In 1967, Nike, Inc. (NKE) was founded in Oregon, entering a competitive, saturated marketplace for sports equipment and apparel. Ultimately, Nike has become one of the largest sporting goods company in the world, thanks in large part to revenues generated by the sale of its running, basketball, football, and other sports-related products and equipment. More than many other companies, Nike has developed a powerful and universally recognizable brand, thanks not only to its product offerings but also to a rich history of partnerships, endorsements and sponsorships involving many of the world's greatest athletes. While Nike is responsible for designing, developing, and marketing many different types of sports apparel and equipment, the vast majority of the company's manufacturing is outsourced to independent contractors.

It’s hard to overestimate the influence that Nike has had on worldwide culture. When Adidas AG (ADDYY) and Converse (the latter eventually bought by Nike in 2003) dominated the United States athletic shoe market in the 1970s, the shoes themselves were intended for function, not fashion. The phenomenon of lining up to buy the latest version of a particular shoe, or even the idea of new models coming out annually, didn’t exist.

According to its 2018 annual report, Nike generated about $36.4 billion in revenues last year, or just under $16 billion in gross profit. This record revenue for the company marks a 6% increase over 2017 figures. Return on equity was 17.4% and current ratio, as of May 31, was 2.5.

Nike's Business Model

Nike's principal business is in the design, development, marketing, and sale of athletic footwear, apparel, and equipment. The company divides its products into six categories: Running, NIKE Basketball, the Jordan Brand, Football (Soccer), Training, and Sportswear. The company also markets products for a wide variety of other sports and activities as well as products designed for children. Most of Nike's apparel and footwear is specifically designed for particular sports and activities, although the company also markets all-purpose products. Nike sells its products to wholesalers as well as directly to consumers via its NIKE Direct program.

Nike also owns various subsidiary companies that it has acquired throughout its 52-year history. Boston-based Converse, for instance, is a Nike subsidiary brand that designs, distributes, and sells a variety of footwear, including casual shoes and sneakers. Costa Mesa-based Hurley is another prominent subsidiary.

A final aspect of Nike's business model includes licensing agreements, which allow unaffiliated parties to include the Nike brand on their products.

As a legitimately worldwide enterprise, Nike reports among the following geographical operating segments: North America, Western Europe, the remainder of Europe, China, Japan, and the rest of the world. It barely bears mentioning at this point that, like most American companies of its size and age, Nike draws a large but gradually dwindling portion of its revenue from its home continent. The first year in which Nike sold more merchandise outside North America than within was 2012, a trend that has continued every year since. In fiscal Q2 2019, sales in Europe, the Middle East, Africa, China, and Latin America made up 54.96% of the company's revenues at $5.16 billion.

Key Takeaways

  • Nike is the largest seller of athletic footwear and apparel worldwide.
  • The bulk of Nike's revenue comes from the sale of its products, which are divided into six categories according to sport or activity type.
  • Nike manufactures very few of its products, preferring instead to outsource this part of the process.

Nike's Footwear Business

In 2018, Nike's footwear sales accounted for $22.27 billion in revenues, by far the largest portion of the company's total revenue. This marks an increase of 4% for footwear revenues over the previous year, on a currency-neutral basis. This growth was primarily driven by strong performances in the Sportswear and Running product categories, while the Jordan Brand declined somewhat.

Nike's Apparel Business

Apparel sales generated $10.73 billion in revenue in 2018. This marks a 9% increase over the previous year on a currency-neutral basis. Nike apparel performed well across the board, with particularly notable increases in the Sportswear, NIKE Basketball, and Football (Soccer) categories.

Nike's Equipment Business

One of the smaller components of Nike's revenue stream, equipment sales generated about $1.4 billion in revenue for 2018.

For 2018, 42% of NIKE Brand and Converse sales took place in the United States, while 58% were from international markets.

Future Plans

In recent years, Nike has been as acquisitive as companies of its size are wont to be, although Nike keeps its purchases somewhat quiet. It owned dress shoe manufacturer Cole Haan until 2013 and is the parent of renowned surf wear company Hurley. The Converse acquisition happened in 2003; today the brand remains a separate entry on Nike’s balance sheet.

Nike's Strategy

Many of Nike's efforts to change and grow its business revolve around the changing nature of shopping. As more and more consumers purchase a wider variety of goods through online channels, Nike has expanded its direct-to-consumer capabilities to match. The Consumer Direct Offense, launched in 2018, is the company's latest effort to provide products directly to consumers around the globe at scale.

The company also focuses its efforts according to what it refers to as the "Triple Double Strategy." This approach centers on the core areas of Innovation, Direct, and Speed. The company expects that, in the next five years, 50% its growth will originate from new concepts that are developed and grown to scale.

Key Challenges

Although sportswear and apparel are growing markets, and in spite of its dominance on a global level, Nike nonetheless faces tough competition for sales as well as for production capabilities. Because Nike outsources most of its manufacturing, it is susceptible to changes in the manufacturing industry dynamic in a way that some other companies are not. Like all other companies that rely in large part on the strength of a brand, Nike must work to actively grow and maintain that brand recognition over time or else face the possibility of losing popularity among consumers. Additionally, consumer preferences and the technology involved in sports apparel and equipment are changing all the time, and Nike must be deliberate about staying on top of these developments in order to best appeal to its customers.