Gen Z might be the core revenue driver for Nike now, but already the sportswear giant has its sights firmly set on Generation Alpha — children currently under the age of 12.
“The way most companies look at consumers is ‘well, who's got disposable income?’,” says president and chief executive John Donahoe, sitting in a vast meeting room at Nike’s global HQ in the small city of Beaverton near Portland, Oregon. “We don't look at it that way. We look at, who is setting the agenda? Who is the future?”
In today’s fast-changing and volatile world, preparing for the future is one giant challenge for the decidedly relaxed CEO, who sits wearing a simple navy crew neck, jeans and Nike black-and-white waffle sneakers in the Seb Coe building, where a three-metre sign outside reads: “Create the future of sport”. Donahoe has stiff competition from disruptor and challenger brands coupled with continued headwinds in China following a domestic backlash over Xinjiang links (Nike issued a statement saying it does not source products from Xinjiang and confirmed with their suppliers that they don’t use textiles or spun yarn from the region) and now Covid lockdowns.
To future proof the company, he’s targeting Generation Alpha and Gen Z with a mix of investment in innovation and creative design, and a push on circularity, diversity and inclusion. There’s also high-profile collaborations like the Louis Vuitton Air Force 1’s by Virgil Abloh. However, meeting the high expectations of future generations means Nike must also take risks standing up for controversial social issues and balancing the metaverse opportunity with Nike’s long-standing commitment to physical sports and activities.
Donahoe, who has been Nike President and CEO since January 2020 has a background in tech — with spells at Ebay and software company Servicenow — now considered a career essential in an industry ever-more driven by digital.
Nike is of course the global sportswear market leader, with revenues hitting $44.5 billion in 2021, compared with arch rival Adidas ($22.6 billion) and smaller names such as Puma ($7.7 billion) and Lululemon ($4.4 billion). For the third quarter this year, Nike revenues rose 5 per cent to $10.9 billion, led by double-digit growth in Nike Direct, its direct-to-consumer business, mono-brand stores and apps including Nike, Nike Running Club, Nike Training Club and SNKRS, its drop-culture sneakers app.
However, China is a thorn in Donahoe’s side. In the most recent quarter, Greater China sales declined 8 per cent and analysts say the future is hard to predict, as lockdowns continue throughout the region. It’s difficult to understand if subdued demand is due to store closure, change in sentiment post Xinjiang cotton boycotts or delivery delays.
“Nike's been in China for 40 years. We've always taken a long-term approach,” Donahoe says. “Chinese consumers like innovation: both global innovations and hyper-local innovations. So, we're going to continue to invest in that.” Nike also has a very large portfolio of Chinese ambassadors who are cultural and social heroes, he adds, including sponsorship of the Chinese Athletics Association. “Our brand connects deeply in China. We’re confident, as we say every quarter, that our commitment to China is as strong as ever.”
Generation Alpha is the next frontier
Nike’s kids business is already growing, with wholesale revenue up 17 per cent from 2020-2021, thanks to product launches like DynamoGo, a kids’ adaptation of the accessible FlyEase running shoe, which mechanically opens and closes without the need to tie laces or pull them on.
Donahoe wants to win the hearts and minds of Generation Alpha as they grow up. “You absolutely have to focus on the next generation and catch them early,” says Michael Binetti, managing director at Credit Suisse. “When Nike has missed a step on its strategy, other brands have caught the next generation before them. When Under Armour showed up in 2005, it snuck in the side door and targeted a very young consumer. Under Armour then captured a generation. I think Nike was probably determined not to make that mistake again.”
Gen Z is already a challenging demographic, Donahoe says. Nike’s core market or consumer muse — internally known as the Phoenix — is 16 to 22-year-olds in urban cities. “It really challenges you to see the world through the eyes of a 16 or 20-year-old,” says Donahoe. “That keeps us young. It keeps us a little uncomfortable because often that age group is a little ahead of the game. They're thinking things that aren't always conventional norms.”
Generation Alpha will usher in a whole new world, experts agree. For Nike, the company will be seeking to balance these kids’ anticipated interest in gaming and the metaverse with its core mission to create the future of sport and boost movement in real life.
