Internet Mini Case #14

Nike, Inc.
Maryanne M. Rouse
Can Nike (NKE) find enough shelf space to make up for lower sales to its top customer? In February 2002,
Foot Locker told Nike that it wanted to reduce the number of Nike’s marquee shoes—the Air Jordans,
Shox, and others that sell for well over $100—because the retailer believed that consumers were turning
more to midpriced shoes. Because Nike refused to change its product mix to support Foot Locker’s product
line reshuffling, Foot Locker, the dominant global footwear retailer, with over 3,600 stores, cancelled
approximately $150 million in Nike orders. (Nike’s premium segment accounts for approximately 15%–
20% of total global revenues and although neither company discloses details of total orders, Nike noted in
its 2002 10-K form that sales to Foot Locker represented approximately $1 billion of Nike’s $9.9 billion
worldwide sales.)
According to Foot Locker, Nike retaliated by cutting the retailer’s allotment of key products, including the
highly popular Air Force One. The feud escalated in December, when Nike announced that Foot Locker
would no longer be its launch customer for marquee products and, in fact, gave rival FootAction access to
high-end basketball shoes that had been exclusive to Foot Locker. In mid-February 2003, Nike’s “Hall of
Hoops” displays in Foot Locker stores came down and were replaced by Reebok’s “Above the Rim”
campaign. In 2004, Nike was aggressively lining up new outlets, while Foot Locker faced a significant
challenge in maintaining a broad, attractive, and profitable product line (for 2002, Nike comprised 47% of
Foot Locker’s sales).

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This case was prepared by Professor Maryanne M. Rouse, MBA, CPA, University of South Florida.
Copyright © 2005 by Professor Maryanne M. Rouse. This case cannot be reproduced in any form without
the written permission of the copyright holder, Maryanne M. Rouse. Reprint permission is solely granted to
the publisher, Prentice Hall, for the books, Strategic Management and Business Policy–10th and 11th
Editions (and the International version of this book) and Cases in Strategic Management and Business
Policy–10th and 11th Editions by the copyright holder, Maryanne M. Rouse. This case was edited for
SMBP and Cases in SMBP–11th Edition. The copyright holder is solely responsible for case content. Any
other publication of the case (translation, any form of electronics or other media) or sold (any form of
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granted an additional written reprint permission.

THE COMPANY
Nike designed, developed, and marketed athletic and casual footwear, active sports and leisure apparel,
sports equipment, and accessories under the Nike, Bauer, Cole-Haan, and Hurley brands. Nike was the
largest seller of athletic footwear and apparel in the world, with a U.S. market share exceeding 40%. The
company’s products were sold through approximately 18,000 retail accounts in the United States, including
footwear stores, department stores, and sporting goods stores. Nike, with the broadest product line of all
competitors, also distributed to specialty, skate, tennis, and golf shops. The company operated several retail
formats in the United States: 78 Nike Factory Stores (primarily close-out merchandise), 4 Nike stores, 13
Niketown “showcase” stores, 4 employee-only stores, and 61 Cole-Haan stores. Sales in the United States
accounted for 53% of total revenues in 2002. Nike sold its products outside the United States through
independent distributors, licensees, and subsidiaries in 140 countries.
In addition to performance equipment (sports balls, timepieces, eyewear, skates, and other equipment
designed for sports activities), Nike sold hockey equipment and related accessories under the Bauer and
Nike brand names. In April 2002, Nike acquired Hurley International LLC, a California-based designer
and distributor of sports apparel for surfing, skateboarding, and snowboarding as well as youth lifestyle
apparel. Footwear accounted for 58% of fiscal 2002 revenues; apparel, 29%; equipment, 8%; and other,
5%.
Almost all Nike brand apparel was manufactured by approximately 700 independent contractors, 99% of
which were located in Southeast Asia. The reasons for locating shoe production in Southeast Asia were

