Nike’s Pricing Power and Brand Drive Its Economic Moat

Nike’s pricing power gives it a competitive advantage over its peers. The company’s pricing power is supported through premium innovation and a structural shift toward the direct-to-consumer business. Nike’s (NKE) dominant position in the athletic footwear and apparel category further drives pricing with lower markdowns. Plus, Nike’s superior brand power leads to premium pricing.

Moreover, the adoption of technology to predict demand supports pricing and markdown cadence. The company’s acquisition of Celect and proprietary digital demand sensing tools are helping it transform, providing an edge over its peers.

Nike’s major product categories include Footwear, Apparel, and Equipment. The company is the largest seller of athletic footwear in the US and leads the competition by a considerable margin. Through innovation and technology, Nike continues to widen the pricing gap with rival footwear manufacturers.

Competitors Under Armour (UAA), VF Corporation (VFC), and Lululemon Athletica (LULU) have sales models tilted more toward apparel. Meanwhile, Nike enjoys a leadership position in the athletic footwear category in nearly every major market.

Footwear revenues came in at $24.2 billion in fiscal 2019, representing about 65% of total revenues. The company’s fiscal year ends on May 31.

Footwear sales grew at a compound average growth rate (or CAGR) of 8% over the period spanning five fiscal years. In fiscal 2019, its Footwear unit’s sales increased 8%, while its pricing increased by 4%. In Q1 2020, Nike’s Footwear category registered 11% growth on a constant-currency basis. Pricing contributed 8%, while its unit sales added 3%.

The company’s Footwear category growth benefits from a sustained increase in unit sales and higher pricing. The graph above shows that Nike has increased pricing over the past several years. Notably, selling prices of footwear have grown consistently in most major markets.

Apparel is the company’s second-largest category, accounting for 31% of revenues for $11.6 billion in fiscal 2019. Correspondingly, the segment’s sales grew at a CAGR of 7.3% over the last five years. Similar to the Footwear category, the Apparel category’s revenues also benefit from higher pricing and an increase in unit sales.

Notably, the growing share of the higher-priced direct-to-consumer business and innovation supports Nike’s pricing power. In Q1 of fiscal 2020, Nike’s apparel revenues increased by 9% on a constant-currency basis. Pricing contributed 4%, while unit sales added 5%.

Athletic equipment sales comprise the smallest product category, accounting for 4% of revenues, or $1.4 billion, in fiscal 2019. This category’s sales have gradually declined over the past several years, indicating a focus shift to footwear and apparel.

Nike is the top athletic footwear and apparel brand in the world. Nike was featured as the top brand in the apparel category in BrandZ’s Top 100 Most Valuable Global Brands 2019. Adidas, Lululemon, and Under Armour ranked third, fifth, and seventh on that list.

The following factors drive Nike’s brand value:

• focus on innovation, high-quality products, and the introduction of proprietary products
• strong portfolio of globally recognized brands
• use of targeted, high-impact marketing at major sporting events such as the FIFA World Cup, the Olympic Games, and the NFL’s Super Bowl
• making endorsement deals with prominent athletes such as Neymar, LeBron James, and Roger Federer

Nike’s superior brand power supports its higher pricing when compared with its peers. The company’s products are available in six main sporting categories:

• running
• Nike basketball
• Jordan brand
• soccer
• training
• sportswear (sports-inspired lifestyle products)

The company also markets products for kids, as well as other sports, including cricket, football, golf, lacrosse, tennis, volleyball, and wrestling. Nike’s line of performance equipment includes bags, socks, digital devices, eyewear, protective equipment, golf clubs, and other equipment designed for sports activities.

Sportswear, running, and the Jordan brand are Nike’s top-selling products in the Athletic Footwear category. Sportswear, training, and running are its top-selling products in the Apparel category.

Aside from its well-known namesake brand, Nike’s brand stable includes several other brands that it either developed organically or acquired.

• Jordan collection: Nike is the market leader in basketball gear by a wide margin. Nike’s Jordan collection is named after iconic player Michael Jordan. The Jordan division designs, distributes, and licenses athletic and casual footwear, apparel, and accessories under the Jumpman trademark. The category targets basketball-related products. Sales of products in the Jordan collection are included in the respective Nike brand’s geographic operating segments.
• Converse: Converse is a reportable segment for Nike and is a wholly owned subsidiary brand. It operates in one industry—the design, marketing, licensing, and selling of casual sneakers, apparel, and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron, and Jack Purcell trademarks. Nike reports its Converse results on a standalone basis.
• Hurley: Operating out of Costa Mesa, California, Hurley is also one of Nike’s wholly owned subsidiary brands. Hurley is a youth-focused brand, including action sports such as skateboarding and surfing. Nike designs and distributes lifestyle apparel and accessories under the Hurley trademark. Sales of Hurley products are included in Nike’s North America geographic operating segment.

The economic moat is an allegorical body of water that surrounds a profitable company. It protects the company’s market share and future cash flows, much like an actual moat surrounding a castle. A company with a wide economic moat has a sustainable business advantage. That makes it difficult for rivals to erode the firm’s competitive advantage or impact future revenues and profits.

A company with a sustainable competitive advantage usually provides consistent, above-average returns. The footwear and sports apparel industry has many players and few barriers to entry. Yet, Nike is head and shoulders above its competition, both in terms of operating and financial performance.

The company’s larger size means that its growth affects the market to an even greater extent. Nike is the acknowledged market leader in footwear, running, soccer, and basketball. A strong brand helps Nike command premium pricing. Plus, brand loyalty also helps build Nike’s economic moat.

Nike’s ability to successfully innovate is critical for keeping its pricing power and the moat intact. Notably, it has built its competitive advantage over the years due to its innovation and pioneering manufacturing practices.