NIKE: Is it the Sustainability Transformation of the Decade?

“how can we double our business with half the impact on the world?”
-NIKE CEO, Mark Parker

Industry Challenges

The $3 trillion global apparel industry remains the second largest industrial polluter, following oil & gas [1].  The industry is a complicated business involving long and varied supply chains.  Each step of the chain requires tremendous consumption and puts pressure on our carbon footprint.  The industry accounts for 10% of global carbon emissions and 25% of the world’s chemical usage [2].  The compiled pollution releases toxic chemicals into our air, water, and soil, resulting in the creation of greenhouse gases and diminution of our water resources.

As one of the largest apparel brands, Nike has a significant role to play in shaping the climate change conversation for two primary reasons: corporate social responsibility and business performance.

Corporate Social Responsibility

Operating 566 factories, employing over a million workers, Nike is responsible for the well-being of those workers and the communities they live in [3].  In the late 90s, the company suffered from negative allegations regarding harsh labor and factory conditions.  Since then, Nike has made one of the greatest image turnarounds in the recent decade.  And focus on sustainability has been the means to achieve it.  The company revamped its management tools – one such example includes the Sourcing & Manufacturing Sustainability Index (SMSI), a tool used to evaluate factories on health, safety, and environmental dimensions.  By 2020, Nike targets to have 100% of its factories improve to the highest required SMSI scores [4].

Business Performance

By minimizing the environmental footprint, improving product innovation, and transforming manufacturing, Nike has repositioned its supply chain to use sustainability as a strategic growth engine.

To minimize waste in 2015, Nike used 54 million pounds of factory scrap and transformed it into premium material.  Additionally, the company reduced water use per unit in footwear by 43% [6].  These initiatives introduced Nike’s Closed Loop Ecosystem, a new method for designing, finishing, and processing materials (See Figure 1).

Figure 1 – Nike’s new way of thinking about a sustainable product lifecycle

As of September 2017, Nike announced the launch of Nike Flyleather, a new super material made with ~50% recyclable leather fibers, using 90% less water, and an 80% lower carbon footprint.  The product is created to maximize performance as it’s 5x more durable and 40% lighter than regular leather [7].  As Nike expands this new material to its leather sneaker portfolio, it’ll have a strong impact on cost reduction and production waste.  Similar to the impact the Flyknit technology created post 2012, reducing waste by ~3.5 million pounds.

In manufacturing, Nike diverted 92% of total waste from landfill and incineration without energy recovery.  And in Q1 of 2014, Nike reached a major step by introducing a water-free dyeing facility in Taiwan.  The factory features high-tech equipment designed to eliminate the use of water and process chemicals from fabric dyeing – Nike names the innovation “ColorDry.”  See Figure 2 for an image of the factory [9].

Water is outpacing population growth, and over the next decade, water demand will exceed the general population growth 4 to 1, implying two-thirds of the world’s population could be living in water-stressed areas [8].  The ColorDry investment marks Nike’s strong commitment to taking a future outlook and reducing its reliance on constrained resources.

Figure 2 – ColorDry technology at new facility in Taiwan

 

What’s Next?

Nike set a prime example of using sustainability as a competitive driving force.  As a result, the sustainability initiatives have created a solid foundation to adapt to climate change pressures (e.g., emission cuts, constrained supply of cotton and leather).  Nike should now use these same sustainability principles and apply them to its dotcom business, which is an important strategic focus for the next 5 years.  Nike plans to grow its E-Commerce business to $7 billion by 2020 (a $5 billion increase over today’s position).  The growth will meaningfully increase the number of packages shipped per day, and hence will be compounded by number of packages returned.  The growth will inadvertently create lots of waste in the system.  In the short-term, I’d like to see Nike use its sustainability best practices in packaging and shipping.  A few years ago, Nike hired a design firm to help it rethink packaging, but those ideas haven’t been fully realized in the mainstream [11].  I hope to see Nike expedite the innovation on that front to ride its next wave of growth.

As alluded to earlier, the company has done a great job at incorporating synthetic fabrics to address cotton and water supply shortages, but in some cases, synthetic fibers can emit gases like n20, which are 300x more damaging to the environment compared to co2 [12].  I’m sure Nike has processes in place to monitor such effects, but I’d make sure these reactions aren’t offsetting the hard work.

