In one year, 1987, it was almost five times more profitable. But then in 1990 the tide swung strongly in Nike’s favor. Note also that Nike’s profitability was far steadier than Reebok’s during this period.
Table 19.2 Nike versus Reebok Comparative Operating Statistics, 1995–
Nike Reebok Nike % of Total
Revenues (million $): 1995 $4,761 $3,481 57.8% 1996 6,471 3,478 65. 1997 9,187 3,644 71. 1998 9,553 3,225 74. Net Income (million $) 1995 400 165 70. 1996 553 139 79. 1997 796 135 85. 1998 400 24 82.
Source: Calculated from company reports. Commentary: In this comparative analysis, the further widening of the gap between Nike and Reebok is clearly evident. In revenues, Nike’s market share against Reebok has grown from 57.8 percent to 74.8 percent in these four years—a truly awesome increase in market dominance. In net income, Nike’s comparative performance is even more impressive, despite the poor 1998 profit performance partly due to poor economic conditions in the Asian markets. Nike’s profits were down, but not nearly as much as Reebok’s.
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troubling portent was the public’s growing disenchantment with athletes. Fan interest seemed to be dropping, perhaps reflecting a growing tide of resentment at overpriced athletes proving to be selfish, arrogant, and decadent—the very role-models that Nike, Reebok, and other firms spent millions to enlist. Knight had to wonder at another disturbing possibility: Had Nike grown too big? Was its logo, the swoosh, too pervasive, to the point that it turned some peo- ple off? Was even the tag line, “Just Do It,” becoming counterproductive? Concerned about such questions, Nike began reassessing. A new advertising campaign had the softer tag line, “I can.” Nike began toning down its use of the swoosh, removing it from corporate letterheads and most advertising, and replacing it with a lowercase “nike.”
Later Developments
At the beginning of the new millennium, Nike’s dominant position continued to strengthen. Changing fashion trends, new products, cost cutting, and an Asian revival aided Nike. It found that with the public’s growing disenchantment with many athlete endorsers it could shave its marketing budget by $100 million. Furthermore, prospects for 2000 were optimistic. Sales of athletic gear peak in Olympic years, and the expectations were reasonable that the summer games in Sydney, Australia would stimulate a big buying spree in merchandise where Nike had a 35 percent market share. 9
ISSUE BOX
HOW SHOULD WE DEFINE OUR BUSINESS?
Nike had developed its business horizons through the following sequence:
running shoes n athletic shoes n athletic clothing n athletic goods
In so doing, it greatly expanded its growth potential. This idea of expanding the perception of one’s business was first put down on paper by Theodore Levitt in a sem- inal article, “Marketing Myopia” in the Harvard Business Review in July–August 1960. Levitt suggested that it was shortsighted for railroads to consider themselves only in the railroad business, and not in the much larger transportation business. Similarly, petroleum companies should consider themselves in the energy business, and plan their strategies accordingly. Can such expansion of a firm’s business definition go too far? Even in Levitt’s day, could a railroad really have the expertise to run an airline? Looking to Nike today, and its expanding views of tapping into the athletic goods market, do you think football equipment is a viable expansion opportunity? Fishing tackle?
(^9) Leigh Gallagher, “Rebound,” Forbes, May 3, 1999, p. 60.
