Nike E-Commerce: How Nike’s D2C Strategy Hits 50% Digital Penetration

This article is part of Commerce 4.0, a series about the next frontier of e-commerce along with the strategies and tactics used by iconic brands to transform how we discover, select, and purchase products.

Nike, the largest seller of athletic footwear and apparel in the world, has never been shy about its aspirations of becoming a digital-first, direct-to-consumer (D2C) company. Over the years, Nike has accelerated its digital transformation by expanding its global supply chain and making “significant investments in digital technologies and information systems” to power D2C e-commerce.

As part of its D2C push, Nike set out to reach 30% digital penetration by 2023, meaning 30% of total sales would be Nike e-commerce revenue. However, Nike blew past that goal two years ahead of schedule. It now expects its overall business to reach 50% digital penetration in 2022.

Meanwhile, total D2C sales have soared from $2.5 billion in 2010 to $16.4 billion in 2021. And, over the trailing 12 months, the company generated a staggering $46.2 billion in total sales, putting it on track to meet its lofty goal of $50 billion in 2022.

In this Commerce 4.0 profile, we’ll review Nike’s digital strategy that serves as its foundation for continued success in e-commerce. We’ll also explore the tactics Nike implemented to realize its mission of driving growth through digital and direct-to-consumer initiatives.

Nike E-Commerce Growth Strategy

The world’s largest sportswear brand has rapidly evolved from a traditional marketing-first retailer into a D2C juggernaut by creating and executing two key strategies: the Consumer Direct Offense (CDO) and Consumer Direct Acceleration.

Consumer Direct Offense

Much of the company’s recent success can be attributed to Nike’s company-wide strategy since 2017, aptly named the Consumer Direct Offense (CDO). Executing the plan has allowed Nike to completely change its business model, shifting away from the lagging wholesale distribution business toward high-growth direct sales to consumers.

Over the last few years, the company has said goodbye to many long-time wholesale partners including Macy’s, Urban Outfitters, Shoe Show, Dunham’s Sports, Dillard’s, Fred Meyer, and Zappos. Nike also ended a high-profile partnership with Amazon after a two-year pilot program, even though Nike products are still among the top 200 most-searched keywords on Amazon.

Instead of working with these partners, Nike is focusing the majority of its efforts on D2C. Leveraging the power of digital has created a much faster pipeline to better serve Nike’s customers personally, and at scale, with tenets outlined in the CDO.

The Consumer Direct Offense involves:

• Accelerating innovation and product creation
• Moving closer to consumers by growing operations in 12 key cities across ten countries
• Deepening one-to-one connections with interactive experiences across different channels

Consumer Direct Acceleration

In 2020, the company announced the Consumer Direct Acceleration, the newest phase of the CDO. This latest strategy involves several initiatives.

The first is to create the connected digital marketplace of the future, which focuses on developing a premium and seamless brand experience wherever customers shop. This leads with digital, online-to-offline services, as well as physical experiences through store concepts such as Nike House of Innovation, Nike Rise, Nike Live, and Nike Unite.

The second is to operate under a more straightforward consumer construct of men’s, women’s, and kid’s categories. Nike’s customers are not just runners or yoga practitioners, so broadening the categories allows Nike to create products with deeper insights and drive even greater specialization. The shift in consumer construct touches every area of the business, including innovation, product creation, marketing, merchandising, and distribution.

Finally, the third is to aggressively invest in digital capabilities in their end-to-end technology foundation to accelerate digital transformation. To date, this has included demand sensing, insight gathering, inventory management, and more.

Nike E-Commerce Growth Tactics

There are many valuable lessons to take away from Nike’s pivot from wholesale distribution to D2C. But, looking back, several critical decisions were made that directly led to the company’s extraordinary results, including:

• Investing in key technologies
• Building a headless commerce platform
• Strengthening the supply chain
• Pivoting with changes in leadership

Without these critical decisions, Nike would not have transformed into the technology-first company it is today and exceed expectations in terms of digital penetration. Below, we will explore each of these choices to see how they contributed to the company’s digital resurgence.

Tactic #1: Investing in key technologies

Nike has been investing aggressively in technologies to further its leadership position. Over the last several years, the company has made several key acquisitions of technology startups to help boost its digital capabilities.

Predictive analytics

Nike acquired the data analytics company Zodiac, a predictive customer analytics platform, in 2018. The platform forecasts the behavior of individual customers and customer segments and uses a company’s historical transaction logs to predict each customer’s future buying habits.