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many, but the most important was the cost of labor. In addition to having lower labor costs, Asia provided
access to the raw material suppliers and satellite industries (tanneries, textiles, plastics) necessary in
athletic shoe manufacturing. A third important factor driving the location of athletic shoe production was
the current complex system of differential tariffs.
Working conditions and wages, as well as allegations of harassment and abuse, had been a source of heated
debate between Nike and a broad array of special interest groups and journalists for a decade. Critics
accused Nike of abandoning countries as they developed better pay and employment rights in favor of
countries such as China with lower wages and little regulation of employment practices. In several cases
relating to physical or verbal abuse and child labor, Nike agreed that employment practices were
problematic, and the company responded with what the Global Alliance agreed were serious and reasonable
remediation plans. The company’s argument that many of the charges were based on old and/or inaccurate
information and did not reflect current operations had done little to satisfy activists. Although Nike had
implemented a series of social and environmental initiatives and Nike’s largest competitors had pursued
almost identical manufacturing strategies, Nike continued to be the focus of activists opposing
manufacturing practices in developing countries.
Because Nike didn’t actually produce shoes, the company’s focus was on R&D and marketing. Nike
considered its product design and ability to quickly take advantage of technological advances key sources
of competitive advantage. Celebrity spokespersons (Michael Jordan, Tiger Woods, Lance Armstrong, Mia
Hamm, etc.) and team endorsements (such as the long-term agreement with Manchester United) were
important elements of what had been a very successful promotional strategy. According to the company’s
annual report, Nike’s spending for “demand creation” was $1,027.9 million for 2002—10.4% of revenue.
R&D costs, estimated at close to $1 billion, were not separately disclosed.
While Nike was fairly well diversified across price points, the company’s marquee shoes, which accounted
for 15%–20% of global revenue, had been a strong contributor to profits and had created the “buzz” to
move lower-priced models. Declining demand for these premium sneakers was exacerbated by growing
unemployment rates, a worsening economy, uncertain geopolitical events, falling consumer confidence, and
competition from other teen and young adult “must haves,” such as cell phones, PDAs, and other new
gizmos; fickle consumer tastes and preferences and the spat with Foot Locker were factors as well.
Although Nike’s fiscal 2002 revenue of $9,893 million was the highest in company history, top-line growth
was slower (4.3%) than in the previous year (5.5%). Slower sales of athletic shoes in the U.S. region were
balanced by increases in footwear sales in other regions and increases in apparel and equipment sales in all
regions. Despite downward pressure on prices and markdowns, the company was able to increase gross
margin as a percentage of sales to 39.3% for the year. Selling and administrative expenses increased from
28.3% of sales in 2001 to 28.5% in 2002, reflecting both lower sales and increased marketing costs.
Operating profit showed definite improvement in 2002, at 10.2% of sales, versus 9.3% in the prior year.
Complete financial information is available in Nike’s 10-K form for 2002 (www.nike.com).
THE INDUSTRY
In 2003, growth in sales of athletic footwear in the United States could best be described as sluggish. The
one bright spot in an otherwise dismal year was the women’s segment. In 2003, women’s casual tennis
footwear was the hottest category, driven by both the retro fashion trend and growth in the casual lifestyle
segment. As footwear providers focused on international demand to grow revenue, it was hoped that a
continued weak U.S. dollar would prop up global sales.
The non-athletic shoe segment had experienced a major shift away from dress to casual shoes, reflecting the
more casual dress environment of the workplace. Lower-priced competition in this segment would make
overseas sourcing, effective marketing, and operating efficiencies keys to profits in the near term.
According to SportscanINFO, the following trends were expected to continue to influence global sales
growth in both shoe segments in 2003:
 Continued growth in the casual, non-performance athletic footwear segment
 A decline in the demand for premium-priced performance athletic shoes
 Price deflation as the middle-range price points continued to shift down and casual styles increased
in importance
 Decent but not spectacular growth in basketball shoes (the huge increases predicted for 2002 never

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 did materialize), coupled with better-than-expected growth in running shoes
 The implosion of White/White Retro shoes, which had been aggressively overpromoted, especially
by mall retailers
Analysts expected weak growth in equipment, with potentially strong growth in casual apparel.