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Reebok turned out to benefit most from the Olympics; its shoes were seen on 2,500 pairs of feet. It had also scored a coup in sponsoring the CBS hit, Survivor. But after years of missteps, its market share was just 12 percent, although Paul Fireman was predicting this would rise to 25 percent within the next six years. The company was pursuing a smarter distribution strategy with less emphasis on discount chains and more on courting mall retailers, such as Foot Locker, for whom Fireman was now giving some exclusive rights. Reebok also was trying to win back teenage boys— who were spurning its conservative, even frumpy shoes—with new colorful designs endorsed by professional basketball player Allen Iverson, its latest endorser. Nike continued to push its apparel lines that in 2001 accounted for about a third of the total $9 billion of sales, with particular attention given to women’s wear. It opened NikeTown stores where shoppers could see the full range of products displayed in a hands-on environment. But it was also trying to boost its exposure in department stores, which were notorious for driving hard bargains. See Table 19.3 for operating results of Nike and Reebok at the turn of the century. You can see from these statistics that Nike’s dominance was increasing. Despite Reebok’s improved showing in 2001, it still lagged far behind. On November 19, 2004, Philip Knight, 69, retired from day-to-day manage- ment of his company, although he would remain chairman of the board. The announcement was not unexpected as he had two co-presidents who were seen as possible successors. But he went outside the company to choose William Perez, the chief executive of family-controlled S.C. Johnson & Son, a consumer-products company, with such brands as Drano, Windex, and Glade air fresheners—rather tame these compared to the big athlete endorsers. But Mr. Perez was a marathoner and a buyer of Nike shoes for 27 years, and had “vast international experience that will help Nike expand further into markets abroad.” Knight explained this choice
Table 19.3 Nike versus Reebok Comparative Operating Statistics, 1999– Nike Reebok Nike % of Total Revenues (million $): 1999 $8,995 $2,872 75.8% 2000 9,449 2,865 76. 2001 9,893 2,993 76. Net Income (million $) 1999 579 11 98. 2000 590 81 87. 2001 663 103 86. Source: Calculated from company reports. Commentary: In this latest comparative analysis, Nike dominance has grown well beyond that during 1995–1998 (see Table 19.2). In revenues, Nike’s market share against Reebok averaged 76.4 percent in those three years, while Nike has over 90 percent of the combined profitability of the two firms.
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ANALYSIS
The case shows the whipsawing of the two major competitors in what was once merely the athletic shoe industry, an industry now expanded far beyond its original focus. In its youth, Nike had outgunned the old entrenched Adidas, only to find Reebok surpassing it in the mid-1980s as it failed to recognize quickly enough a new opportunity. But Nike came back stronger than ever after a brief hiccup, cap- italizing on the mistakes of Reebok with its own aggressiveness. The most controllable factor in the divergent success patterns of these com- petitors had to be customer relations. Nike catered to its customers, especially the large dealers such as Foot Locker, while Reebok was surprisingly nonchalant and even arrogant in such relationships. A maker of even high-demand goods is myopic if it is arbitrary and dictatorial toward dealers. This relationship should be symbiotic, with both parties benefiting from it and spurning any temptation to capitalize on a perceived king-of-the-hill position. The caprice of fashions and fads should quickly destroy any smugness, as was the case with the Shaq Attaq shoes and the expensive endorsements of Shaquille and others. In other aspects of its comeback, Nike may have lucked out. It choice of athletes to endorse were some who became dominant figures in their sport, ones lionized by fans. The advertising theme of Nike also caught on: “Just do it,” had great appeal to youth. But such home runs can never be guaranteed. The success and visibility of Nike and its products brought with it critical pub- lic scrutiny. Was Nike—and other U.S. manufacturers as well—guilty of violations of accepted moral and ethical standards in farming out production to foreign sub- contractors in Third World countries using child labor at low wages? Critics con- demned this as exploitation to maximize profits. But others pointed out that while long hours in a smelly shoe or garment factory may be less than idyllic, it was superior to subsistence farming or laboring in even harsher workplaces. Could Reebok or some other firm arise to challenge Nike? That seems less likely today, with Nike’s revenues four times greater than Reebok’s, and net income six times greater. Still, the gap could be closed with a striking new product innovation—or if Nike becomes complacent. Remember the 3 C’s of Boeing in Chapter 7, when it opened the gates for AirBus. And, dare we forget, Nike vanquished the dominant Adidas in its early days.
Invitation to Make Your Own Analysis and Critique Your analysis, please, of CEO Parker’s count of different sneaker and apparel styles at 13,000.
