On the Run
In a sweltering, claustrophobic chamber the size of a storage closet, a sweat-glazed man in a running top pounds away on a treadmill in the Nike Sports Research Lab in Beaverton, Ore. Wires attached to thermal sensors sprout from his body. Heat lamps beat down on him. Moist air blasts through an overhead vent. The room temperature is 95 degrees Fahrenheit. The humidity is 40%. For seven days the runner, compensated only with a Nike store credit, has come in to run for 90 minutes in these conditions, created to mimic a sweltering August afternoon in Beijing, site of this year’s Summer Olympics.
At Nike it’s all in the details: The running shirt, a prototype for the Chinese track and field teams, is being tested for its ability to wick away sweat.
Nike, the largest sports footwear and apparel company in the world, lives and dies on fine engineering points and microscopic differences. It is not, in the way that Apple or Wal-Mart is, a mass marketer. It is more a collection of micromarketers, aiming to prove to this population of Chinese runners or that subset of American skateboarders that it has just the right shirt or sneaker for their sports.
Nike has revenues of $16 billion a year. Roughly three-fifths comes from footwear, most of the rest from apparel, but it slices its markets very thin. There is one shoe aimed only at Native American athletes, another for cricket players in India, yet another for folks who play lacrosse. The count of different sneaker and apparel styles has reached 13,000 a quarter. On this extravagantly diverse product line Nike will probably net $1.6 billion in the fiscal year that ends in May.
Nike Chief Executive Mark G. Parker, 52, sits in an airy, cool corner office of the John McEnroe Building, across the company’s 175-acre campus from the research lab. He knows running, he knows shoes, and he cares a lot about that research lab, since he founded it in 1980. At Penn State Parker was a runner who was "hooked on high mileage," he says. He liked to tinker with his own shoes, adding foam to the midsoles and neoprene to his sock linings for better comfort.
Not long after graduating he heard about what was then called Blue Ribbon Sports, a fledgling shoe company in Oregon run by a coach, William Bowerman, and one of his former runners, Philip H. Knight. The two of them were obsessed with making better athletic shoes. Parker got a job as a shoe designer in 1979 and soon after was working alongside Bowerman, who designed the company’s first running shoe soles with his wife’s waffle iron.
Bowerman died at age 88 in 1999. Knight, now 69, ran the business intensely for 36 years. When he decided in 2004 to find another chief executive, he reached far from Beaverton. Parker, who felt that he had earned the right to the big office, had the unpleasant task of helping to pick his new boss. Nike hired William Perez, a proven marketer from household products company S.C. Johnson & Son.
It didn’t take long for Knight, chairman and largest shareholder (with a stake now worth at least $5.6 billion), to realize that he had made a mistake. Nike didn’t need a brand guy, it needed a sports guy. A year after bringing Perez in from Wisconsin, Phil Knight axed him. The exercise cost the company at least $15 million in pay and severance benefits; Perez is now running Wm. Wrigley Jr., the gum company.
Shortly after he sent Perez home, Knight gave the job to Parker and went back to his isolated chairman’s office and to his retirement hobbies. "It’s easy to call the play after the game is over," Knight grumbles when needled about Perez’s tenure. "That didn’t work. This is working."
And what did Parker, the loyal 29-year veteran, do when he got the power? He tore up a fair amount of what Knight had built. The biggest thing he did: reorganize the company. It used to be divided into categories of products (shoes, apparel, gear like golf clubs). Now it’s divided by sport. There’s a division for soccer (shoes and apparel combined), a division for running, one for basketball, one for men’s fitness, one for women’s fitness. Each has its own product-development and marketing executives. In this taxonomy a running shoe is entirely different from a cross-training shoe—why, running is an entirely different sport from training. There are parts of the company that sell only to golfers or only to kids on skateboards. Dreamer athletes, the people who don’t run or pole vault but want to dress as if they do, have their own division (called Sports Culture at Nike).
It’s all part of the micromarketing game. In a mass market a sneaker is just a sneaker, competing with $30 sneakers coming from the same sort of factories in China and Indonesia where Nike gets its products. In a micromarket a sneaker is something with a seemingly unique air cushion or even a microchip inside (the Nike Plus, which communicates with an iPod to track your miles). Then it might be worth $80 or $120 or even $200 a pair.
When golf star Tiger Woods complained that he needed better traction in his golf shoes, Parker’s designers did video analysis of his feet while he swung a club. The solution: They cut a groove in the sole plate of his shoe and inserted a flexible pad, better to keep his feet on the ground. That addition became the basis for the SP-8 TW Tour shoe in 2006. It retails for $220.
Nike will outfit 22 of the 28 Chinese Olympic teams. The event will be the sneaker vendor’s big coming out in China, where it has opened 3,000 stores and sales are expected to top $1 billion this year. Nike must tread carefully: It can’t storm into the country, where it has seen 50% sales growth a year, and paint its signature swoosh on every available surface as it would have done a few years ago. The company must appear in step with everyone who encounters it, from Olympic sprinters to inline skaters in Nanning. "We’re not going to take the Western version of the brand and try to shove it down their throats," Parker says.
Parker recently returned from Shanghai, where he sat down with 50 of the country’s artists, architects, novelists and filmmakers to "download their brains." Says Parker: "What we learned is that China is undergoing a tsunami of Westernization, and it’s losing some of its own identity. The creative community is looking for its voice, and we’re trying to be sensitive to that."
