How Nike Resisted Amazon's Dominance for Years -2-
For years, Nike Inc. was one of the biggest holdouts against Amazon.com Inc., refusing to provide its sneakers and athletic clothing for sale on the hulking e-commerce site. Its products were so cool, the company reasoned, it didn't need or want the help.
Recently, Nike reversed course. Behind that decision lies a dramatic shift in the balance of power between brands and Amazon.
For decades, big consumer brands carefully controlled which retailers could sell their wares and at what prices. And for years, Amazon left the brands alone.
Lately, the explosion of third-party sellers on the site has led to authentic goods from companies such as Nike, Chanel, The North Face, Patagonia and Urban Decay being sold on Amazon even though they don't authorize the sales, undercutting their grip on pricing and distribution.
Even though Nike didn't send Amazon its products either directly or through approved wholesalers, Nike is the most purchased apparel brand on the site, according to a Morgan Stanley survey. A recent search for Nike products on Amazon turned up roughly 73,000 items.
These days, there are so many third-party resellers, who generally are allowed to resell goods they have lawfully acquired at whatever price they want, that companies see few ways to stop them.
"It's a Whac-A-Mole situation," said Robert Payne, an attorney who works with companies on the issue.
Nike's recent deal represents one strategy: Add Amazon as a distributor to drown out the flood of third-party sales. Nike agreed to start selling some products directly to Amazon in exchange for stricter policing of counterfeits and restrictions on unsanctioned sales, according to a person familiar with the deal.
Amazon told sellers this month that they won't be allowed to sell certain Nike items, including sneakers and apparel, starting July 13.
Nike and Amazon declined to comment.
As traditional stores close and shopping moves online, Amazon's dominance in retailing has grown, leaving even the most powerful brands unable to ignore it. Some companies disdain Amazon's site design, which doesn't conform to the tailored image they want to project, according to lawyers and consultants who work with them. They consider it a site that sells items, not one that builds brands.
One reason for their capitulation is the collapse of a retail distribution network they could better control, as malls flounder and chains like Sports Authority Holdings Inc. shutter.
A company's power to dictate who could sell its products and how, penalizing retailers that step out of line by withholding inventory or other measures, has been a critical tool to preventing unwanted discounting, which damages the ability to sell at full price.
Controlling their distribution "eliminated the exposure and much of the risk of having excess inventory in the market," said Ken Seiff, a venture capitalist at Beanstalk Ventures and a former retail executive.
Amazon, on the other hand, often gives third parties wide leeway on products sold on its site. Its goal is to offer the widest possible assortment of goods and bring down prices.
That has made it the first stop for e-commerce searches. Amazon pulled even with Foot Locker Inc. as the preferred U.S. retailer for buying sneakers in a spring consumer survey, according to retail analysts at Cowen & Co.
And while some retailers offer discounts in certain markets and stores, lower prices on Amazon can be seen by shoppers around the world.
When Julie Wyatt, 32 years old, wanted to buy Nike sneakers recently, she turned straight to Amazon. She filtered the selection by shoe size and color, and knew she would find a low price with free shipping. She ended up purchasing a $50 pair of gray and pink basic running shoes.
"I feel like Amazon is just the go-to," said the Atlanta resident, who estimates she does more than half of her total shopping on the site. "It's just so much more convenient."
Adidas AG added Amazon as a distributor in 2014, part of its strategy to grow in the U.S. Its market share of the U.S. athletic footwear market jumped from 7% to 11% this year through May, according to retail industry tracker NPD Group.
Amazon is where the U.S. consumer is, said Adidas Chief Executive Kasper Rorsted, who estimates that nearly a fifth of the sporting-goods market is now online. "Amazon is the best, without any comparison, transaction platform in the world," he said. "It might not be the best brand-building platform in the world, but that's why we...separate crudely between transaction and brand-building."
In addition to the merchandise Adidas allocates to Amazon, more Adidas products end up on the marketplace without its permission through third-party sellers. "We can't police that," Mr. Rorsted said, adding that the company tightly controls supply of its most-desired shoes, like Yeezys, to minimize reselling.
In recent years, Nike has focused on bulking up sales via its roughly 1,000 named stores, its apps and its own website.
When the sportswear company first started selling on Nike.com in 1999, it didn't see Amazon -- then a 5-year-old Seattle startup still selling mostly CDs, DVDs and books -- as a threat.
Nike, after some experimentation, "ended up deciding that direct-to-consumer was stronger than using a third-party entity" for online sales, because it allowed it to better differentiate its offerings and was more profitable, said Vada Manager, a former Nike executive who worked on developing the company's online strategy and left in 2009. "That was the right decision" at the time, the now-consultant said, allowing Nike to sell online at higher margins while keeping its traditional, brick-and-mortar retail partners.
That year, Jeff Wilke, a top deputy to Chief Executive Jeff Bezos, flew to Nike's headquarters in Beaverton, Ore., to explain the merits of a direct sales relationship with Amazon, according to a former Amazon executive who was briefed on the meeting. Third-party sellers were already selling thousands of Nike items on the site.
Other sports names such as TaylorMade and Under Armour were eager to take advantage of Amazon's rapid growth and were signing on. Baltimore-based Under Armour initially joined as a third-party seller and later became a direct seller to Amazon, which Chief Executive Kevin Plank in an interview called a "great partner."
Nike executives balked, saying the online retail giant was a product pusher that didn't know how to treat premium brands and goods, according to the former Amazon executive.
These companies typically expect control over everything from the arrangement of a product display on the wall to the way brands are marketed and described online.
