Nike sneezed, will the industry catch a cold?
Today we’re looking at the state of the sneaker market, with a post co-written by sneaker expert Anthony McGuire.
There’s a famous saying, “When America sneezes, the world catches a cold.” The idea is that the US is so important to the global economy, that America’s problems inevitably become the rest of the world’s problems.
In the sneaker market, Nike is the world’s juggernaut. So, when the company announced poor Q2 earnings, the entire industry took notice.
Is Nike’s performance indicative of a larger problem within the industry, or is something fundamentally wrong with the brand itself?
There are 3 things we want to explore today:
- What’s the current state of the market?
- Why is Nike having problems?
- What are trends to watch in the rest of the market?
Let’s go 👇
Anthony McGuire is the Co-Founder & CEO of PWR House, a media advisory firm. He was formerly the Editor-In-Chief of Neustreet, a data and media company focused primarily on sneakers and trading cards. You can follow Anthony on LinkedIn.
Table of Contents
State of the sneaker market
Last month, the CFA Institute published a piece entitled, How Sneakers Took a Grip on Investment Portfolios
This is the latest in a string of high-profile articles and TED Talks highlighting sneakers as a viable alternative investment.
Sneakers constitute an $80 billion global market, currently growing at a CAGR of 5.8%.
The sneaker market is dominated by just a few mega-companies: Nike, Adidas, Puma, Skechers, and New Balance.
In terms of both total revenue and market share, Nike is by far the largest and most important sneaker company.
So when they report bad numbers, the whole industry pays close attention.
The secondary market has weakened
The other thing to pay attention to here is the secondary market.
The secondary market is the hype engine for the entire sneaker industry. The late 2010s and early 2020s were outstanding times to be a reseller. High margins over retail price were the norm, and the hype for new drops seemed never-ending.
But this market is also the canary in the coal mine. Secondary market trends are often leading indicators for the rest of the market.
And we’re seeing some troubling data.
Neustreet is one company that tracks macro and micro sneaker trends. In a recent article, Neustreet CEO Eric Witschen commented,
In 2023, we saw a 25% decline in secondary market prices. Even worse, the number of sneakers trading above their MSRPs…fell from 80% to about 50%. That’s a dramatic decline in one year’s time.
The leading sneaker marketplaces like StockX and Goat publish their own public trend reports, ranking the most in-demand sneakers on their platforms.
Over the last year, both StockX and Goat have indicated growing competition from younger brands like ASICS, Hoka, and On.
If the secondary market continues to serve as a leading indicator, then the latest trends in sneakers demonstrate that new brands outside the Nike-Adidas duopoly will continue to grow in market share.
What going on at Nike?
While Nike has maintained its position as the world’s dominant sneaker brand for decades, they’re facing a critically challenging time.
Nike shares tanked 20% after announcing that they expect a larger-than-anticipated sales drop in 2024 in their latest earnings call. This was the single largest dip in the company’s history.
Additionally, Nike announced a recent round of layoffs affecting around 2% of the total global workforce. This is really the downstream consequence of several years of Nike’s decisions and market dynamics.
So what’s going on?
Running shoes: Losing market share
Historically, Nike has dominated the market for athletic running shoes.
But over the last three years, Nike has been losing market share to an increasingly competitive world of global running brands:
- 🇫🇷 French-born Hoka
- 🇨🇭 Swiss-based On (creators of those incredible spray-on shoes you may have seen)
- 🇯🇵 Japanese-born ASICS, and especially
- 🇺🇸 Philadelphia-born Brooks has quietly become the #1 performance adult running shoe for US retail.
What’s extra crazy is this is all happening at a time when running is having a resurgence! Run clubs are taking off, the WNBA is on fire, and interest in women’s sports is rising.
Basketball shoes: Lots of new competition
Nike basically invented the modern basketball shoe category, and has dominated it since releasing the Air Jordan 1 in 1985.
But today a large number of popular athletes are choosing to work with Nike’s rivals instead:
- Anthony Edwards with Adidas
- Kyrie Irving with Anta
- Steph Curry with Under Armour
- Joel Embiid with Skechers
- Nikola Djokic with 361 Degrees
- Even Shaquille O’Neal is the new head of Reebok Basketball.
To be clear, Nike is still the dominant basketball shoe brand. But there is more competition than ever before.
