17 Oct

Nike’s Target Markets: Everything You Need to Know

WRITTEN BY Mohit Oberoi, CFA

Nike is the leading sports footwear and apparel company in the world. In this article, we’ll look at Nike’s target markets. We’ll also look at how these key target markets have performed over the last couple of years. We’ll also look at the risks and opportunities that Nike faces in its target markets.

Nike’s target markets

Nike (NKE) is the world’s leading sports footwear and apparel company. Nike’s high-performance athletic gear is mostly targeted at professional athletes. Nike’s innovations, products, and services seek to develop athletic potential, according to the company.

The company’s operations are spread around the world. In this article, we’ll look at Nike’s key target markets.

Nike’s key target markets

Women are an important part of Nike’s target market. In fiscal 2019, the Women’s Training segment grew faster than the Men’s Training segment. However, in fiscal 2018, the Men’s Training segment grew at a faster rate. Nike’s fiscal year ends on May 31.

With an eye toward ensuring future growth, young athletes are also a big part of Nike’s sales strategies, especially in categories such as soccer, basketball, and running. Young athletes also form part of Nike’s target market. We’ll look at these opportunities and their potential later in this article.

Converse, Hurley, and Jordan

Nike purchased Converse in 2003. The brand’s product line focuses on the premium target market. It includes casual apparel and footwear products, which are sporty but not necessarily high performance. Notably, Converse has been losing ground in North America to brands like Vans. Hurley’s target market is action sports such as surfing and skateboarding.

Nike’s Jordan collection, named after basketball superstar Michael Jordan, is also a premium-label brand targeted at athletes. Nike also developed various product lines endorsed by athletes such as LeBron James. These high-performance lines are targeted at athletes.

Nike targeting the digital space

Nike’s target market is largely consumers ages 15–45. Nike has focused its marketing efforts on the digital space in recent years. The company went high-tech with its push into digital sports and e-commerce.

The company introduced the Nike+ running sensor in collaboration with Apple (AAPL). It also launched the Nike+ FuelBand. However, the company discontinued support for wearable devices last year, including Nike+ SportWatch GPS and Nike+ FuelBand.

Nike’s operations

Nike’s operations consist of the design, development, marketing, and sales of athletic footwear, apparel, and equipment. Its sales are seasonal and dependent on geography. Historically, its first and fourth quarters have been relatively stronger in terms of sales. Nike categorizes its revenues by geography, with the exception of its separate unit, Converse.

Nike’s reporting structure

In 2017, Nike changed its reportable operating segments. Nike has four geographical reporting segments:

  • North America
  • Europe, Middle East, and Africa (or EMEA)
  • Greater China
  • Asia Pacific and Latin America (or APLA)

Apart from these geographical segments, Nike also reports two other operating segments—Global Brands Division and Converse. As a key target market for Nike, Greater China’s sales have been growing at a brisk pace.

North America is a key target market

  • North America is Nike’s largest segment, accounting for 40.3% of total revenues in Q1 of fiscal 2020, down from 41.7% in Q1 of fiscal 2019. In comparison, Nike’s major competitor in the US market, Under Armour (UA), derives around 70% of its revenues from North America. Nike’s revenue share from North America has fallen over the last five years as its international sales have increased. Among Nike’s other competitors, VFC Corporation (VF) and Lululemon Athletica (LULU) have a much greater dependence on North American sales.
  • NKE, UA, and VFC are part of the Vanguard Total Stock Market ETF (VTI), the SPDR Consumer Discretionary Select Sector ETF (XLY), and the SPDR S&P 500 ETF (SPY).

Growth rates have moderated

  • Nike’s North American segment grew at a compound average growth rate (or CAGR) of 1.5% from fiscal 2017 to fiscal 2019. The segment’s revenue growth has stalled over the last few years. However, it is one of the company’s more profitable segments, with an EBIT (earnings before interest and taxes) margin of 25.6% in the first quarter of fiscal 2020. A higher revenue share makes North America one of Nike’s key target markets.

How Nike plans to penetrate target markets

Nike is already the category leader in most markets it operates in. The company is currently strategizing on how to widen the gap with its nearest competitors or increase the degree of separation. How?