Nike held firm year after year when Amazon executives returned to Beaverton. Amazon hosted Nike executives in Seattle around the turn of the decade, shortly after Amazon bought online retailer Zappos.com, which had a selling relationship with Nike.
While the meetings were friendly, Nike was clear: It had no plans to add the online retail giant as a distribution partner, according to another former Nike executive. It wanted to maintain its branding and sell through its own stores, website and existing partners.
In 2012, Nike launched a new product, its FuelBand fitness tracking device, and wanted to try a new distribution strategy. In addition to using electronics retailers like Best Buy Co., Nike decided to experiment with selling on Amazon.
The online retailer, it conceded, was a major marketplace for selling electronics, and therefore a necessary partner for the FuelBand, the former Nike executive said.
But while Amazon's distribution was key, Nike wasn't thrilled with its merchandising strategy. Scrolling through the site's "Activity Trackers" page showed row after row of black- and neutral-colored wristbands. Click on one, and the landing page looked the same.
Ultimately, Nike scrapped the FuelBand in 2014, deciding it couldn't make enough headway in the fitness-tracker industry, and instead partnered with Apple Inc. on a smartwatch released last year. Selling FuelBand through Amazon reinforced Nike's opinion it had better options for retail partners.
Around the same time, the sportswear market started to take a turn. Nike's dominance as market leader was under attack as Adidas, Under Armour and Puma all found success with new celebrity endorsers. The athleisure boom took off, giving rise to nontraditional competitors like Fabletics. Traditional retailers were also under pressure, and the liquidation of major U.S. chain Sports Authority last summer sent sportswear companies scrambling for new ways to reach customers.
Meanwhile, more and more of the sales of Nike and other goods on Amazon's site were by third parties. The growth in the third-party segment had been fueled by rapid adoption by sellers and an offering in which Amazon warehouses and fulfills orders.
These days, analysts estimate third-party sales in total have surpassed Amazon's own sales on the site, and the number of sellers has swelled to over two million. Amazon doesn't report the value of sales by third-party sellers, but it confirms that about half of units sold on its site are from third-party sellers.
Third-party sales are generally more profitable to Amazon than its own, because it collects fees from the sellers without having to take on inventory risks. Amazon said its revenue from such sellers jumped 34% in the latest quarter from the previous year to $6.44 billion, nearly a fifth of total revenue.
The third-party sellers typically buy legitimate merchandise from distributors, big box stores such as Wal-Mart, or discount retailers such as T.J. Maxx, circumventing the retail networks companies have built up. The sellers then offer the items on Amazon at a slightly higher price than they bought them for, but typically lower than the suggested retail price, undermining companies' control over pricing.
Two years ago, Mike "Reezy" Rezendes II started selling footwear on Amazon. Already a seasoned book reseller, the 33-year-old heard shoes were easy to get and profitable. So he and three full-time employees started scouring Marshall's, Ross, Nike Outlets and even Nike.com.
"Nike is a large focus for us. We just keep sending them in and they keep selling," he said. Nike makes up more than half of his current 2,500 pairs in stock. He said he makes an average of $20 per pair of shoes.
Nike has added controls to try to keep resellers away, limiting the amount a consumer could spend in one go, according to several resellers. Mr. Rezendes found ways around the restrictions. He pays other mall customers $20 apiece to make his transactions, and he places small online orders of about 10 pairs of shoes during sales on Nike.com to get around detection, since large orders are flagged.
The bankruptcy of Sports Authority, one of Nike's biggest wholesale clients, unleashed a flood of Nike products on Amazon. An estimated $400 million worth of merchandise in total was liquidated, according to Edward Stack, chief executive of competitor Dick's Sporting Goods Inc.
Sam Cohen, a New Jersey-based seller, waited for discounts of 80% to 90% to buy roughly $200,000 worth of merchandise, including Nike shoes, hoodies, sports bras and golf equipment. Within a few months, he grossed about $1 million from his Sports Authority bounty, he said.
Nike is his best-selling fashion brand, helped by its lack of direct presence on the website. "That's how I make my money. Amazon is the No. 1 marketplace. Nike is the No. 1 brand," said Mr. Cohen. "If they're not in bed together, that's my opportunity."
Nike noticed. In recent months, Nike realized it was losing negotiating leverage to argue for better brand presentation or eliminate counterfeits as long as Amazon could make money off unsanctioned sales of its product, according to one of the people familiar with the deal. That triggered internal conversations among senior Nike executives about its relationship with Amazon, according to people familiar with the deal.
In recent weeks, Nike and Amazon executives held intensifying talks about cracking down on the proliferation of unsanctioned third-party sales and counterfeit products on the site, according to the people.
In the new deal, Nike will sell a small amount of product to Amazon in exchange for Amazon telling resellers not to sell those products, according to one of the people. The agreement is likely just the first step in a broader partnership, although Nike remains concerned about how its products will look on the site, the person said.
Unique product numbers should immediately identify the blocked items when a seller tries to list one. Last year Amazon also started requiring third parties to provide more information to list certain popular names, including Nike, requiring in some cases proof of permission to sell and a one-time application fee.
On the night of June 13, Amazon seller Mr. Cohen started getting hundreds of automated emails from Amazon informing him that he had 30 days to sell off certain items from his Nike inventory before the products would no longer be allowed.
Mr. Cohen immediately told his staff to stop buying swoosh products for resale. "I have a bad feeling that Nike and Amazon are about to get into bed together," he said.
Write to Laura Stevens at laura.stevens@wsj.com and Sara Germano at sara.germano@wsj.com
(END) Dow Jones Newswires
June 28, 2017 11:22 ET (15:22 GMT)