Sports giant Nike (NYSE:NKE) has shown solid growth momentum in the past few quarters, which has resulted in more than 50% increase in its stock price year to date. The performance has been underscored by broad based growth across geographies (excluding China and Japan) and different product categories. In this article, we look at how Nike stacks up along Porter’s Five Forces, to analyze where it could gain or lose going forward.
According to our analysis, competitive rivalry within the industry is a key force which has the potential to curtail Nike’s growth. The competition is increasing from both established, as well as upcoming and local sports-apparel and footwear companies. In case Nike is unable to adapt to changing trends, its growth could be impacted. The company relies heavily on wholesale channel and big wholesale customers could exert leverage to attain higher product discounts/ better credit terms. The low barriers to entry in the Internet retailing business could enhance the competition in the industry. Also, Nike needs to address the problem of counterfeit products to dilute the threat from small players.
|Porter Five Forces||Intensity|
|Competitive Rivalry Within The Industry||Medium to High|
|Bargaining Power Of Customers||Low To Medium|
|Threat Of New Entrants||Low To Medium|
|Bargaining Power Of Suppliers||Low|
|Threat Of Substitute Products||Low To Medium|
- By What Percentage Did Nike’s Revenue & Gross Profits Grow In The Last 5 Years?
- What is Nike’s Fundamental Value Based On Expected 2016 Results?
- What is Nike’s Current Revenue and Gross Profit Breakdown?
- What is Nike’s Current Revenue and Gross Profit Breakdown?
- By How Much Can Nike’s Revenue And Gross Profit Composition Change In The Next 5 Years?
- How Has Nike’s Revenue And Gross Profit Composition Changed In The Last 5 Years?
Competitive Rivalry Within The Industry – Intense competition from established and upcoming rivals could threaten Nike’s market share growth
- The global market for athletic footwear, apparel and equipment is characterized by intense competition, with presence of a large number of players such as Puma, Adidas, V.F Corporation, Asics, etc.
- The global athletic products industry is exposed to continuous changes in consumer preferences and technology; if Nike is unable to adapt to these changes quickly, it could suffer losses in its market share.
- Rising competition from emerging players such as Under Armour and Lululemon Athletica, which focus on niche market segments such as performance apparel and yoga-focused apparel, also pose a threat to Nike’s share of selected markets.
- Nike also faces rising competition from local players in emerging markets, who are increasingly improving their product quality.
- Having said that, Nike has a strong brand reputation which likely will continue to propel strong demand for its products. Further, Nike continues to differentiate its products within an innovative product portfolio, leveraging a particularly strong brand with enhanced marketing activities.
Bargaining Power Of Suppliers – While no single supplier holds significant bargaining power, footwear production is concentrated in Vietnam, China and Indonesia
- Nike’s footwear and apparel products are manufactured by third-party contract manufacturers outside the U.S. in various countries, including Vietnam, China, Indonesia, Argentina, Brazil, India and Mexico.
- Nike’s footwear production is largely conducted in Vietnam, China and Indonesia as contract factories in these countries in fiscal 2013 comprised around 42%, 30%, and 26% of total Nike brand footwear production, respectively. Hence,both sovereign issues and currency effects could be a cause for concern for Nike.
- No single footwear factory or apparel factory accounted for more than 6% of total Nike brand footwear production and Nike brand apparel production respectively in fiscal 2013; hence, due to a large base of suppliers, we believe their bargaining power is limited.
- The switching costs in changing suppliers is significant.
- However, suppliers generally share the inflationary pressure (related to raw material costs and labor expenses) with Nike through manufacturing service pricing.
Bargaining Power Of Customers – Big wholesale customers could exert some bargaining power
- Nike caters to its customers through both the wholesale and direct-to-consumer channels, which accounted for 80.6% and 18.9% of total Nike brand’s sales respectively, in fiscal 2013.
- Direct-to-consumer sales rose by 23% in fiscal 2013, as compared to 6% growth in the wholesale channel; hence Nike is looking to strengthen its direct channel.
- Certain big wholesale customers hold bargaining power as they could widen their partnership with Nike’s competitors or provide their own private label offerings to earn higher profitability.
- Bargaining power of end-customers is low as Nike has a very strong brand image and holds an innovative product portfolio.
- However, customers could also choose other brands owing to factors such as price, advertising, product sponsorship, and changing styles.
Threat Of New Entrants – Requirement for high capital and research investments could limit the entry of new players; however, there is a threat from new e-commerce players
- Significant capital resources are required for creating a new brand as large investments are needed for marketing and procuring floor space; hence, this restricts the entry of newer players.
- Nike enjoys a great degree of brand recognition and loyalty, and it will be a difficult for a new player to match its level.
- Having said that, we believe more Internet companies could start selling competitors’ footwear, apparel and equipment online as the barriers to entry are low in this business.
Threat Of Substitute Products - Counterfeit products represents the biggest threat in this area
- The worldwide demand for athletic footwear, apparel and equipment is expected to grow in the future as customers cannot substitute these products.
- However, the problem of counterfeit products is an area to watch. As the quality of counterfeit products has been improving over the recent past, we believe this could threaten the company’s sales in emerging markets and could also potentially dilute Nike’s brand value.
Our $63.18 price estimate for Nike, represents almost 20% downside to the current market price.