One way of connecting with Generation Alpha is to go where they’re likely to hang out as they grow older. Since its launch, 6.7 million players from 224 countries have visited Nikeland on Roblox. To use Web3 to boost physical sport participation while activating in the metaverse, Nike released a Roblox game with LeBron James, where you received a virtual reward for completing a physical activity.
“We think there's just enormous opportunity there. So, it's not digital or physical, you know, physical or virtual. It can be: ‘How do we do the best of both and how do we continue to innovate?’,” Donahoe says.
Nike has always spent a lot of time obsessing over and understanding how young, urban youth is thinking. It uses a mix of consumer data, social media and in-person community interaction to understand them, with teams across the world pulling in insights at local community level. Nike Express Lane, a hyper-localised innovation engine, for example, can turn products around in 100 days based on local youth trends and consumer needs.
“We ask what they care about? How do they view the world? What are their aspirations? And that then informs almost everything we do and informs our design,” Donahoe says. It’s how Nike saw the potential of skateboarding early on (Nike launched skate in 1997, while luxury brands are only just exploring its potential). And, how it became an early adopter of gender-neutral apparel in 2019.
The sneakers of the future
It’s early days for the metaverse, Donahoe thinks. “I've been in technology of one form or another for a long time and we're in kind of phase zero, not even phase one, of the metaverse.”
Expect more in the metaverse and with NFTs. “But, you'll see us not just participate there, but link it to activities and things in the physical world to bridge that gap. We know that virtual sneakers and virtual athletic apparel are some of the most coveted things in the NFT world and the most scalable things. So we'll be very thoughtful in how we do it, but we'll continue to test and learn about what connects with the community.”
There’s some inherent tussles with the rarefied world of NFTs for Nike. First, NFTs must be accessible for Nike consumers. “Right now, an awful lot of the focus is on really high-priced items, it’s how much an NFT sold for — 0.01% of people are participating in that. That's fine, that runs a headline, but that's not scalable and that doesn't speak to our community,” says Donahoe. “The question is, how can our community participate in an inclusive and healthy manner in the metaverse?”
A test-and-learn philosophy is crucial. Nike acquired virtual sneaker brand Rtfkt in December and last quarter released its first-ever branded NFT, and it now has a Nike Virtual Studio arm dedicated to Web3. Full details remain under wraps but a Swoosh microsite, featuring an animation of the Nike swoosh and what could be interpreted as the Nike x Rtfkt monolith NFT, is teasing an upcoming project. Over the weekend, Rtfkt teased the next iteration of its new Nike co-branded products: Holders of Rtfkt x Nike's Space Drip NFTs will be able to redeem them for cobranded physical sneakers.
It’s an area that Nike chief design officer John Hoke is keen to discuss. “For us, the metaverse is a wide open sphere to explore,” he says. “What’s the next generation thinking about in terms of what is avant-garde? How do I want to dress myself or my avatar? How do I still cut through and have a sense of style?”
Hoke and his team have some interesting things cooking, from multi-sensory clothing that can respond to the human body, clothing that has sound properties to help sportspeople work cohesively as a team “like swallows in flight”, and clothing personalisation made by 3D design.
Doing the right thing isn’t always easy
Nike’s internal culture has been through transformation in the two years since Donahoe’s arrival. The company faced criticism over claims of its lack of inclusion of women and BIPOC within its business, particularly following the acceleration of Black Lives Matter (BLM) in June 2020. Donahoe heard a “pretty clear” message — that, despite Nike’s external reputation as one of the most diverse and inclusive brands in the world, internally it had to do better. “The first thing we needed to do was face up to the fact that if we're not there. Let's acknowledge it and let's have dialogue about how we're going to move towards a more inclusive workplace.”
Nike’s annual employee survey showed improvement in inclusion from 2020-2021 but Donahoe says the task is far from over. “We have this phrase at Nike, you never get to the finish line — this is a great example of that.”