COMPETITION
The athletic footwear, apparel, and equipment segments were intensely competitive both in the United
States and globally. Key competitors included Reebok, New Balance, and Adidas in athletic footwear and
sports apparel.
New Balance
Privately held New Balance Athletic Shoe, Inc., headquartered in Boston, Massachusetts, was a leading
manufacturer of technically innovative, width-sized footwear and athletic apparel for women, men, and
children. The range of product categories included running, walking, cross-training, basketball, tennis,
adventure sports, and kids. In 1998, New Balance acquired Dunham Bootmakers to expand into work and
hiking boots, sandals, boat shoes, and rugged casuals without diluting the New Balance brand. In 2001, the
company acquired PF Flyers to pursue the comfort/casual market.
The company, which has remained committed to a domestic manufacturing strategy, employed more than
2,400 people around the globe. New Balance, long a staple in such outlets as Sports Authority, Foot
Locker, and Champs, expanded its distribution channels in 2000 to include independently owned retail
stores that would provide the opportunity to showcase the full brand and were to carry New Balance
apparel, accessories, and the Dunham line of casual shoes. At the end of 2001, 55 of these independently
owned stores, which generated about $46.4 million in sales—4% of New Balance’s $1.16 billion in revenue
—had opened. By the end of 2002, the company was distributing to over 90 independent retailers. New
Balance surprised analysts and industry watchers alike with its vault to the number three spot both
worldwide and in the United States, with a 25% year-over-year sales increase from 2001 to 2002, estimated
athletic shoe market share of more than 11%, and full line sporting goods market share of 19%.
Adidas
German-based Adidas-Salomon AG held the number four spot in the United States in 2002, with an
estimated 11% market share. With global sales of almost $7 billion, a 7.7% increase from 2001 and a
record for the company, Adidas was the number two footwear and apparel company worldwide, behind
Nike. Industry analysts noted that double-digit sales increase in both North American and Asian markets
helped fuel the company’s growth. Although analysts expected a sales boost in Asia (the World Soccer Cup
matches were played in Japan and South Korea), the company’s gains in the North American market were
interpreted as a strong indicator of Adidas’ success.
Adidas suffered a setback in 2002, when its most important endorser, Kobe Bryant of the L.A. Lakers,
bought out his contract (he was expected to sign with either Nike or Reebok). Although the company’s new
“marquee endorser,” Tracy McGrady, was a popular NBA player, he played for the Orlando Magic, a
losing team in what was considered a small market. The Adidas group comprised three distinct divisions:
Adidas Sports Performance, Adidas Sports Heritage, and Adidas Sports Style. The Sports Performance
group housed the current footwear and apparel lines and accounted for 80% of the business; Sports
Heritage was the retro division that put out the classic, old-style sneakers targeted to the urban audience;
Sports Style, introduced in February 2003, was an upscale sportswear collection to be sold in 150 retailers,
including Barney’s New York, where the launch was held. Although it accounted for just 20% of the
company’s revenue, Adidas Sports Style was expected to make significant contributions to both the top and
bottom lines.
Reebok
Reebok International, with a 12.2% market share, was the number two U.S. maker of athletic shoes, behind
Nike, and ranked fourth globally. In addition to athletic shoes, sportswear, and accessories, Reebok’s
product lines included the Greg Norman line of men’s casual wear, Rockport walking and casual shoes,
and Ralph Lauren and Polo dress and athletic shoes. An athletic shoe powerhouse in the mid-1980s and
early 1990s, Reebok couldn’t compete with Nike when the emphasis shifted from fitness to team sports.
Reebok reached its low point in 1999, when its share price fell to about $7; however, industry observers

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believed that, with the return of Paul Fireman, the company was once again on the move and appeared to
be gaining market share on several fronts. In December 2000, Reebok signed a 10-year licensing contract
with the NFL that gave the company the exclusive right to sell “authentic, on-field stuff.” Reebok’s
marketing budget for 2003 was reported to be $40 million, a 38% increase from the previous year. That
increase was expected to help cover the cost of endorsement deals with a roster of younger basketball stars,
such as Steve Francis of the Houston Rockets. In 2003, Reebok had deals with 17 of the 26 NBA teams
and, by November 2004, was expected to have signed all 26.
THE CHALLENGE
Although Nike’s 2002 acquisition of Hurley had further diversified its product line, it was essentially still
an athletic shoe company. Aggressive competition from Reebok, New Balance, and Adidas; the Foot
Locker fiasco; Michael Jordan’s retirement—which was expected to seriously impact the company’s $350
million Jordan business; increasingly fickle consumers; and a worsening economy all posed significant
threats to the growth of Nike’s top and bottom lines. What is the company’s next strategic move? Can Nike
continue to “Just do it”?

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