How Nike fell behind in the innovation race

Some consumers and industry analysts say the pace of innovation coming from Oregon-based Nike is slowing. (File Photo: Reuters)
Some consumers and industry analysts say the pace of innovation coming from Oregon-based Nike is slowing. (File Photo: Reuters)

Summary

The sneaker company faces stiffer competition in the running and lifestyle categories.

Nike made a swift comeback earlier this month in the super-shoe fight when marathon runner Kelvin Kiptum set a world record while wearing a new iteration of the company’s Alphafly 3. But the sneaker maker is losing steam in other races.

Competitors such as Hoka and On are gaining a foothold among runners and with people who are looking for something comfortable to wear to work or school. Adidas and New Balance are also making headway in the market for streetwear by bringing back old models in dozens of colorways, moves similar to those from Nike’s own playbook.

Nike said sales of footwear in North America—its largest market—fell 2% in the latest quarter. Higher prices for Nike shoes weren’t enough to offset a 10% decline in sales volume, the first decline in more than a year.

Nike and other consumer-goods companies have been hurt by rising prices that are causing consumers to rethink their spending plans. Nike remains the world’s largest seller of athletic footwear and apparel, generating $48.7 billion in revenue from its namesake brand in the year ended May 31.

Still, Nike executives have said they are working to improve product marketing and assortments and also drive more meaningful connections with everyday runners.

“We are focused and mobilized to address areas where we need to raise our game," said Chief Executive John Donahoe in late September during an earnings call with analysts.

Del Shaffer, a Realtor in Charleston, S.C., used Nike running shoes for decades but last year traded his Free RN Flyknit for a pair of Hoka Mach 4 because he wanted something softer, with more cushioning. The 44-year-old runs every day after dropping his children off at school and said he felt a huge change once he switched to Hoka because of the shoe’s materials.

“They give me that cushion, and I’m kind of looking forward to not having knee surgery when I’m older," Shaffer said.

Sales of the Deckers Outdoor-owned Hoka reached $1.4 billion in the year ended March 31, up from $223 million in 2019, when the company first reported sales of the brand. In 2021, the company moved away from saying the shoes were made only for “ultra runners and athletes" and included “world champions" and “tastemakers."

On Holding, owner of the On brand, reported sales of about $1.3 billion for the year ended Dec. 31, a 69% increase from a year earlier. The Swiss maker of the Cloudmonster and the Cloudflow said it plans to generate $1.9 billion in revenue for 2023 and expects to double that number by 2026.

“They are all taking share from Nike," said footwear industry analyst Matt Powell. “If you can capture the fashion side of the business, that is really where the money is."

Nike in a statement said that it has an innovation pipeline that spans more than 50 years and that its products “will bring the innovation, performance, style and comfort consumers will be excited about for years to come."

Innovation slog

Some consumers and industry analysts say the pace of innovation coming from Oregon-based Nike is slowing. The company in 2017 introduced the lightweight Vaporfly sneaker, which became a lightning rod in elite running competitions amid concerns it granted wearers an unfair advantage. Its first Alphafly sneaker launched in 2020. The sneakers were perceived as groundbreaking years ago, analysts said, but they are also made for runners willing to spend more than $200 and not necessarily for people just looking for something comfortable to wear.

Nike, during the Covid-19 pandemic, also leaned into delivering new color and design variations for some of its most popular franchises, the Air Force 1, Air Jordan 1 and Dunk. Those releases have delighted some fans, but annoyed others, including sneakerheads who built businesses on hawking products with limited availability.

“Nike is really, really good at innovating but they keep innovating the wrong things," said James Hesse, who has dedicated a chunk of his decade-old YouTube sneaker channel to finding the most comfortable casual running shoe.

From design concept to store shelves, footwear development at Nike can take about 18 months. The pandemic, and subsequent supply-chain snarls, messed with Nike’s production pipeline.

Nike is also working through inventory problems that resulted from the pandemic—initially not having enough goods to sell but later carrying too many. To help boost sales, the company has opted to return to some retail partners it had dropped just over a year ago.

Investors haven’t lost faith in the company. Shares are up 16% over the past year, compared with a roughly 13% gain in the S&P 500.

Shifting priorities

Nike boss Donahoe said last month that the company was giving priority to the everyday runner looking for something new—and reaching that customer whether at a Nike store or not.

The company released the $80 Nike Interact Run last month as a more affordable performance shoe. It is launching a new technology for running shoes that is expected to be ready for the 2024 Summer Olympics.

Still, Nike executives have said they are working to improve product marketing and assortments and also drive more meaningful connections with everyday runners.

Moving further into the mass market is a shift from the company’s reliance on limited-edition products to drive sales—and customer hype. In 2020 and 2021, new releases on Nike’s SNKRS app often would sell out quickly, but now some models remain available for weeks. The average transactions of sneaker resale platforms, such as StockX and GOAT, have declined since April 2022, according to data from Earnest Analytics.

Younger shoppers want new and unique products in order to stand out, and Nike needs to move away from doing different colors of the same sneaker if it wants their attention, said footwear analyst Powell. Nike was recognized as the top apparel and footwear brand for teens, according to a recent survey from investment bank Piper Sandler.

Some sneakerheads and resellers think Nike needs to come up with something like a new collaboration that parallels the Jordan brand’s successful run with rapper Travis Scott. A golf shoe from this collaboration released last week is already fetching $1,000 in the resale market, or about six times its retail price.

Even that can prove uncertain. The company released a new sneaker in collaboration with hip-hop superstar Drake about a month ago and those are still in stock. Resellers said that the release “bricked," meaning that there is no profit to be made in the resale market. At the moment, a pair can be bought on StockX for less than what Nike is charging on its website.

Write to Inti Pacheco at inti.pacheco@wsj.com

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