Variables that could threaten NIKE’s Business Model
Traditionally innovative: A must-know investor’s guide to NIKE (Part 22 of 22)
Threats to NIKE’s business model
While the outlook appears rosy for NIKE, Inc. (NKE), there are some thorns, too, that could challenge the company’s ability to achieve its financial and operational targets.
Exposure to overseas markets and currencies
Compared to its rivals, United Armour Inc. (UA), VFC Corporation (VF), Lululemon Athletica Inc. (LULU), and Adidas AG (ADDYY), NIKE derives a larger portion of its revenues from overseas markets. This leaves the firm vulnerable to both economic cycles in other geographies and adverse currency movements. Either of these variables could reduce NIKE’s profits, as noted earlier in this series.
In the current context, this overseas exposure risk is particularly applicable. Economic growth has been subdued or even negative in major economies including China, Japan, Brazil, Argentina, Russia, and Western Europe. Currencies in these countries have also depreciated significantly this year against the US dollar. NIKE could face heat in most of these economies apart from China, as discussed in Part 13.
In contrast, rivals UA and LULU, which derive over 75% of revenues from the US market, could benefit from the geographic tilt. The US economy is growing and so is consumer spending. Third-quarter gross domestic product grew by a larger-than-expected 3.9%. Consumer spending is also on the rise, increasing 3.6% year-over-year in October. US sales are particularly relevant now for consumer-oriented firms in the run-up to the holiday season that started just before Thanksgiving and continues until the New Year.
You can gain exposure to UA and NIKE through the the SPDR S&P 500 ETF (SPY) and the SPDR Consumer Discretionary Select Sector ETF (XLY).
Competitiveness, similar strategies adopted by rivals
Although NIKE leads the market by a wide margin, rivals could possibly emulate its premium strategy in an attempt to eat into its market share. Still, it would take years to build the brand that NIKE’s got.
Adidas could be its closest competitor in a global context, but it’s got its work cut out for it in the US market. That said, the newly revamped Reebok brand and retail push may pose a threat in the casual sports apparel segment.
To stay ahead, NIKE must continue to launch innovative products and maintain the width of its economic moat, as discussed in Part 17 of this series.
Consumer price sensitivity
Higher-priced products also leave NIKE vulnerable to consumer preferences. Although the company proved to be relatively resilient in the most recent recession, an economic downturn could reduce demand and unit sales.
Supply chain risks
As mentioned earlier in the series, all of NIKE’s manufacturing is outsourced to third-party contractors in countries including China, Indonesia, and Vietnam. Government legislation regulating factories or an increase in input costs, especially labor costs, could present challenges to NIKE’s financial goals.
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