The John Donahue post

Who is John Donahue?

John Donahue is the outgoing CEO at Nike. Full disclosure, I have Nike in my wardrobe and I own a share in the company at the time of writing. Anyway back to Donahue, according to his biography on the Nike website:

John Donahoe is President & CEO of NIKE, Inc. He is responsible for the continued growth of NIKE’s global business portfolio, which includes the Nike, Jordan and Converse brands. John became president and CEO of NIKE in January 2020 and has served on the Board of Directors since 2014. Previously, he was the president and CEO of ServiceNow and of eBay Inc., and he continues to serve as chairman of the board at PayPal. Earlier in his career, he worked for Bain & Company for nearly two decades, becoming the firm’s president and CEO in 1999. A former basketball player and lifelong sports fan, John received an MBA from Stanford Graduate School of Business and a bachelor’s degree in economics from Dartmouth College.

john-donahoe — John Donahue via the Nike website.

He is a business strategy wonk and has extensive experience in online businesses and online commerce. When Apple had the vision thing, they hired Tim Cook – a famed operations and logistics executive in the technology industry to deliver. John Donahue had been hired to do great operational execution, by a company that was running low on the vision thing.

Donahue may not have had permission to deal with some of the systemic issues in Nike and some of them issues might be due to the board itself.

Penetration

Nike’s collective strategy to move to D2C via its own retail stores and e-tailing platform was ostensively a way to increase profitability and presumably focus on heavier, brand loyal users. I can understand why they might have felt that due to the ubiquity of their products on the backs and feet of customers around the world.

Secondly, prior to 2010 (and in most business schools still) the perceived wisdom was that modern marketing is supposedly about focusing on loyal, heavier buyers; focusing on retention (not acquisition) and return on investment.

However, things changed in 2010; Ehrensberg Bass researchers Byron Sharp and Jenni Romaniuk summarise the marketing science research that their institution had been doing in their books How Brands Grow part one and part two. A key part of their findings was that brand loyalty is positively correlated with brand penetration – if you have higher levels of penetration then your customers will tend to be more loyal. However, if you have lower levels of penetration then your customers will tend to be less loyal. Smaller brands suffer from a double jeopardy of sorts: their sales are lower because they have fewer buyers, who buy the brand less often.

Which kind of makes sense. When you go to a supermarket, you can only buy what’s on the shelf when you’re in the supermarket. It would take a lot to go and try another supermarket to just buy one product. Most people will just buy what they can on their list and maybe look at substitute products.

Nike is a huge brand, but it wilfully reduced its marketing penetration, by reducing the amount of places it appeared. It withdrew or reduced engagement with a range of partners:

Amazon
DSW
Footlocker
JD Sports
Macys
Olympia Sports
Urban Outfitters
Zappos

When Nike goes back to those partners, there will be a shift in the power dynamic away from Nike. These retailers have options because Nike let other brands in to fill the void it chose to leave behind.

On LinkedIn, people have talked about this as Nike has a brand problem. This is far beyond a brand problem; but brand has suffered.

Where’s the community?

Nike’s Londoner celebrated community back in 2018. Nike has continued to win in culture with collaborations including Nigo and Yoon Ahn of Ambush. But the culture didn’t translate into the degree of sales that Nike wanted so far.

Part of the reason for this is Nike’s focus on sub-cultures rather than broader transformational trends in middle class and working class consumers.

On Running have built their brand around running groups. Nike used to have running clubs ran by staff at their retail outlets. They were also were supporting Charlie Dark’s Run Dem Crew in the early 2010s.

When did Nike give competitors space in communities? Was it down to a pivot win focus from retail to online? Given that part of the rationale for Nike’s move to selling direct to customers was to be closer to them, this all seems really odd.

Charlie Dark has since become a global running ambassador for Lululemon.

Core competences

In the late 1990s and early 2000s Nike sold watches. The most famous of which was the Triax range that angled the display to make it glanceable for runners. There were also Nike MP3 players made with Philips. There was also the Nike fuelband, an in-house attempt at a wearable.

The company decided to focus on what it did well and has since made products that are complementary to Apple’s product line like watch straps and apps. Under Donahue’s watch Nike extended itself into the technology space with NFT offerings and metaverse experiences. Both of which seem to have been expensive follies.

Fading stars

Nike was formed at a unique point in time and over the decades has worked with a range of game-changing athletes who were known globally thanks to mass media and the internet.

Nike’s biggest brand and star is still Michael Jordan. The Air Jordan 1 was launched in 1984. That means that the shoe design and when he played in it is older than the young people it is sold to. The linkage between the iconic jumpman performance and his signature shoe is becoming elongated by time.

Granted Adidas sells the Superstar, the Stan Smith, the Samba and Gazelle shoes which are older than the Jordan 1. But Adidas doesn’t lean as heavily on any one design. Instead they rotate in and out of style. Even then Adidas has suffered from problems executing consistently such as the Yeezy scandal.

Nike’s Dunk design comes from 1985, the Air Force 1 came out in 1982. They are not bad shoes, but they will fade in and out of style.