Zodiac’s predictions improve customer acquisition, reduce churn, and enhance the accuracy of sales forecasts. This technology has been important for Nike’s apps—SNKRS, Training Club, Run Club, and its commerce app—which have helped drive immense value for the company. According to John Donahoe, “a consumer who connects with us on two or more platforms has a lifetime value that’s four times higher than those who don’t.”

In addition to data analytics, demand forecasting for retailers is an inexact science that’s notoriously crude and error-prone. To help address this issue, Nike acquired Celect, a demand sensing firm based in Boston, in August 2019. The company’s cloud-based analytics platform provides proprietary insights that allow retailers to optimize inventory across an omnichannel environment through hyper-local demand predictions.

The goal is to integrate the technology into Nike’s mobile apps and website, which would allow them to predict what styles of sneakers and apparel customers want, when they want them, and where they want to buy them from.

Computer vision

Another acquisition is Invertex Ltd., a leading computer vision firm based in Tel Aviv, Israel. Invertex was acquired by Nike in 2018 and specializes in 3-D foot scanning. It even created the FeetID system, which includes an in-store unit that can precisely measure and 3-D-scan a shopper’s feet and send the data directly to their mobile phone within seconds.

According to co-founder David Bleicher, “Invertex’s combination of powerful deep learning and augmented reality, combined with its 3-D body scanning technology and domain expertise, have created the world’s most accurate body-based match engine for footwear.”

Data integration

Nike’s most recent acquisition is Datalogue, which it acquired in February 2021. The company has “built cutting-edge and proprietary machine-learning technology that automates data preparation and integration.” This latest acquisition will help Nike integrate data from all sources—including the company’s app ecosystem, supply chain, and enterprise data—in a fast, seamless, easily accessible, and standardized platform.

Tactic #2: Building a headless commerce platform

Nike has also invested in custom software to create Nike’s e-commerce platform that is powered by headless commerce, cloud-native technology, and microservices. Early on, Nike recognized that technology was a strategic priority and began shifting its focus to transforming the entire tech stack of the organization.

Nike software engineers carefully examined many areas of the company’s engineering organization where off-the-shelf vendor software was routinely used and found that, in many cases, the software did not meet their strategic needs for functionality, security, or scale.

At the time, commerce-in-a-box solutions for enterprises were slow, prone to problems, difficult to scale, and wholly inadequate for a company the size of Nike. Today’s commerce platform-as-a-service (PaaS) providers would have supported all of Nike’s use cases and allowed it to focus on its core IP instead of managing technology infrastructure and services. However, these platforms were still years away from development.

As a result, Nike engineered its own solutions from the ground up. Its engineering teams aggressively marched towards cloud-native, microservice architecture and developed cloud-based software, resulting in cutting-edge applications and platforms that serve at a global scale. These investments enabled speed, scale, and stability across the enterprise.

In addition, they helped ramp up its backend capabilities to capture more of the demand generated from its industry-leading personal experiences.

According to Murali Narahari, Nike’s Director of Engineering, Shared Commerce, and Retail:

“Over the last five years, we have re-imagined our entire technology stack using observability, security, reliability, availability, and performance as core principles for software development.”

Tactic #3: Strengthening the supply chain

Nike’s products are sold directly to consumers through: Nike-owned retail stores; Nike-owned digital platforms; retail accounts; and a mix of independent distributors, licensees, and sales representatives in practically every country around the world. Simply put, getting Nike’s vast catalog of products to its customers requires a robust and highly complex supply chain strategy.

Not surprisingly, the company has invested heavily in IT systems (p.16) to beef up its supply chain. Key areas include product design, production, forecasting, ordering, manufacturing, transportation, sales, distribution, and processing financial information for external and internal reporting purposes, retail operations, and other business activities.

Manufacturing

Independent contractors manufacture virtually all of Nike’s products. In an effort to be transparent, the company releases up-to-date data on the independent factories and material suppliers used to manufacture Nike products, including the name and location of each factory and the products they produce. As of August 2021, 193 footwear factories in 14 countries and 342 apparel factories in 33 countries supplied the company.

Nike has been actively developing new technologies to enhance its manufacturing business model with investments in automation, modernization, sustainability, and innovative new manufacturing methods.

For example, Flyknit is a digitally engineered knitting process used to manufacture shoes that produce 60% less waste than traditional cut-and-sew methods. Nike has also invested in 3D printing technology for years and announced the Flyprint in 2018, the world’s first 3D-printed textile upper in performance footwear.

