We are rounding on four years since the pandemic’s start and two from its end, and the normalization from the distortions created by the pandemic continues for many industries, including housing, autos, grocery, spirits, and athletic footwear to name a few. Given the size of housing, autos, and grocery, the normalization and distortions are of significant magnitude. Spirits and athletic footwear, on the other hand, are smaller industries, and the duration to get back to normal has surprised many while the challenge is to get supply in line with demand. Below we contrast these two sides of the same coin.
For the spirits industry, the excess inventory is with wholesalers, smaller retailers, and liquor cabinets at home. Cocktails being enjoyed at nightclubs, restaurants, and home are running 2%-3% above the 3%-5%+ volume declines at the largest producers per results, meaning the liquor cabinet piece alone is worth 1-2 points alone, and more than that when for premium pours of tequila, whiskey, etc. And so that’s why we say the spirits industry is suffering a bad hangover. However, hangovers end, and we expect the producer’s momentum to pick up in the second half of 2024 assuming a solid consumer backdrop and easy comparatives.
Unlike spirits, the supply/demand imbalance in athletic footwear and athleisure seems to be worsening with On Running, Nike, and Lululemon all recently reporting softer-than-expected results and trends (Deckers' HOKA brand has been an outlier). Results from adidas, Under Armour, Columbia, Athleta have also been softer-than-expected, and Allbirds has seen its share of challenges. (On a related note, several brands in this category have announced leadership transitions, including Allbirds, Brooks, and Under Armour the past two weeks, joining Deckers, Crocs, Fila, and adidas.)
The imbalance has also impacted athletic footwear retailers differently, with Dick’s Sporting Goods leaping over the trail hazards--helped by new store formats--while Academy Sports + Outdoor, Foot Locker, and JD Sports got tripped up. We’ve been discussing increased competition across the category since 2022, but for the manufacturers, it isn’t clear when the imbalance will smooth out as it stems from new brands making large inroads into the category. For example, during 2023 in the U.S., HOKA and On Running sold $1.1B more product on a retail dollars basis to reach $5B in volume. For context, we estimate that Nike’s U.S. non-Jordan business is about $25B in size at retail. For entities that provide consumer access, like the best malls, retail avenues, and shops, this means the balance and economics shift their way. Moreover, the athletic footwear and athleisure categories---which moved so aggressively towards e-commerce--is shifting to physical retail to tell its brand stories. It’s also telling that we hear little about On Running and HOKA’s e-commerce businesses, as they instead talk about wholesale and retail.
On Nike’s recent Q3 2024 update, CEO John Donahoe said, “We know Nike is not performing to our potential. While our Consumer Direct Acceleration Strategy has driven growth and direct connections with consumers, it's been clear that we need to make some important adjustments. Simply put, we need to make adjustments in four areas: we need to sharpen our focus on sport; we must drive a continuous flow of new product innovation; our brand marketing must become bolder and more distinctive; and while NIKE Direct will continue to play a critical role, we must lean in with our wholesale partners to elevate our brand and grow the total marketplace.” (Thus, making a further adjustment to its decision two years ago to pull the upper end of its running product from Foot Locker.) For the fiscal year ending May 2025, management expects revenue to be down low single digits in the first half of the fiscal year – an outlook that took many by surprise given that it’s a summer Olympics year.
Nike CFO Matt Friend said, “First, we are elevating and differentiating the consumer experience with our brands at retail, especially as consumers continue to shift back into physical stores. This includes increased investment to support strong seasonal retail marketing execution, breadth and depth of assortment, and elevated service and product presentation...We will increasingly leverage our full portfolio of thousands of physical doors to position our newest products in the path of consumers...This quarter, we began streamlining support and operating functions, reducing management layers, and shifting more of our resources toward consumer-facing activities. In particular, we are increasing investment in areas such as design, product creation, merchandising, brand, and our ground game to drive greater impact for consumers, dimensions of sport and the marketplace. Overall, our focus is on allocating our resources to drive more return while building an operating model with greater speed and better cost productivity as we grow.”
