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Nike’s direct-to-consumer strategy is ‘scary’ for small footwear businesses, Exclucity owner says

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Entrepreneur & Exclucity Owner Trent Out Loud joins Yahoo Finance Live to discuss how Nike's direct-to-consumer strategy is affecting retailers and small businesses that sell the athletic apparel giant's sneakers.

Video Transcript

BRIAN CHEUNG: Welcome back to Yahoo Finance Live. We were highlighting Nike's earnings recently, which shows a strategy of growing its sales through making direct sales to the consumer-- that would be through their stores, through their online model. The company, in fact, grew their direct sales by 15% to $4.6 billion in its fiscal year third quarter earnings. And this has really hurt third party retailers like Foot Locker, but also small shops and boutiques which make up a lot of the sneaker community.

So for more on this, let's bring in the owner of Exclucity. A big part of the streetwear scene in Toronto and Montreal, Trent Out Loud. Trent, it's great to have you on the program. You know I'm a big sneaker head as well. And we were talking before this segment and you were saying that Nike has already reduced some of the supply that your stores are getting. How is this affecting your business?

TRENT OUT LOUD: It's affecting it really primarily with allocations. You know, Nike's direct-to-consumer strategy, part of that is really highlighting and focusing neighborhood stores, like you mentioned. And in doing so, you know, they are also reducing our allocations. And another component, which a lot of people don't know about, is that they're also reducing our spending budgets. And that is, like, scary for me.

I get an email once every quarter before I book to let me know how much I'm allowed to spend with them. And the concerning part about it is that those budgets are not weighed against my budgets or my projections. So it's enabling my business to not have any projections or forecasts, which, as you know with any business or any CEO, that would be hard to do, right?

BRIAN CHEUNG: Right. You know, this is really interesting, because I think people who might not be aware-- I mean, if you're not in the culture, you think you just go to Foot Locker, you just go to Finish Line and pick up a pair of sneakers. What's the deal with that? But the whole story of Nike's distribution model historically has been the cultural aspect of it-- people queuing outside of small shops like in New York A Life Rivington, or Jeff Staple shops to go get a pair of dunks, right?

So how do you feel this is working with Nike's strategy? Is this going to have an impact on the brand if they can't get it at your store versus just going online and using the sneakers app?

TRENT OUT LOUD: Well, part of their strategy, which is very smart, is, like I said, focusing on neighborhood doors and amplifying neighborhood doors. But the scary part for owners is that we no longer have the allocations or the spending budgets to maintain a profitable business-- for me, particularly. I can't speak for everybody else, but for me, you know, that's where I've been seeing it.

I detailed that in my book, you know, "How Sneakers Ruined My Life" in 2018 when Nike introduced tier zero, and that was damaging to me and my business. And I had to restructure and close down some stores. And I made my pivot. And now coming back in now with their direct-to-consumer offense, you know, it's even scarier for me because now that I've managed to get through 2017 and '18 changes, it's going to be even scarier now in the future.

And one of the things that a lot of people don't know also, too, is that with Nike highlighting the neighborhood stores, we're also tapped to focus on our brick and mortar locations and not amplify our online components. As a CEO, I should be thinking about how I'm going to be able to have an imprint in the metaverse and not thinking about brick and mortar.

As we know, brick and mortar is the most expensive end of a retail business. So it's just kind of, like, very confusing to me. And it's also actually just very scary as a retailer.

AKIKO FUJITA: Bottom line, what are you budgeting right now? When you look at the hit to sales, what kind of estimate?

TRENT OUT LOUD: That's the thing-- I can't even estimate what 2022 is going to be, because every quarter I have to open my Nike email to let me know how much I'm going to spend. So your guess is as good as mine.

BRIAN CHEUNG: Well, then, I guess as a follow-up there, I mean, it sounds like your whole business is predicated off of how Nike feels in any given day. So when Nike says, look, we're going to give you fewer, you know, pairs of this SKU or of this specific shoe model, how do you counteract that? Do you have to turn to other brands? Do you have to create your own in-house brand? I know a lot of stores are doing that. I mean, what do you do to survive against that very volatile outlook?

TRENT OUT LOUD: Yeah, that's a good question. And that's what I'm trying to figure out right now. And what's important to note is that, you know, in the neighborhood offense, you know, they're actually even maybe creating SKUs for us, but at the same time reducing allocations by maybe 60%, 70%. So if I have a reduction in allocations and then I now have new spending budgets, you know, like you said, I have to pivot.

But to be able to pivot and, Brian, as you know, you know, Nike is more than dominant in this space, right? So you can't turn to other sneaker brands to fill what Nike is going to fill. And you know, for me to try to have my own in-house brand, I mean, it's very difficult for a small business to be able to think about that.