This brand has truly lived and breathed its sustainability mission and I’m confident it will continue to innovate and set the standard, but can Nike actively expand this standard and help other industry players realize its benefits?  Should Nike even play this role?  The big question I pose for you, is how can we now create a movement within the apparel industry and get other key players to set high sustainability standards?

 

Word Count

800

 

Sources

[1] EcoWatch – Fast Fashion is the second dirtiest industry in the world, (August 2015), “https://www.ecowatch.com/fast-fashion-is-the-second-dirtiest-industry-in-the-world-next-to-big–1882083445.html”

[2] Forbes – Making Climate Change Fashionable, (December 2015) “https://www.forbes.com/sites/jamesconca/2015/12/03/making-climate-change-fashionable-the-garment-industry-takes-on-global-warming/#65145f9379e4”

[3] Nike, Inc., The manufacturing map of global factories, (August 2017) “http://manufacturingmap.nikeinc.com/”

[4] Shoes & Accessories (Factiva), Market Trends: Footwear Consumer 2030 – Incorporating Global Trends to Foresight Footwear Market (August 2017)

[5] Quartz, Nike proves cleaning up your act is smart business, (August 2015) “https://qz.com/485333/nike-north-americas-most-sustainable-big-brand-proves-that-cleaning-up-your-act-is-smart-business/”

[6] Nike, Inc., Sustainability Report, (August 2017) “https://about.nike.com/pages/environmental-impact”

[7] Nike, Inc., Transforming Manufacturing, (August 2017) “https://about.nike.com/pages/transform-manufacturing”

[8] Huffington Post, Shocking Environmental implications of Fashion (August 2015) “http://www.huffingtonpost.co.uk/heidy-rehman/shocking-environmental-fast-fashion_b_8009850.html”

[9] Nike, Inc., ColorDry technology, (December 2013) “https://news.nike.com/news/nike-colordry”

[10] Nike, Inc., Investor Day Report, (August 2017) “http://s1.q4cdn.com/806093406/files/images/irday/Heidi-Adam-Transcript-with-slides.pdf”

[11] Esquire, The Man Who’s Making Nike More Sustainable, (June 2017) “http://www.esquire.com/style/mens-fashion/news/a55854/nike-arthur-huang/”

[12] Eco Textiles, January 2011, “https://oecotextiles.wordpress.com/2011/01/19/estimating-the-carbon-footprint-of-a-fabric/”

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10 thoughts on “NIKE: Is it the Sustainability Transformation of the Decade?

  1. Great essay – I particularly enjoyed reading about the interlink of its future business model (e-commerce direct distribution model) and its environmental implication. As I was researching about Inditex (Zara´s mother company) and its actions against climate change, my answer to your open challenge would be – in the global apparel industry, is sustainability even a competitive advantage or is it rather a norm? For example, the “close-loop”, factories & transportation standard, as well as the setting up sustainable index are now almost the standard “action plan” of each of the global apparel companies, such as Nike´s competitor Adidas and other fashion brand Zara and H&M. It is my view that such standard action plan and CSR will not be the differentiator anymore, nor shall Nike be the “industrial advocate” as there is sufficient good practice and adoption in the industry. Rather, I would encourage Nike to focus on practices that actually deliver double bottom-line innovation like you mention. To meet the fast changing fashion demand, Nike´s supply chain is under sufficient stretch – how can we have more practices that is not adding additional supply chain design parameters, but rather be a solution to some of the design challenge is what I would recommend to focus.

    In addition, I think the essay focuses on mitigation part of the climate change, I would also encourage to discover how Nike is adapting impact of climate change to its supply chain. For example, with the increasing food and droughts, and hurricanes, what is Nike doing or what standard is Nike imposing on its partners for natural disaster recovery? Policies like these could help guarantee short lead time even under extreme conditions and minimize bullwhip effect.

