Nike Inc.’s China business is in need of a shake-up — and the sportswear firm might have just figured out how to do it.
A report from BNP Paribas Equity Research senior analyst Laurent Vasilescu said that per a Chinese media report Nike plans to cut off its key distributors in China beginning Jan. 1. The end result will be that the distributors will no longer be able to sell Nike products on any online platform. That would leave consumers with just one option: They will be able to buy Nike products only from the brand’s official flagship website in China. It’s a shift in focus to direct-to-consumer from brick-and-mortar.
December’s second-quarter earnings report saw declines in Greater China and the Asia-Pacific and Latin America, or APLA, region. Revenue fell in Greater China by 10 percent, with online sales down 21 percent. Greater China footwear revenues also fell 10 percent in the quarter. At the time, Nike president and chief executive officer Elliott Hill said during an earnings call, “We are moving with urgency.” He noted that the brand’s China comeback is still in its early phase.
Footwear News found that Nike’s problem stretched back over five years, and that under the leadership of former CEO John Donahoe, the brand’s DTC-first approach meant the sportswear firm could own consumer data and improve margins. But that also marginalized its wholesale partners such as Topsorts and Pou Sheng, partners that helped the brand build a robust retail network reaching millions of consumers at key retail outlets that include lower-tiered markets.
Angela Dong, the local veteran who was CEO of Nike Greater China, stepped down from her role on March 31. She was succeeded by Cathy Sparks, who was named to the position of vice president and general manager of Greater China this past January. Sparks, a 25-year Nike veteran, was most recently vice president and general manager of APLA.
BNP’s Vasilescu noted that data from Pou Sheng and Topsports indicate that brick-and-mortar sales have been pressured for years, while online sales overall in China has been the growth engine for many sporting goods brands. But he pointed to one key risk with what could be the new distribution strategy.
“A potential push to eliminate online distributor sales would remind us of Nike’s DTC push at the expense of wholesale partners in Western markets,” the analyst said. “This strategy opened up shelf space for competitors and ended poorly for Nike. We believe the same could happen if it takes the same approach in China.”
Vasilescu was referring to the sportswear firm’s consumer direct initiative in 2017 that was launched as Nike Direct, pivoting the company from traditional wholesale to digital and company-owned retail platforms. Nike zeroed in with its Consumer Direct Acceleration program in June 2020, but by December 2023, the company had to restructure operations with a $2 billion cost-savings plan as the consumer direct strategy added a layer of complexity and inefficiency. It also added back some of its wholesale partners that it worked with before. But the exit from wholesale also left space on store shelves that were filled by competitors.
And when Nike posted third-quarter earnings results in March 2024, then-CEO Donahoe told investors during a conference call that more necessary adjustments were needed, including a reinvestment with wholesale partners and more innovation in its product lines. By September, Nike said Donahoe was out and Hill, a former Swoosh executive, came out of retirement to become its current CEO. Hill’s first focus of attack was Nike Running. Better-than-expected first-quarter earnings results for the three months ended Aug. 31 had Wall Street thinking that Nike’s running rivals — such as On, Hoka and New Balance — had better rethink their growth expectations.
Vasilescu said he didn’t know who made the distribution decision, noting that it could have been Sparks, “who is new to the Chinese market.”
“We don’t think Nike has a distributor problem but rather a product problem, which also applies in other markets,” the analyst concluded.
When Nike posted third-quarter earnings results on March 31, investors learned that China wasn’t Nike’s only problem and that Europe is now also a concern. Revenues dropped 7 percent in its Europe, Middle East and Africa, or EMEA, region. Nike’s executive vice president and chief financial officer told analysts during an earnings conference call that EMEA present “both progress and challenges” in the quarter. The region saw softness in its sportswear offering and operated against a highly promotional retail backdrop.
On Tuesday, Nike said David Denton will join the company as executive vice president and CFO on Aug. 17, succeeding Matthew Friend.
Nike executives did not respond to a request for comment.
