Nike Should Be the Next Luxury Fashion House

(Bloomberg Opinion) -- Nike Inc. is so on trend right now.

By making its hottest sneakers harder to find, it's on its way to becoming more a top-end name, like Gucci or Louis Vuitton, than a mainstream product. That's of immense value to both the sportswear giant's brand equity and its profits. And with American luxury on a tear, it's a strategy the company should take even further.

The pivot has not been so good for Foot Locker Inc., which has lost about a quarter of its market value since revealing it would receive a slimmer supply of Nike's most in-demand styles. On Friday, Foot Locker said that no single vendor — Nike is its largest supplier — would account for more than 60% of the chain's total purchases this year, down from 70% in fiscal 2021 and 75% in the year earlier. Foot Locker shares then fell the most in four decades, although they recovered slightly on Monday.

But for Nike, this is part of a broader shift away from selling through third-party retailers. Reaching customers instead through channels that it controls is more profitable, because it gives Nike greater power over its pricing and its image. If the company's stores, website or app are the only places selling a particular sneaker, then there's no risk that it might be available somewhere else at a discount. Markdowns damage not only profits but also, crucially, the Nike brand's standing in the market.

Selling through its own channels also enables Nike to forge closer relationships with its customers, generating valuable data, which is something that grows even more useful as products that are tailored to individual customers — from sneakers in specially chosen colors to bags emblazoned with the buyer's name — become more important.

In deciding to sell more of its products directly, Nike is following in the footsteps of luxury brands that have, for example, stopped supplying certain department stores that they no longer consider to be upmarket enough. This keeps their own pricing power and brand cachet intact.

Luxury adviser Mario Ortelli estimates that for multi-billion-dollar luxury brands, direct-to-consumer channels account for more than 90% of sales, on average. For Nike, the share is nearing 40% and could reach 60% by 2025.

That's a worry for Foot Locker and other retail partners such as Dick's Sporting Goods Inc. and Europe's JD Sports Fashion Plc. But for Nike it's an opportunity. The U.S. luxury market is on fire right now, fueled by a new generation of buyers, flush — until recently at least — with stock market and crypto gains.

Nike could take more pages from the luxury playbook. While it will always be partly a mainstream retailer, it could sell more aspirational, and expensive, sneakers and apparel at the top end of its range. Demand for the luxury brands' own casual footwear collections — popular with those young buyers — demonstrates that there is ample room to do this.

Even more limited-edition pieces would increase the allure of the Nike name. In a virtuous circle, this should enable the company to forge more collaborations with the luxury houses. Nike's Jordan brand has already partnered with LVMH Moet Hennessy Louis Vuitton SE's Christian Dior, while late Louis Vuitton menswear creative director Virgil Abloh created new versions of Nike's Air Force One.

And Nike may have other moves of its own. The company was reported to be eyeing Peloton, a company that, for all its recent troubles, operates in the luxury home fitness space.

Foot Locker, for its part, will have to figure out how to fill the gap as its Nike inventory shrinks — not an easy task. There may be one silver lining: The retailer is getting exclusive access to Reebok's basketball footwear. If Authentic Brands Group Inc. succeeds in reviving Reebok, this could be beneficial to sales and profit.

Nike has already made one smart move. Its challenge now is to make a more dramatic shift toward becoming a luxury house. 

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

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