Can Nike Do It?

The sneaker maker's new CEO laid out an ambitious plan to boost revenues 50% over the next five years. Some wonder whether he's pushing too hard

Nike (NKE) never lacks for boldness. The Beaverton (Ore.) sneaker goliath recently offered the German National Soccer Federation $778 million to sponsor its national soccer team for 10 years in an audacious move to rattle its German rival Adidas and longtime sponsor of the German team. Nike's new chief executive, Mark Parker, upped the boldness quotient again on Feb. 6, when he outlined an ambitious plan to grow revenues by $8 billion in five years.

In his first major initiative since inheriting the top spot in January, 2006, Parker explained to investors at Nike's annual analyst conference how the company aims to grow to $23 billion in revenue by 2011. The comprehensive long-term strategy calls for reshaping the management structure; redefining Nike's relationship with its fast-changing, digitally driven consumer; and adding 100 new company stores worldwide in three years. "We're fundamentally changing the way we organize the company," Parker said. "Nike is as hungry and as driven as we've ever been before and becoming more focused and more competitive."

While analysts and investors applauded much of Nike's new strategy, some questioned whether the company could actually do it. After all, revenues would need to rise 53% over five years, or average about 9% a year, to reach the target of $23 billion. It's going to be challenging to achieve $8 billion in new sales without turning around slumping sales in Europe, Japan, and the U.S. basketball market—a crucial $3 billion to $3.5 billion market segment.

"I think it's going to be tough for them," said John Shanley, financial analyst for Susquehanna Financial. "Basketball, for example, is shrinking in terms of sales. They have 96% of the market share in the $100 or more price point. How do you get high single-digit growth when you already have more than 96% of the market?"

Focus on Retail

Nike executives fell short in offering specific details to some of these questions and focused more on painting a broader picture of the new strategy. They stressed a multipronged approach that includes reorganizing the Nike brand into six main athletic divisions—running, basketball, soccer, women's fitness, men's training, and sport culture—that are expected to generate 75% of the brand's growth. The company had previously divided the brand into three segments: footwear, apparel, and equipment.

Growth is also expected to come from emerging markets and potential acquisitions. But Nike Brand President Charlie Denson said the company can reach the $23 billion target without new acquisitions. As for new markets, China is expected to become Nike's second biggest market behind the U.S., potentially chalking up $1 billion in sales, and Nike's India business has grown 40% since last year thanks in part to its efforts in cricket. Nike executives also said they plan to invest aggressively in other potential billion-dollar markets—such as Russia, India, and Brazil.

Clearly, Nike's efforts to add new retail stores and "elevate" its partnership with existing retailers is a big part of its new strategy. This effort comes at a time of sluggish sales from some of its biggest retailers—mall-based chains Foot Locker (FL) and Finish Line (FINL). Nike executives said the company plans to grow its direct-to-retail business to 15% of total sales, or $3.5 billion, from 12% today. The segment includes its own stores, factory outlets, and an e-commerce division, which executives expect to see a significant increase in revenues over the next five years. For the planned retail investment, Nike will increase capital spending to $475 million annually, up from just under $400 million, Nike said. Gary DeStefano, president of Nike's global operations, stressed its retail goal is to make Nike a better retail partner: "This is not about Nike vs. the retailers," he said. "This is a partnership. We believe this could be a growth strategy."

Meeting Consumers Where They Live

But probably Nike's boldest bet is on the consumer. In the eyes of Parker, this new and evolving digitally driven consumer is reshaping the retailing landscape. The power is now in the consumer's hands, and Parker believes Nike and other consumer brand companies need to adjust to the new market dynamics. "Consumers have never held as much power as they do today," Parker said. "And clearly the power has shifted to consumers."

Nike's Denson said this fundamental shift can be captured in the way the company studies its consumer profiles. In the past, managers used to consider 18- and 22-year-olds as part of the same demographic target. Now he says they are treated as separate and distinct markets when it comes to age, interests, and tastes. "We spent the last 30 years trying to bundle things, and now it's almost the reverse and we have to unbundle things," Denson said, explaining Nike's new efforts to tailor products to individual consumers.

Despite these fundamental changes in how Nike approaches its customers and its reshaped management structure, some things never change. Nike remains its audacious self and competitive juices still run strong. It still has goals to dominate markets where it is not already No. 1, and it's redoubling efforts to unseat rival Adidas as the world's top supplier of soccer shoes and apparel.

Its recent bid to sponsor the German national team is part of its 2010 goal to "dominant the football brand," said Nike marketing vice-president Trevor Edwards. "We believe it's time to create separation. This is not a game of chicken." Some things never change.

Before it's here, it's on the Bloomberg Terminal.