In the spring of 2000, Nike's president of outdoor products, Gordon O. McFadden, was on a mission. He was out to persuade Nike's top brass that they should buy North Face Inc., a maker of popular outdoor gear and clothing. Nike had been slow to get in the race for the fast-growing hiking market, though it did eventually manage to build a decent business in "all-conditions" shoes and boots. Buying North Face, with its $240 million in sales, would have catapulted Nike (NKE) into the top ranks of outdoor-gear makers. "It would have doubled the business overnight and made Nike the dominant player," says McFadden.
So McFadden spent months courting North Face and fiercely lobbying for the purchase. But in the end he got shot down. As they had many times before, CEO Philip H. Knight and his top lieutenants concluded that the company would be better off with a homegrown business than taking on the hassles of integrating another acquisition. Says McFadden, who has since left the company and now works at an apparel company, the Gerry Group: "The decision not to act stemmed from an insecurity of moving outside the Nike domain."
HITTING THE WALL. Such go-it-alone thinking seemed to serve Nike well back in the mid-1990s, when revenues were growing 30% a year. But sales have been stuck at about $9 billion for three years running, and Nike's share of the U.S. athletic-shoe market has slipped from 48% in 1997 to 42% in 2000. Earnings, which hit a high of $796 million in 1997, are only expected to reach $590 million when Nike releases fiscal 2001 results on June 28, up from $451 million last year. Nike's stock is also in the doldrums, trading at about $40 per share, well below its 52-week high of just over $60.
The problem? Wall Street analysts, industry rivals, and former Nike executives say the company is in serious need of fresh blood and new ideas. They believe Nike's insular mind-set is a major reason for its current troubles. That inward focus has driven off new talent the company recruited to help get it out of its rut, caused it to miss major shifts in consumer tastes, and resulted in botched or foregone acquisitions that could have boosted its prospects. Nike needs to revitalize its core domestic footwear business--about 30% of revenues--and develop new products and brands, critics say. Faye I. Landes, an analyst at Sanford C. Bernstein Co., says that Nike's corporate culture will make that hard to do. "The feeling is `what we do is so special, no outsider can ever understand it,"' says Landes. "That's flawed thinking."
Knight, 63, declined to be interviewed, as did other top company executives. In a statement, Nike spokeswoman Leslye L. Mundy denies any insularity at the company, pointing out that nearly 40% of its vice-presidents have been with it less than five years. She also said that outside of domestic footwear, sales are up and that Nike's international business grew 9% over the past three quarters.
Yet Knight's siege mentality seems only to deepen as Nike struggles. The visionary entrepreneur who started the company by selling shoes from the trunk of his car has always done things his own way, critics be damned. Knight pooh-poohed charges of unfair overseas labor practices for years before addressing the issue. The resulting public-relations damage has yet to abate. And dissatisfied with the company's progress late last year, he pushed aside trusted aide and former Nike president Thomas E. Clarke--only to take the president's title himself. In March, the mercurial Knight once again realigned Nike's top management, this time stacking the corporate suite with a number of 20-year company veterans, including two chief operating officers as head of the Nike brand. Few newcomers advanced in the management shuffle. "This was a decision to get the old warriors back in place," says board member John E. Jaqua.
It's not that Knight hasn't hired outsiders for top posts. In the past three years he has brought in at least nine senior execs from the likes of Microsoft (MSFT), PepsiCo (PEP), and SBC Communications (SBC). But many ended up cutting their tenures short, sometimes after butting heads with Knight and other top Nike managers. In the past two years, Nike has lost its vice-president of new business ventures, chief marketing officer, and McFadden, as well as other newcomers.
Several say that their departures were partly prompted by an inability to adapt to the company's notoriously tight-knit jock mentality. At Nike, the top brass sometimes even list their personal best running times in company bios. "People joke about what's going on outside the Berm," says former Chief Marketing Officer Ellen Turner, referring to the term used by insiders to describe the grassy earthen wall that encircles Nike's campus in Beaverton, Ore. "But it's no joke."
Turner, who was lured to Nike from Kinko's Inc. in 1999, left after six months. She says she came to Nike intent on bringing some sophistication to the sales and marketing departments, which she says were run "like a $1 billion company, not a $9 billion company." Turner wanted to create systems that could measure the effectiveness of advertising and bring more customer focus and accountability to Nike's product-design and marketing programs. But her efforts, she says, "died on the vine." Turner says that three weeks after starting her job, she was advised by the head of global human resources, Jeffrey M. Cava, to resist making bold changes and instead "lay low and keep your head down." Cava, who left Nike June 1, says he does not recall that talk. And Knight, Turner says, urged her to "spend a lot more time with old-timers who know our brand."
In fairness, Nike has seen some success with its outside hires and some of its new products. Analysts give high marks to CFO Donald W. Blair, a former PepsiCo executive, as well as to newly promoted Americas Vice-President Mary Kate Buckley, a Walt Disney Co. veteran. Meanwhile, Nike's colorful slip-on Presto and $143-a-pair Shox lines have done well in recent rollouts, as have the reintroduced classic Air Jordans.
But Nike underplayed the importance of the shift three years ago from a white-shoe, athletic look to a more urban, brown-shoe trend--largely because of its long-held insistence on performance at the expense of fashion. That blunder left the door open for competitors such as New Balance Athletic Shoe Inc., which came out with a line of shoes that fed off the more muted, trail-look trend. Reebok (RBK) and such upstarts as And1 and Skechers (SKX) also have made inroads with flashy, well-priced shoes that trend-setting urban teenagers covet.
WRONG DIRECTION. Most glaringly, Nike has neglected the crucial "kill zone," the $60-to-$90-a-pair sneaker segment that analysts say makes up most domestic sales--and 50% to 60% of Nike's U.S. shoe sales. "They put too much emphasis on new technologies like Shox and lost market share in the midpriced arena," says Shawn Neville, president and CEO of Irving (Tex.)-based retailer Footaction USA. The result: a 15% drop in U.S. footwear sales for Nike's most recent quarter, while No. 2 shoemaker Reebok International Ltd. saw a 3.4% uptick. Privately held New Balance expects 25% growth in 2001, while analysts are forecasting that Nike's domestic footwear business will drop 6%.
Many observers blame those screwups on the Berm mentality. They attribute Nike's lousy record with acquisitions to the same mind-set. By passing on the chance to acquire bankrupt rival Converse Inc., analysts say the company lost a shot at penetrating low-end department stores with a well-known, less-expensive brand. When it has completed deals, Nike has had trouble integrating the new companies. After buying hockey-equipment maker Bauer Sports Inc., Nike insisted on putting out its own Nike brand of skates--thus cannibalizing the brand it had just bought. "At some point, they have to go outside the brand to grow the business," says John Horan, publisher of trade magazine Sporting Goods Intelligence.
The company says Knight will soon unveil detailed plans to boost Nike's anemic growth. With his competitors gaining, it might be time for Knight to start thinking outside the Berm. By Douglas Robson in San Mateo, Calif.