Nike had also been relatively slow to take advantage of the surge of interest in women’s basketball with Caitlin Clark only getting a signature shoe deal this year.

Nike also managed to grossly underestimate the demand for replica jerseys of its England and Australia women’s football teams.

Jordan has since expanded into a brand that Nike has used to sponsor the likes of French football team Paris St Germain.

In golf, Nike parted ways with Tiger Woods this year. Woods is launching his own line instead. While Nike has other golfers on its roster, they don’t have the cultural impact that Woods had on the game.

The brand has better news in football where it has a deep bench of both teams and player sponsorships to draw on. Nike still has a great bench of athletes comparable to rivals like Adidas, and that’s the problem. They glitter like the Milky Way rather than radiate like the sun.

The secondary market

Hypebeasts

The rise of streetwear as an industry took off in the late 1980s. Its origins go further back. You had Dapper Dan in Harlem in the 1980s, football casual culture, Japanese fashions and the California surf culture influence. Soon after it took off you had unobtainable items:

Major Force t-shirts – (Major Force was a Japanese hip hop and house label featuring artists like Hiroshi Fujiwara)
The Tommy Boy Carhartt Detroit jacket
Numerous Stüssy Tribe letterman jackets
Supreme drops from 1994 onwards

Trying to scratch that itch made you a hype beast. I know hypebeasts who are 60 years old and have college age children. The signs of this secondary market being bubbly could be seen back before COVID.

The end of easy money

Nike like other premium brands benefited during COVID-19, when interest rates were low and consumers had money in their pockets. Interest rate rises, inflation and an economic dip took away the easy money. Nike doesn’t seem to have factored this into its expectations. The decline in Chinese economic growth, seems to have hit Nike particularly hard.

The polyurethane problem

Nike shoes took off on them being tradable alternative assets like sports cards, or vintage bottles of wine. Nike trainers have a shelf life due to the materials that they are made from. Adhesive bonds can be reapplied, stitching can be repaired, but polyurethane midsoles crumble over time and can’t be replaced.

The plastic breaks down and and the soles disintegrate. I have had pairs go at the four year mark. Chemistry undermines the collector segment that supports much of the secondary market for Nike products.

A long train running

Passengers relax and view the scenery from the lounge car of the Empire Builder enroute from Chicago to East Glacier Park Montana, and Seattle, Washington, June 1974

John Donahue was in charge when Nike had unprecedented decline in sales. But there have been issues for a long time. Donahue was executing on a strategy for direct-to-consumer sales via its own retail stores and online, that Nike had committed to prior to his arrival as CEO.

This is obvious from John Donahue’s recruitment process.

Donahue’s reputation was helped by his roles at ServiceNow and eBay
Donahue was a former partner at Bain and a friend to many in Silicon Valley
He received his MBA from Stanford School of Business – which is a great institution and happens to be the one that Phil Knight went to.

What Nike didn’t do was commission a headhunter, hold a beauty parade or anything akin to a rigorous recruitment process in hiring their CEO.

All of which points a board-wide issue rather than just a CEO issue. Which begs the question, will Nike become the sports apparel version of Yahoo!? A rotation of CEOs, intractable board level issues and an inevitable slide out of the limelight? Nike has been wrong-footed before, it was clobbered by the rise of Timberland in the early 1990s driven by the brown boots usefulness for standing on cold wet street corners in the criminal underworld adjacent to hip hop culture. But Nike came back. That was a different Nike with a more energetic Phil Knight and Tinker Hatfield.

The scale of this stumble seems bigger and faster than before. Nike might not be resilient enough to withstand it.

The innovation problem

Former Nike designer Steve McDonald has painted a very different picture on Nike innovation internally within the company than has been seen on the outside. Outdoor sub-brand ACG was ‘never supported‘ when it was launched back in 1989. It was an immensely political environment with star-designer Tinker Hatfield warring with rival designers. Instead Nike used golden birdcage contracts to lock up and stifle talent. Hatfield is in charge of Nike’s Innovation Kitchen, but there seems to be a lack of commercially beneficial output.

Hatfield’s days as a star designer are numbered following several decades at the top and there doesn’t seem to be a star-status worthy successor coming though.

Nike seemed to abandon mainstream sustainable innovation some time after 2012, with its ISPA range as a sporadic tokenism to green issues.

NikeLab – a premium line that fits in with On Running’s apparel seems to receive only sporadic support. All of which implies that product innovation had problems way before Hoka and On Running turned up.

Nike’s Vaporfly running shoes were originally released back in 2018 and by 2020, World Athletics rule changes meant that Nike has a range of competitors providing similar shoes.

The next battle ground has been fought over consumers focusing on wellness and fitness. When Hoka and On Running did turn up, Nike didn’t have much in the tank to respond.

It was really brought home to me in sportswear-loving Merseyside where On Running shoes are the universal choice of everyone from office workers to scallies. Before COVID they’d all be in Nikes with the Air Max 95s being particularly popular.