You can see the narrowcasting of the sales pitch in Nike’s marketing budget (which, at $2 billion a year, is probably only a billion dollars or so behind what it spends to manufacture 225 million pairs of shoes). It’s not surprising that the company spends lavishly on endorsements from stars like Tiger Woods; it has always done that. What’s surprising is how little it spends on mass-market television ads: $60 million in the first nine months of 2007 in the U.S., according to TNS Media Intelligence. Parker would rather spend money on events, like the LeBron James showroom it opened briefly in Shanghai late last year to promote a $200 shoe, or on the Web, where a cheaply made threeminute ad featuring Brazilian soccer star Ronaldinho got 35 million hits.
Parker’s acquisitions and divestitures fit the new mold. Last year he unloaded Starter, a low-end brand offered in Wal- Mart, selling it to Iconix Brand Group for $60 million. But he shelled out $582 million, more than two times revenue, for Umbro, the Manchester, England maker of soccer shoes and apparel. With its Manchester connection Umbro stands for a sport. Starter didn’t stand for anything.
which explains the piercings and tattoos on staffers in the department called Nike Skate (that means skateboards) and the preppy attire at Nike Golf. "We want to segment and diversify," says Parker. "Our potential has everything to do with how well we focus and align ourselves in each of the different businesses."
The Nike Plus, the chip placed in running- shoe soles that communicates wirelessly with an iPod, has a whole cult built around it. Runners listen to music while they are electronically logging time and distance. Lance Armstrong’s voice comes on periodically to provide information and encouragement: "Congratulations! You’ve just run your fastest mile!" When they get home, runners can log on to the Nike Plus Web site, where that information is captured and graphed. They can also interact with other runners, challenging someone overseas to a weeklong runoff.
A so-called barefoot running sneaker, which features deep grooves to simulate a shoe-free run, will supposedly help strengthen foot, shin and ankle muscles. It retails for as much as $100. For $230 you can get the Air Jordan XX3, Nike’s first "green" basketball shoe. The sneaker is made partly from recycled components from old sneakers and water-based solvents. "There’s a certain honesty to design. You’re really trying to solve a pure problem or better serve a need," Parker says.
Nike has spent several hundred million dollars (according to analyst John Shanley of Susquehanna Financial Group) rearranging suppliers so it can get shoes to market up to three weeks faster than in the past. Now, instead of routing all footwear and apparel that come in from factories in Southeast Asia through a distribution center in Memphis, Nike can have them sent directly to specific stores or the consumers who order them online. That also makes it easier for the company to order up limited runs of specialty items that command a premium price. This summer it will put 2,000 pairs of the $400 Mercurial SL, a carbon fiber soccer cleat, in 50 stores.
Parker plans to boost retail and online sales from $1.5 billion to $4 billion a year by 2011, primarily by opening 100 smaller Nike-owned stores that will be tailored to the lifestyle of their neighborhoods. A shop in Buenos Aires might be focused on soccer and women’s fitness. One in Los Angeles could feature skateboarding gear and fashion products. Won’t important retailers like the Finish Line get irked? Nike makes sure its own stores aren’t too close to theirs. It will partner with them when it can. Parker is working with Foot Locker with its jointly owned House of Hoops, a store dedicated exclusively to basketball shoes and apparel. The first one opened late last year in Harlem. Fifty more are planned. Two slick new Nike iD Studios, one in New York City and one in London, allow consumers to design their own shoes. It plans limited-edition runs of the best designs.
Parker is very clear about wanting consumers to feel Nike has something to offer them. "The last thing I want to be is the kid who’s invited to the party because he has the money to buy the keg but nobody really wants to hang out with him," says Parker. "I want to be the person who’s invited because he’s funny, interesting, relevant and can bring some insights."
Under Knight the company put a swoosh on everything from performance wear to baby booties. If there was an occasion, Nike had a shoe that fit—and it let the world know it. Lavish TV ad campaigns featured big-name, highly compensated sports stars, including the NBA’s Michael Jordan and multisport star Bo Jackson. Its attitude was arrogant; its ad tagline a command: "Just do it." Occasionally the message was obnoxious: At the 1996 Olympics in Atlanta it ran ads that sneered at runner-up Olympians: "You don’t win the silver; you lose the gold."
The proof that Nike was out of step: When Nike bought the Converse line, long known for its basketball shoes, "a fan sent me a Chuck Taylor shoe that he had painted a swoosh on and said ‘Please don’t do this,’" says Parker.
It was caught flat-footed when young athletes stopped playing multiple sports, which had required lots of different shoes and apparel. They wanted to excel at one sport rather than dabble in several. "Kids were picking one sport at an early age and staying and living in that sport all year round," says Charles Denson, president of the Nike brand. That might be a sport where Nike didn’t rule the game. Skateboarders found new, smaller footwear and apparel makers such as Vans and Emerica that better understood their sport.
In 2002 Nike jumped into the skateboarding market with swoosh-emblazoned shoes and apparel. It bombed: Sales were only $25 million that first year. Parker, who was then co-president of the Nike brand, rolls his eyes when he recalls the blunder. "I literally woke up one morning and thought, ‘This is ridiculous. We’ve never committed to that kid and culture, and that’s why we’re not relevant,’" he says. Parker hired away marketers from skateboard manufacturers; Nike Skate sales totaled $200 million last year, says Matthew Powell, analyst with SportsOneSource in Princeton, N.J.
The company grew under Perez, posting $13.7 billion in sales for the 2005 fiscal year, a 12% increase, but it didn’t have that runner’s high. During his brief tenure the stock fell $3, to $42. Since Parker took over in January 2006, the stock has rebounded to $56, adjusted for splits.
Is the big shareholder happy? It’s a good sign that Knight is now more interested in filmmaking (Laika Entertainment) and taking fictionwriting courses than he is in running gear. Parker says he sees his boss only occasionally, at board meetings.
Nike spends $2 billion a year on marketing.
True indeed Success is based on character...see you tomorrow