  • innovation
  • providing the customer with premium, must-have products as well as a premium experience
  • transforming the marketplace and expanding its direct-to-consumer footprint
  • investing in the digital channel

Nike acknowledged the evolution of the North American retail market as consumers shift toward online sales. However, it also sees some stabilization in that domain now.

Europe, Middle East, and Africa segment

EMEA: Previously, Nike reported Western Europe and Central and Eastern Europe as separate segments. However, in 2017, the company realigned its reporting structure. Now, it reports Europe, Middle East, and Africa as a consolidated business segment. As with Nike’s other target markets, its products are seen as a premium brand in this region also.

The EMEA segment accounted for 26.0% of Nike’s revenues in the first quarter of fiscal 2020. It reported an EBIT margin of 21.9% in the quarter. The United Kingdom, France, Germany, Austria, and Switzerland are Nike’s key target markets in Europe. Between fiscal 2017 and fiscal 2019, the region’s revenues increased at a CAGR of 7.2%.

Greater China: Another key target market

Greater China: In terms of growth, Greater China is Nike’s key target market. It accounted for 15.8% of Nike’s total revenues in Q1 of fiscal 2020. Five years ago, Greater China’s contribution to Nike’s revenues was in the single digits.

The region’s percentage contribution to Nike’s top line has increased for two reasons. Firstly, Nike’s sales in the region have increased sharply. For example, between fiscal 2017 and fiscal 2020, Nike’s Greater China revenues increased at a CAGR of 13.6%. In comparison, its consolidated revenues increased at a CAGR of 4.4% over this period.

Notably, China is a key target market for several luxury brands. A growing middle class has made China an attractive target market for foreign brands.

What makes Greater China Nike’s key target market?

The second aspect that we need to consider is that revenue growth in North America, which is Nike’s biggest geographical market, has sagged. As a result, Greater China’s percentage contribution to Nike’s top line has increased significantly.

Furthermore, Greater China is a high-margin market for Nike. In Q1 of fiscal 2020, the segment’s EBIT margin was almost 40%. This is higher than what the company achieves in its developed markets. Strong topline growth and high margins make Greater China Nike’s key target market.

China’s consumer spending

The Greater China segment should benefit from the Chinese government’s efforts to increase consumer spending. With respect to the Chinese economy, the contribution of the consumer sector is much lower compared to India and South Korea.

The US economy is also largely driven by its consumer sector. From its status as an export- and investment-led economy, China has been trying to steer its economy toward a consumption-driven economy.

Consumer spending should be a crucial growth driver in China going forward. This would benefit consumer discretionary companies like Nike, especially considering the boom in sports and sports marketing in China.

Converse: An iconic brand presenting unique opportunities

Nike acquired Converse in 2003. The Converse brand comprised 5.2% of Nike’s revenues in Q1 of fiscal 2020. The brand’s percentage contribution to Nike’s top line has come down over the last five years.

This segment reported an EBIT margin of 24.9% in Q1 of fiscal 2020. The brand’s margins have come down over the last five years. Converse’s target market focuses on consumers of casual sneakers, accessories, and apparel.

Last year, Converse incurred higher administrative expenses due to higher marketing expenses and investment in digital business. According to Nike, conversion from licensees to a direct distribution model had a minimal impact on Converse’s fiscal 2019 revenues.

Asia Pacific and Latin America

Nike consolidates Asia (ex-China) Pacific and Latin America as one reporting segment. The segment is the smallest geographical region for Nike and accounted for 12.6% of its Q1 of fiscal 2020 revenues. The APLA segment’s EBIT margin was 25.3% in Q1 of fiscal 2020.

The segment’s revenues have increased at a CAGR of 3.5% between fiscal 2017 and fiscal 2019. Brazil, the largest economy in Latin America, is another of Nike’s key target markets. Meanwhile, Latin America has reported subdued growth over the last five years. To add to that, some of the countries in the region, especially Argentina, have faced currency devaluations.

Nike faces challenges in its target markets

Meanwhile, Nike faces some challenges in its target markets. In the United States, economic growth rates have tapered down. North America is Nike’s largest market.

Plus, Nike is facing strong competition from companies like Under Armour (UA) and Lululemon Athletica (LULU). In Greater China, economic growth has slowed down. Furthermore, if the US-China trade war worsens, US brands like Nike could face backlash in China. As we noted previously, China is one of Nike’s key target markets due to its strong growth and high margins.

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