The driving point of connection within the business is a passion for sport. “Nike is a purpose-based company. And, I think there's a little bit of self-selection,” Donahoe says. “I would say of Nike’s 75,000 employees, almost every one of them joined because of Nike's purpose and a deep love for sport and belief that sport can make the world a better place and bring hope and inspiration to a world that needs it.”
The sprawling collegiate campus of Nike’s global headquarters with its 8,000-plus employees is a sports fan’s delight with running tracks, basketball courts, a full-size football (soccer) pitch and around 70 buildings named after sporting greats such as Michael Jordan and Seb Coe. The new one-million-square-foot Serena Williams building, home to Nike’s design teams, features rare memorabilia including William’s winning outfits and post-match notes alongside themed restaurants based on her grand slam victories. There’s a Wimbledon restaurant complete with custom collage British-themed wallpaper, printed with London telephone boxes and double decker buses. The Roland Garros cafe, meanwhile, is entirely themed on Parisian tropes, even down to the bathrooms, styled like stations from the Paris metro.
Nike’s stance on social issues has resonated with younger people, who want brands who align with their values. Nike supported American footballer Colin Kaepernick after he was fired for taking the knee — and the company made a $140 million donation to Black community organisations in response to BLM. “It looks easy in hindsight and maybe it looks easy from a distance, but standing up for social issues is always going to be hard,” Donahoe says. “It’s about having the courage to stand up and have a point of view and then being human to say, we don't always get it right — I think that's really important,” he adds. “I talk a lot about the importance of authenticity and vulnerability. That's partly how we connect with young people today.”
SNKRS and resale
One success story has been Nike’s Snkrs app, launched in 2015 to sell higher ticket, coveted sneakers in the popular drop model, pioneered by streetwear. Nike says that demand on Snkrs surged by up to 400 per cent during the pandemic, with more customers than ever entering a draw to be able to purchase a pair. And interest continues to grow: in Q1 2022, Nike reported demand on the Snkrs app was up 130 per cent.
“Even though it's been a huge driver of Nike’s success, there's a lot of room for improvement with the Snkrs app,” says Binetti of Credit Suisse. “On days where Nike has high-profile launches, if you follow on Twitter, Instagram or TikTok, some big sneakerheads are frustrated because they get all the way to the point of payment and then lose their sale — so they still have room to improve."
Nike is constantly improving Snkrs in line with customer feedback, Donahoe counters, attributing much of the early criticism to what he calls “supply-demand alignment”. Nike’s lead times are reasonably long, meaning it confirms product volumes for Snkrs sometimes 12-18 months ahead and has had to learn to tweak volumes based on careful analysis.
“We’re catching up now with increased demand,” says Donahoe. “We want people on Snkrs to be successful every five, six, seven times — that adds to the energy, but it also doesn't feel unfair. When it gets to only winning [the draw to purchase] one out of 10 times or… 20 times, that can feel too challenging for our customers.”
Should Nike have its own resale platform? Nike and its Jordan brand are two of the most-traded brands on secondary resale sites including StockX and Goat. Trainers sold for around £200 on the Snkrs app are often resold on platforms such as StockX, Ebay or Goat for double or triple the price. Analysts certainly feel Nike could capitalise on these resale dollars with its own resale platform.“If that business is going to happen somewhere, like it's better off happening within Nike,” says Gabriella Colangelo, analyst at Deutsche Bank.
Nike is working on take-back programmes with fully recyclable shoe the ISPA Link Axis, but a Nike-owned secondhand resale site for high-ticket sneakers goes against its principles, Donahoe says. “We could charge a ton for a rare pair of sneakers, but that's not fair to all of our consumers. And so, we stick to our standard pricing with knowledge that in some cases that can turn around the next day and be sold for five or 10 times what that is,” he says. “There's a long history of our core consumer, let’s say a young kid in London, getting a hot pair of Nikes or Jordans and reselling them, even creating a little micro business — that's great! We support that. If they do that on other marketplaces, that’s fine. What we don't support is people who abuse the system or crowd others out.” Classic Nike.
This story was updated to include details of the RTFKT x Nike Space Drip NFTs. (23 April, 2022)
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