  2. Thanks for writing this piece! Such an interesting read. Similar to you, I am confident that Nike will continue to innovate and set the standard in clothing / shoe sustainability. However, instead of framing it as — should Nike play this role or actively help other industry players realize its benefits, I think we should view the retail industry as the very competitive and consumer driven market it is, and realize that it’s the competitive landscape and the consumers that will help other players see the benefit.

    Consumers in the North America and Europe (give or take a few more ‘developed’ countries) have long cared about the environment and I believe they view new processes like using recycled goods to make running shoe as cool technological developments. These consumers will naturally push Nike to develop the newest, coolest, best products and will push other retail brands to do so as well. It’s not random that in the last 10 years, we saw the emergence of brands like Outdoor Voices, Girlfriend Collective and Reformation — while all more feminine than Nike, they are all in the athletic space, and all use recycled materials in their products.

    I think what Nike should focus on as its next frontier is translating the coolness factor of products produced sustainably to its consumers in developing countries with a recent surge of high purchasing power (i.e., India, China). To really make an impact going forward, Nike needs to make sure its new consumers will see the benefits of buying sustainably produced goods and continuously push companies in these newer markets to reach the same level of sustainability as Nike.

  3. Whether Nike can – or should – influence other industry players to take similar actions to reduce greenhouse gas emissions, water usage, and waste creation is an interesting question. I tend to agree with DPI that the mechanism through which Nike will influence other companies is by training/teaching its customers. In which case, the question could really be phrased as how public vs. discrete Nike should be about its sustainability efforts and how will customers receive this.

    I think Nike is in unique position thanks to brand strength; for millions of customers, Nike represents superior athletic apparel technology as endorsed by the world’s best athletes. Producing its items sustainably is a way for Nike to prove (the way that only Nike could) to mass-market shoppers that you don’t have to compromise on performance and durability to make a more environmentally-friendly product. Nike was smart to pair sustainability achievements with a material innovation, FlyLeather. This has positive effects on shopper behavior beyond athletic gear – these shoppers will hold “green” products in higher esteem relative to their conventional alternatives. It starts to bridge the gap between performance-seekers and sustainability-seekers; they no longer believe there is necessarily a trade-off, and can “vote” with their dollars for brands that offer both.

  4. Very well done and a great read. I believe that it is Nike’s responsibility to set the standard for other shoe and apparel manufacturers and use its platform to act as a role model for its peers (as many of the athletes that Nike currently endorses are). Patagonia is doing remarkable things within CSR to not only work towards a Closed Loop System, but also to push climate change initiatives outside of its apparel purview.

    I think the primary constraint for smaller, less innovative apparel manufacturers is lack of infrastructure and scale to invest in R&D focused on sustainable practices that actually enhance performance. While Nike has found several ways to drive performance, cut costs, and minimize its carbon footprint, it will be a long time become smaller shoe companies can replicate the model. However, I do believe that what Nike is doing is re-calibrating consumer expectations which eventually will drive how other apparel and shoe manufacturers approach climate friendly practices.

  5. Great read. I think that a viable business case for a sustainable product lifecycle is the most powerful tool that Nike has in influencing its competitors to follow suit – if Nike can save money in manufacturing while still delivering a superior product, cost-conscious competitors in the athletic apparel space will follow suit. The CSR and image benefits that accrue to the brand through sustainable practices are secondary, in my view, to the improved manufacturing efficiency and cost management that such practices offer.

    I think that Nike can play a unique role in demonstrating that cost-efficient recycling practices in manufacturing will not compromise the performance of its products. I found what you wrote about products like Flyleather very interesting, as it shows how Nike’s investment in innovation in this space has allowed them to make a better, more sustainable product less expensively.

    I am also struck by the magnitude of the opportunity that you describe in the apparel space. First-movers like Nike are doing a great service by embedding sustainable product lifecycle practices into their products, and less forward-leaning apparel companies should be able to lean forward using the same technology as a result. I’m interested in the extent to which these types of innovations are practical in faster moving consumer goods, like products in a Unilever or P&G portfolio. Like Nike, these are global companies steeped in supply chain excellence with a significant environmental footprint – it will be interesting to see if some of the less visible but equally culpable polluters in industries outside of apparel are confronted with the same cost-reduction, quality-preserving, and environment-conserving mandate from consumers or the media in coming years.

