Nike’s C.D.O and the Demise of the Manufacturer-Retailer Relationship

In the two weeks since Nike announced its “Consumer Direct Offense”, much has been written about two of the main elements of the plan: “Capitulating to Amazon” and “Going Local On a Global Scale”.
The driving force behind this plan is mass consumer migration that everyone has been watching for the past decade: physical migration to global mega cities, and digital migration to platforms such as Amazon and Instagram. Neither migration qualifies as “news” but Nike’s initiatives are generating buzz primarily because they are harbingers of the transforming relationship between brand manufacturers, retailers and consumers.
Nike’s decision to sell directly on Amazon and their Instagram partnership represent a recognition that brands must embrace distributed commerce by enabling consumers to transact on their platform of choice rather than force them to visit a particular site or store. Ironically, many of the brands which have been the most aggressive in developing their DTC channel in recent years are reluctant to remove friction through distributed commerce. Why? Because the primary motivation behind DTC for these brands is higher margin. Despite professing themselves to be “customer centric”, brand manufacturers are inherently driven by a inventory-driven business model. The ROI case behind the large investments brands have made in opening and maintaining stores and ecommerce capabilities rests heavily on increasing their share of revenue at +70% gross margins. But this focus on inventory and margins has made the traditional model vulnerable to disruption by the demand-driven platforms who can focus on customers and operate at lower margins because they don’t own inventory.
Nike’s recognition that it must engage in commerce on the platforms where consumers prefer to spend their time (eg. Amazon and Instagram) is the latest signal that the traditional manufacturer-retailer “wholesale” model is rapidly deteriorating. Brands can no longer stake their financial growth on the traditional distribution network and are pursuing alternatives. Feeling undercut, the retailers’ are pulling back their support for the brands. It is a lose-lose cycle that has industry observers like Pamela Danziger, saying “the supplier-dealer relationship must change”. However, proposed solutions such as exclusive selling territories for retailers won’t succeed in an age of the mobile enabled consumer. If retail truly “is not about selling product anymore, but providing a memorable customer experience” then the biggest financial obstacle to achieving this must be addressed: inventory management.
Even though Nike CEO Mark Parker professes to “obsess about the needs of the evolving consumer” Nike’s efforts will always be first and foremost about turning inventory, as they should be. While Danziger thinks that “increasingly supplier brands hold all the cards and the independents retailers are left out in the cold”, local retailers are actually in the best position to create authentic customer relationships and deliver relevant experiences that are not entirely focused on selling through whatever inventory they happen to own. The key to changing the supplier-retailer relationship is to rethink how inventory is sold and managed as well as margins. The retailers who are able to think and act like platforms (like Amazon) while providing rich, localized customer experiences (not like Amazon) can thrive. Moreover, brand manufacturers who are worried about Amazon’s dominance, their private label initiatives, etc. have a vested interested in helping their retail network make this change. But change is hard, especially for brand and retail executives who feel limited by their existing financial model and targets. These execs already know “what Day 2 looks like”…or they will soon.

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