Fulfillment

As part of the CDO strategy, Nike has been trying to improve the speed and efficiency of its fulfillment capabilities. For example, in response to the global pandemic, Nike tripled its digital fulfillment capacity across North American, European, Middle Eastern, and African markets last year. The company also opened a U.S. fulfillment center in Los Angeles and ramped up in time to reduce fulfillment costs per unit on West Coast shipments before the holidays in 2020.

Increasing total fulfillment capacity has also included the introduction of robots to fulfillment operations. In 2020, Nike developed more than 200 robots in collaboration with Geek+ and met the rapid growth in e-commerce while also mitigating labor shortages and high labor wages.

Supply chain challenges

Disruptions are testing the resiliency of Nike’s supply chain. Container shortages, transportation delays, and U.S. port congestion interrupted the flow of their inventory last year. In addition, government-mandated COVID-19 lockdowns in Vietnam and Indonesia also caused inventory issues. In response, Nike maximized its footwear production capacity in other countries and shifted apparel production to countries like Indonesia and China to offset the impact of the shortages.

The good news is that consumer demand has never been higher, which will likely help accelerate the company’s D2C strategy. Moreover, according to Nike’s CFO Matt Friend, the temporary supply chain disruptions will likely trigger an even greater acceleration in the transformation of the marketplace—toward Nike and their most critical wholesale partners.

Tactic #4: Pivoting with changes in leadership

When Nike announced that John Donahoe would become the company’s third President and CEO, many people were surprised to learn that a career technology executive was taking the reins of the iconic sports apparel brand.

Donahoe, who served on Nike’s board since 2014, was the former President and CEO of Bain & Company, eBay, and ServiceNow, and still currently serves as the Chairman of the Board of PayPal Holdings.

After serving as Nike’s Chairman, President, and CEO for 14 years, this well-publicized transition of power allowed Mark Parker to relinquish his day-to-day management duties and step into an Executive Chairman position within the company. More importantly, Donohoe’s carefully planned appointment as CEO made it clear that Nike would not be making any drastic or significant shifts in its strategy and would safely stay the course with its new leadership.

According to former CEO Mark Parker, “Donahoe’s expertise in digital commerce, technology, global strategy, and leadership—combined with his strong relationship with the brand—make him ideally suited to accelerate our digital transformation and build on the positive impact of our Consumer Direct Offense.”

However, even though Donahoe is a strong choice for the company to continue executing its plans, he is making moves with other leadership changes to try and accelerate Nike’s growth with the Consumer Direct Acceleration strategy.

Nike recently announced a series of senior leadership changes shortly after he became the CEO. The company also shuffled the management team and announced massive job cuts, which resulted in “one-time employee termination costs of approximately $200 million to $250 million.”

More recently, a Nike VP/GM that oversaw the brand’s North America business stepped down from her position after a Bloomberg Businessweek story uncovered her son’s sneaker resale operation. Sarah Mensah immediately replaced her and was named the VP/GM of North America.

With these leadership changes in place, and with Donahue’s recent appointment as CEO, it will be interesting to see how fast and how far Nike can take its digital transformation.

The Future of Nike E-Commerce

It’s not easy to replicate Nike’s digital transformation strategy. Scale matters, and with the company’s breadth and depth, no one has the advantage in this space that Nike has to connect with consumers directly. Nike’s size, products, brand strength, direct consumer relationships, and ability to create seamless and differentiated shopping experiences is how it has set itself apart from competitors such as Adidas and Under Armour.

The company recently filed trademark applications that indicate it might sell digital versions of its sneakers, clothing, and other goods in virtual worlds, such as videogames or other online platforms. Perhaps it sees blockchain technology as yet another opportunity to deepen connections with its customers.

However, the company understands that it’s in the midst of a multi-year journey with lots of opportunities ahead, which is why the company isn’t resting on its laurels. According to CEO John Donahoe, “While we’ve had tremendous success in digital and quickly pivoted to the accelerated consumer shift, I truly believe that Nike is just scratching the surface of what’s possible.”

Key Takeaways

• Executing on Nike’s Consumer Direct Offense strategy has transformed the company from a traditional marketing-first retailer into a massive D2C technology juggernaut.
• Key technology acquisitions and investments in cloud-native microservices that power Nike’s e-commerce platform have increased the lifetime value of customers.
• Nike engineered its own e-commerce platform since no flexible, headless commerce solution was available years ago.
• New President and CEO John Donahoe is attempting to push digital transformation forward with leadership changes and the Consumer Direct Acceleration strategy.

Editorial Team

Digital content editorial team @ fabric.