An oversupply of Hype shoes
One of Nike’s biggest miscalculations has been its assessment of ongoing demand for hype shoes. Similar to streetwear drops, these are supposed to be tactfully released, in limited quantities.
Sneaker bloggers have criticized Nike for re-releasing too many in-demand shoes, and flooding the secondary market with too many variations.
Five years ago, it would have been impossible to find Air Jordan 1s that weren’t sold out immediately after release. But today, Air Jordan 1s are sitting on the shelves of retailers.
But Nike doesn’t appear to be listening. Just last month, Nike announced they’ll be re-releasing certain “grail sneakers,” highly sought-after shoes like the famous “Wu-Tang” Dunks and the Playstation x Nike Air Force 1s.
But the reason these shoes are desirable is because of their scarcity. Re-releasing this grail will benefit Nike in the short-term, but you can only pull that string so many times.
Sneaker blogger Mike Sykes put it this way:
Let’s be real. This release was announced on a Sunday morning with no major Wu-Tang Clan benchmark or anniversary in sight. It’s hard not to think this is unconnected to Thursday’s disastrous earnings call. It feels like Nike is just buttering us up and hoping we forget how stale things are.
He continued…
Retros like this one…turn true “grails” into run-of-the-mill collaborations, making everything feel a little less cool and special. While that feels good at the moment, it also does nothing but temporarily ameliorate the brand’s woes.
Big distribution mistake
Over the last several years, Nike went “all-in” on direct-to-consumer (DTC).
They reduced their presence at wholesalers, instead focusing on Nike retail stores and the Nike SNKRS app.
The boneheaded move freed up valuable shelf space at retailers for Nike’s competitors, and severely damaged their B2B wholesale relationships.
Nike executives were actually sued for misleading investors about the success of this DTC initiative. And in a schizophrenic move, Nike recently expressed that they will be reversing that decision and reinvigorate some of their wholesale retail partnerships.
Former employees point to the current Nike CEO John Donahoe as responsible for the misguided DTC decision. Donahoe has also come under fire for focusing on technological innovation instead of culture.
Interestingly, this is similar to how Donahoe operated as CEO of eBay. What started as a vibrant community for passionate hobbyists and small business owners turned into a culture-less, algorithmically sorted megamart.
In January, Tiger Woods, arguably the most famous Nike athlete besides Jordan, announced that he had left the brand.
It’s clear Nike’s wounds are only partially related to the broader sneaker downturn, and mostly self-inflicted.
The company pioneered cultural marketing, and is still the gold standard for sneaker collaborations in sports, music, and fashion.
But if they want to keep this lead, it’s crucial for them to convince the world of their continued prowess and cultural swagger.
Adidas
Adidas is Nike’s biggest rival, and their big story over the past few years has been the termination of their lucrative partnership with Kanye West and the Yeezy brand.
Kanye West launched Yeezys — some of the most desirable sneakers of the last decade — and it became a billion-dollar brand.
But in 2022, it all came crashing down, thanks to Kanye’s controversial behavior and anti-semitic comments.
Things were looking pretty dire for Adidas in 2022. Their biggest brand collaboration had collapsed, the company was sitting on half a billion dollars worth of Yeezys, and North American sales plunged 16%.
But on Jan 1, 2023, Bjorn Gulden became the new Adidas CEO, and has helped usher in a surprisingly positive era of recovery for the brand.
In Feb 2023, Adidas and Ye negotiated a deal allowing Adidas to sell their remaining $500 million worth of Yeezys. By the second half of the year, the Adidas Samba and Adidas Campus had become two of the most popular shoes on the secondary market.
The most recent Adidas earnings shared financial guidance that was higher than expected, including data indicating that Adidas silhouettes are some of the most searched for on Google.
Anthony Edwards is a rising NBA star, and has become the face of Adidas’ primary basketball shoe, the AE1, which has boosted Adidas within the basketball category.
It’s a major win. Edwards clearly had the opportunity to work with Nike or any other sneaker brand, but he chose Adidas.
In Q2, Adidas posted a net profit of ~$223 million — up 117% from the same period last year.
Despite the insane Kanye West situation, Adidas seems to be recovering nicely. Compared to Nike, they now find themselves in a pretty positive financial situation.
New Balance
New Balance is the biggest “Cinderella Story” of the last decade.
