Getting personal: What digitization and customization mean for Nike’s supply chain
How is one of the world’s largest consumer organizations reacting to a new reality where they have to deliver customers customized products faster than they ever have before, without letting costs spin out of control?
The average sporting goods shopper is changing. Consumers are increasingly foregoing the mall to shop through digital channels and they expect a personalized shopping experience and product assortment. Combining these two trends sends shocks through a company’s supply chain, forcing them to manufacture and deliver in a new reality. Nike, the largest sporting goods company in the world, is taking this challenge head-on, proving a company doesn’t need to be small to be agile. Through manufacturing innovation, re-evaluation of logistics and transportation, and a re-organization to set the company up for success over the long term, they’re embracing digitization and its impact on their supply chain.
The case for change
E-commerce penetration in the sporting goods industry has steadily increased in recent years. On average between 2010 and 2015, e-commerce sporting goods sales have grown above 20% per year1, compared to overall industry growth of 1-2%2. Consumers are increasingly shopping through both online and mobile channels, using company websites and proprietary applications as paths to purchase. For Nike, this means a shift in their channel mix towards direct-to-consumer, through Nike.com and online applications. With that shift comes an expectation – not only do consumers want to shop anywhere, they want quick and convenient delivery to come with it.
Personalization – customizing product assortment and shopping experience for individual customers based on their historic behavior and preferences – is also changing the game for consumer brands. According to research from the Boston Consulting Group, brands that are creating a personalized experience are seeing revenue increases between 6-10%, growing two to three times faster than their peers who don’t3. Nike is going headfirst into personalization, using the customer data they collect via their digital channels, allowing customers to make one-of-a-kind custom shoes and register for events catered to their specific interests.
Nike makes moves
How is one of the world’s largest consumer organizations reacting to a new reality where they have to deliver customers customized products faster than they ever have before, without letting costs spin out of control? In the near-term, Nike is investing in manufacturing innovation. They have joined forces with leading robotics and automation companies to re-design how they produce footwear4. They are investing in digital printing to enable custom artwork at the absolute last stage of the manufacturing process, while using advanced robotics to leverage economies of scale on the standardized parts of the shoe. At their October 2017 Investor Day, company executives shared that they will have deployed over 1,200 new automated machines in their manufacturing facilities by the end of the fiscal year4. They have also established a strategic partnership with contract manufacturer Flex to build more flexibility and localization into their manufacturing footprint.
Realizing efficient custom manufacturing is useless without delivery, Nike has re-evaluated their distribution strategy, establishing 12 key cities prioritized based on significant growth potential where they will fulfill same-day delivery5. They have openly de-prioritized their presence with retail partners in favor of digital channels and own stores6. This move allows Nike to have fuller control over the consumer experience, leveraging their digital channels and proprietary data to give consumers a truly personal shopping experience.
Playing the long game?
Looking longer term, Nike has made several strategic organizational moves to set the company up for the new digital reality. They have created the new Nike Direct organization, which will unite Nike.com, Direct-to-consumer retail stores, and Nike+ digital products5. This organization brings together all of the consumer touchpoints to enhance the company’s ability to plan for and optimize the personal shopping experience for the consumer, and make the related operational changes required to make it real. They have also created the Advanced Product Creation Center at the company’s Oregon headquarters, to serve as a development and testing ground for future manufacturing innovation, as well as opening a digital studio in New York City, a ‘mini start-up’ focused on staying on the cutting edge of digital innovation4.
A call to action remains for Nike to further re-evaluate their brick and mortar retail footprint, both their own stores and their remaining retail partners. They have a large footprint in an environment where the economics of brick and mortar retail are getting less attractive by the day, suggesting store closures may be a logical route.
While Nike is clearly on the front foot of their industry with respect to handling the impact of digitization on their supply chain, big questions remain. What does personalization look like in store? How will they manage the omni-channel experience so that consumers experience the brand in the same way whether they are using an app or in-store? As they look further out, how will they roll out the innovations they have established to a truly global supply chain, once they have saturated their 12 key cities?
1US Census Bureau, “2015 Annual Retail Trade Survey”, http://www2.census.gov/retail/releases/current/arts/ecommerce4541.xls, accessed November 2017.
2IBISWorld, “Sporting Goods Stores in the US: Market Research Report”, https://www.ibisworld.com/industry-trends/market-research-reports/retail-trade/sporting-goods-hobby-book-music-stores/sporting-goods-stores.html, accessed November 2017.
3Mark Abraham et al, “Profiting from Personalization”, https://www.bcg.com/publications/2017/retail-marketing-sales-profiting-personalization.aspx, accessed November 2017.
4Nike Inc., Nike Investor Day transcript, http://s1.q4cdn.com/806093406/files/doc_events/2017/10/updtd/NIKE-Inc.-2017-Investor-Day-Transcript-With-Q-A-FINAL.pdf, accessed November 2017.