  6. Great article! I appreciate the approach to sustainability discussed which began with increased scrutiny into the process of manufacturing and then seeped into the materials themselves. I’m curious to see how companies like Nike that are very performance based invest in innovation to make products that are both environmentally friendly and outperform competitors in function.

    To your question regarding the likelihood of competitors following suit, I’m optimistic. As brands begin to realize sales uplift from their CSR activities and see cost savings from more energy efficient and environmentally friendly, I believe sustainability practices will become more widespread.

    This article opened my eyes to the creativity that exists within the sustainability space. Thanks!

  7. Imran, thank you for the article, it was a very interesting read. To address your last question, I believe the movement cannot come from the companies alone (or from the governments / NGOs / consumers in isolation). There has to be a joint movement where all the forces agree to work towards a common and standardized direction.

    An interesting article published by BCG indicates that “The landscape for change is bold and ambitious, going well beyond what individual players have accomplished thus far and can accomplish going forward. The main challenge to achieve this ambition is not individual commitment and actions but leadership, collaboration, and innovation.”

    The article calls on the regulator as the amplifier voice (with the ability to pass laws that reinforce sustainability targets and incentivize change), points out the consumer has the power to tip the scales (through education, information, and incentives, consumers can gradually change their fashion consumption habits to reduce their own footprint) and draws on the need for collaboration and innovation on an unprecedented scale (e.g., establishing unified standard for recycling).

    https://www.bcg.com/publications/2017/retail-how-innovation-collaboration-accelerate-sustainability-fashion.aspx

  8. Great read around another positive story in the apparel industry. I am personally excited to see corporations like Nike and Patagonia take initiative around climate change. However, I think a health level of skepticism regarding CSR is still important. I don’t believe that all Nike consumer’s are aware and understand the value of Nike’s sustainability initiatives. Sure, it may be a source of competitive advantage for Nike (as we saw with IKEA), but if one is truly invested in the issue, the value of the work the firm is doing should be communicated sufficiently to those who are contributing tot he financial success of the firm.

    While the figures around the apparel industry’s contribution to GHGs are astounding, I am curious to know the breakdown either by company or sub-category. I wondered about this will writing the Patagonia piece as well. Nike reported revenues of $32B in June 2017, whereas Patagonia stands at a mere $750M. How much is each contributing to that 10% in emissions? Moreover, with such a large market share, I see Nike as a corporation in a unique place to influence other firms in the industry. But, it will require a partnership with other stakeholders (government, non-profits, etc.) to move the needle around the issue. For instance, Patagonia invested $1M in a campaign to encourage more environmentally conscious individuals to vote. There is so much power amongst these organizations and I expect them to do more in actually leading policy change.

  9. Regarding its corporate social responsibility, I find it hard to believe that Nike considers itself responsible for the well-being of its workers or the communities that it operates in. Large, multinational corporations are driven to earn as much profit as possible. It seems that Nike only cared when it thought enough of its customers. Could it be that by responding to some customer concerns about the social and environmental impact of their purchases that Nike may have opened up another avenue of future profitability? I think this could be an example of industry being behind the public. Not only does pursuing sustainability seem to lay the groundwork for reducing waste and pollution, it appears that most aspects of promoting sustainability produce a significant long-term cost savings for Nike. Reducing water consumption is also not just a resource saving initiative for Nike, but a cost saving initiative as the cost of water continues to rise as growth in demand exceeds the growth in supplies. Nike and many other companies adopting sustainability has been long overdue. This shows the occasional shortsightedness of business concerns until they finally see the big picture.

  10. Very interesting! Glad to read Nike is taking meaningful steps towards becoming a more sustainable company. I wonder however how much do these efforts represent of their overall activity; are they global initiatives being gradually implemented in all of their plants, business lines, and products? Based on your description, these measures seem to increase financial costs in the short-run (R&D, capex…), but to reduce consumption of raw materials and to improve efficiency leading to an increase in savings in the long-run. A cost-benefit analysis of each of those initiaves, identifying their return both in terms of profitability in the long run and environmental outcomes, could present evidence to incentivize other companies to adopt similar measures.

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