ANALYSIS: New pricing strategy pays off for Nike
Nike’s commitment to innovation includes Lunarlon cushioning technology, inspired by images of astronauts walking on the moon
Sporting goods giant Nike is raising its prices at a time when other companies are turning to increased markdowns and heavy promotional activity to drive traffic. And analysts say the strategy is single-handedly driving growth in the US sneaker market, as well as helping the company to carve out a new competitive advantage.
Speaking on Nike's fourth quarter and full year earnings call last month, chief financial officer Don Blair confirmed the company has "done quite a bit of work" around its "consumer value equation," adding that "the strength of our brand and the innovation that's in our products means that there is a great consumer value proposition at higher price points."
He continued: "Working to optimise that price value equation, we think we can continue to raise prices, particularly around product innovation and brand strength." He also noted that in both footwear and the apparel, the company "is migrating consumers to premium product."
His comments appear to be borne out by recent research that suggests not only have higher average selling prices (ASPs) at Nike driven more than 100% of total US athletic footwear industry dollar growth in 2014 so far - but that the company is holding up when it comes to price perception too.
UBS analyst Michael Binetti explains. "In Sportscan-measured channels, total industry sales dollars have increased by $127m in 2014 year to date - resulting in +1.4% dollar growth year-on-year for the total industry.
"Higher Nike ASPs have added $168m to total industry dollars over the same period last year - adding +1.8 percentage points to total industry dollars year-on-year, and contributing more than 100% of total industry dollar growth."
Redesigned pricing strategy
According to Binetti, the changes come after Nike last year added a pricing team at it corporate headquarters to redesign its pricing strategy - and since then the company's global ASPs have been rising significantly.
In fact, the company has completely changed its architecture from its previous "cost-plus" model - which simply charged a margin over the cost to manufacture - to the comprehensive "consumer value equation" model.
"The new consumer value-driven model is based on multifaceted analytics of how much a consumer would be willing to pay for each product - without being anchored to any cost components," Binetti explains.
He adds: "In addition to a strong on-going focus on innovation at premium price points (a mix shift to higher prices), prices started increasing on like-for-like items as Nike rolled out its new strategy."
Binetti estimates that in Nike's fiscal year to May 2014, global footwear ASPs increased by 5-6% year-on-year - up from +4% in FY13.
And he underscores the importance of this improved pricing power to the bottom line.
"For Nike, we estimate that every one percentage point of revenue growth from price increases is 2.2x more impactful to earnings per share than one percentage point of growth from increased unit volumes."
Industry pricing pressure
The juxtaposition, of course, is that Nike's investment in an improved pricing architecture comes at a time when the broader US apparel and footwear industry is under significant pricing pressure.
The US consumer price index (CPI) for apparel and footwear has lagged core CPI since autumn 2013 amid bloated inventories and heavy markdown requirements.
"Our proprietary UBS Inventory Risk Indicator suggests that total US softlines industry inventories were still too high relative to sales trends at the end of [the first quarter]," Binetti notes, adding that many companies stepped-up markdowns to clear inventories - which in turn leaves a risk to margins heading into the second half of the year.
Charge more for compelling products
However, not only is Nike's new pricing strategy an emerging competitive advantage, but "we think the consumer is giving Nike permission to charge more for compelling products over time," Binetti says.
And his comments seem to be supported by separate research from Cowen & Company into the perception of US athletic footwear and apparel brands year-on-year through June.
Its updated Activewear Survey suggests that in terms of brand preference, Nike remains "solidly dominant," its "cool factor" has risen, and its price perception "remains encouraging."
This compares with another activewear innovator, Under Armour, which is seeing increasing brand preference year on year overall and among young men and women aged 18-34, along with a rising "cool factor", but a "somewhat uneven" price perception.
In parallel with its new policy on pricing, Nike is working to reduce the amount of labour and materials needed to produce its products - from more evolutionary initiatives like lean manufacturing and waste elimination, to revolutionary innovations like Flyknit and waterless dyeing.
Click on the following link to read just-style's insight on these initiatives: Nike gears up for a "manufacturing revolution"
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