5Nike Inc., “Nike Inc. announces new Consumer Direct Offense”, https://news.nike.com/news/nike-consumer-direct-offense, accessed November 2017.
6Sara Germano, “Nike Tells Investor It Will Shift Away From ‘Mediocre’ Retailers”, Wall Street Journal, https://www.wsj.com/articles/nike-tells-investors-it-will-shift-away-from-mediocre-retailers-1508967034, accessed November 2017.
This was a fascinating read – it’s clear that Nike is highly attuned to evolving customer preferences in the digital world and managing its supply chain accordingly. The article did raise a question for me, though, on the compatibility of personalization with Nike’s strategy. As I think about how Nike has cultivated such unyielding customer loyalty and brand affinity, it seems as though athlete and celebrity product endorsements are part and parcel of the company’s success.
In the existing model, Nike and its product evangelists are the arbiters of style, functionality, and ultimate product decisions. When branded with the ‘Swoosh’ and associated with highly visible professional athletes, Nike’s products consistently generate a sense of virality amongst consumers. Comparing this approach to a model with greater personalization wherein the customer owns more of the product design process, I wonder if Nike risks undermining its position as the standard bearer of sports style that has fueled the company’s success for so long.
As it relates to supply chain, the existing approach requires effective forecasting, logistics execution, and inventory management. Since the company knows – irrespective of realize consumer demand – how many and which types of products it will produce, there is a finite set of variables around which the company must plan. In implementing product personalization on a large scale, however, it seems that Nike’s supply chain process could become more reactive and sensitive to real-time changes in customer preferences. This, in turn, would likely necessitate fundamental changes to Nike’s planning and raw material procurement processes.
Thus, while higher consumer demand for product personalization makes this a logical strategy for Nike to pursue and grow, it’s interesting to consider the limitations of scaling personalization in the context of Nike’s business model.
Thank you for the article. Creating personalization in physical stores is a challenge that might be promoted by a technology also mentioned by you in the article, digital printing. The industry is evolving to allow smaller, cheaper, and faster printers that can, with improving quality, create customized patterns on different materials. Other challenges may arise from implementation of this solution of course, such as, possible “mistakes” occurring in front of the customer but the experience itself can bring much value both marketing wise on operationly.
Taking into account 3D printing projections I believe even greater in store customization possibilities may absoltly arise.
Thank you for the article. Creating personalization in physical stores is a challenge that might be promoted by a technology also mentioned by you in the article, digital printing. The industry is evolving to allow smaller, cheaper, and faster printers that can, with improving quality, create customized patterns on different materials. Other challenges may arise from implementation of this solution of course, such as, possible “mistakes” occurring in front of the customer but the experience itself can bring much value both marketing wise on operationly.
Taking into account 3D printing projections I believe even greater in store customization possibilities may absolutely arise.
Interesting reading!
Totally agree with the remaining questions that you are presenting at the end of the essay. In that line I would add one major concern that retailers that are working in customization as Nike are facing these days; how to conserve and take the most of the brand equity built over time.
During all its history, Nike has built a brand communicating one big message to its customers: “Just do it”. Under that message we found Nike value preposition: high quality of every product plus the aspirational desire of being linked to top athletes in each discipline. Based on this framework Nike marketing rationale has been always over the particularities of each customer; it has been the strength of the brand and its message over customers individual preferences.
Nowadays, when “Getting personal” seems to be the name of the song for Nike, it is an open challenge how the company will adapt it’s message and conserve the brand equity when every customer will have the chance to design and has it’s own Nike experience.
As consumer demands become increasingly personalized, Nike seems to be effectively responding with supply chain innovations such that it can continue to fulfill its customer promise. While the technological changes to sell more customized shoes are exciting (e.g. digital printing), I’m more cautious about Nike reevaluating its brick and mortar retail footprint. While I agree that the economics of brick and mortar stores are a challenge, other consumer retail companies that have gone to market with an online-only strategy (e.g. Bonobos) have begun opening brick and mortar stores. Similarly, years ago, many industry analysts in the financial sector predicted significant bank branch closures; while these have materialized (see article below), banks continue to operate thousands of branches today. These two examples suggest that there are limits to digitalization – consumers (or at least some of them) still demand an in-person experience.
https://www.economist.com/news/finance-and-economics/21725596-banks-have-shuttered-over-10000-financial-crisis-closing-american
Great read. In a world where brick and mortar is going online, and online is going brick and mortar, it is interesting to highlight the strength of the brand that has been visible over the past against those only available on screens. The touch and feel of the brand still requires physical stores, where customers create the first connection with the brand, a lesson online stores are realizing late, so although the digital scale is massive, the physical strength is still dominant. Yet, with such huge leaps in the digital world and brand strength beyond description, it is interesting to keep track of the performance of a company such as nike, which seems to have all variables of the equation figured out. Not strange how this is one of the greatest brands in the world right now.