For many years, New Balance was considered a shoe for uncool boomer dads, made fun of by Ryan Gosling in the 2011 film Crazy, Stupid, Love:
But through a series of strategic collaborations and powerful marketing, New Balance has, incredibly, emerged as one of the top competitors to Nike and Adidas.
In 2019, New Balance began embracing its dorky brand identity, releasing a 990v5 shoe with a pretty cool tagline:
Then they tapped into streetwear culture and started doing collabs like crazy. This new sense of brand boldness paid off.
Over the last few years, New Balance has gone from an “uncool dad shoe” to becoming celebrity staple. They’ve managed to find a special place in sneaker culture which arguably makes them the hottest sneaker brand in the world.
Taylor Swift conspicuously wore a pair of red New Balance 550s last year at a Chiefs game. In the week after the game, New Balance 550s experienced a 25% increase in revenue.
At this point, New Balance is leaning in and bringing on key brand ambassadors across the cultural spectrum:
- Designers: Joe Freshgoods and JJJJound
- Musicians: Action Bronson and Jack Harlow
- Sports: Tennis player Coco Gauff and baseball player Shohei Ohtani
Other brands
Putting aside the semi-duopoly of Nike and Adidas, and the special excitement around New Balance as the premier upstart sneaker brand, the rest of the sneaker market is characterized by more aggressive competition across a wide variety of new brands.
Hoka, On, and Brooks are having plenty of success competing against Nike — primarily across the running category, but also within lifestyle shoes.
Hoka
In 2013, Hoka was acquired by Deckers (the Santa Barbara-based company that owns Teva and UGG, among others) for just $1.1m.
When Deckers acquired them, Hoka was doing $3m in sales. Today, they’re doing $1.4 billion a year — an astounding 42% of Deckers revenue!
Brooks
Founded in 1914, Brooks initially produced ballet and bath shoes, before focusing on running in the 1970s.
The brand is celebrated by professional runners for their comfort, durability, and innovative performance-enhancing features.
Brooks has maintained its position as the #1 performance adult running shoe in the US since 2022.
Reebok
In 2022, the once proud Reebok was acquired by Authentic Brands — a private company that owns a bunch of apparel and footwear brands you’ve probably heard of.
NBA legend Shaquille O’Neal has been named Head of Basketball for Reebok and is actively recruiting new athletes to partner with the brand.
Converse
It’s an interesting story with Converse.
After dominating the basketball market in the 70s/80s, Converse lost out to Nike and Adidas. Compared to Nike, Adidas and Reebok, Converse didn’t have as good deals for athletes, which became a self-fulfilling prophecy, and didn’t innovate as well beyond their key designs.
A large part of that also came from mismanagement, and getting bought and sold several times. Funny enough, Converse makes over $2 billion a year as a Nike subsidiary today, which is actually their best ever performance financially.
Closing thoughts
Nike has enjoyed a comfortable position as market leader for many years. But today, Nike is at its weakest ever position historically. Their biggest rival Adidas is on the rise, and a slew of both new and old sneaker brands are quickly gaining market share.
Competing purely on product/innovation is a race to the bottom for most sneaker brands. Sneakers are like other fashion industries; most people don’t wear sneakers for the physical benefits, but for how it makes them feel.
This puts sneakers into an interesting category. They operate with a part focus on “product technology,” i.e., the quality of the shoes, and with a part focus on “a connection to culture,” i.e., how cool or relevant it is to wear a particular brand of shoes.
Companies like New Balance and Hoka have embraced their own chunkiness, uniqueness, or even uncoolness into brands that work.
But as The Rebooting’s Brian Morrissey puts it:
[Nike] is at risk of becoming a cautionary tale… It has the fingerprints of McKinsey all over it, a botched focus on DTC at the expense of wholesale relationships and an over-reliance on performance marketing over brand. CEO John Donahoe is at risk of becoming a modern John Scully.”
Former Nike exec Jordan Rogers puts it in simple, harsh terms:
“Nike will die a death of a thousand paper cuts.” 👟
That’s all for today.
Reply to this email with comments. We read everything.
See you next time,
Anthony
Disclosures
- This issue was co-authored by Anthony McGuire and Stefan von Imhof
- The ALTS 1 Fund has no holdings in any companies mentioned in this issue.
- Stefan does own a pair of Adidas Samba Spezial, and wants these custom Nike Dunkin’ Donuts sneakers
- This issue contains an affiliate link to StockX
