Why NIke stumbled

The Wall Street Journal reported recently that Nike’s digital strategy to sell more sneakers online rather than in stores has been unsuccessful. “Since the pandemic, Nike has lost ground in its critical running category while it focused on pumping out old hits and preparing for an e-commerce revolution that never came.” During Covid, Nike cut its ties to long-time retail partners such as DSW and Urban Outfitters but is now asking them to renew their business partnerships. 

The history in brief: During COVID-19, Nike’s digital commerce accounted for 30% of its sales revenue. The CEO, Joh Donahoe, once the successful CEO of eBay, “redoubled the company’s bet that it could make more money by selling products directly to consumers through its stores and digital channels.” He said he believed digital sales would reach 50% of the business, and Nike should transform faster to define the future marketplace. It was time to act. By late 2020 it had dropped about 1/3 of its sales partners. The market was not kind. Instead of boosting revenue, the strategy led to stalled sales and a 24% decline in the company’s share price. 

Donahoe’s strategy is textbook economics. Why not cut out the middleman, build a direct relationship with the customers, and garner all the data and insights you can from their online purchasing behavior? Sensible? Maybe not. After all, this concept is based on an underlying assumption that the in-store shopping experience is burdensome, entailing high transaction costs that customers will willingly forgo. After all, doesn’t convenience always win? But stating it this baldly raises a competing idea. There are times when customers value their shopping experiences greatly. They can be journeys filled with surprises while allowing shoppers to test who they are in playful ways. They can ask without taking undue risks, “who am I really?” Customers will pay for this. experience. 

 Now, I am not a sneaker shopper, but I love books. Yes, I buy Kindle books. But going to a bookstore is entirely different. When I roam the shelves, I am awe-struck by the abundance of possibilities and the universe of knowledge it represents. I will approach the Math shelves with anticipation, knowing that I could never read many books on the shelf. But when I take one the shelf, read its table of contents, and rifle its pages, I identify with the genius who wrote it and fantasize that, with sufficient work, I could understand it. It transports me. I always buy something, knowing I have no more room for one more book in my study.

I can imagine that people have just this experience when they shop for sneakers, especially when famous athletes endorse them. Moreover, I can’t help but imagine that some younger men who experience the sneaker as a symbol enjoy going to a store together to demonstrate to each other their mastery of the “genre,” their understanding of sneaker “history,” and which brands dominated the market when. In this instance, the shopping experience is social, in the same way that women have always enjoyed shopping for clothes together. 

Nike has an insights and data analytics team, which helps them understand the customer’s psychology. But the title “analytics” is worrisome. The only way to understand the arc of the customer shopping journey is to hang out with them as an anthropologist would. You need research in the field to understand the customers’ feelings. This data is qualitative, not quantitative. Indeed, using the Insight Team’s data, Nike executives overestimated the demand for its “retro franchises” or older sneaker brands. The data was off. I grant you, dear reader, that what I have written is speculative. But it’s supported by two other features of Nike’s recent history, seemingly unrelated, but at second glance connected. Hear me out on this. 

 In the wake of George Floyd’s killing, Donahoe led a commendable and necessary effort to increase the number of black and minority executives in Nike’s ranks. However, DEI, while necessary, can lead executives to focus too inwardly. Executives start seeing the company itself, rather than its business, as an object to be perfected. When this happens, DEI programs lose their pragmatic edge and become moral undertakings. As Donahoe wrote to employees soon after George Floyd’s murder, “Nike needs to be better than society as a whole. Our aspiration is to be a leader.” When the organization is moralized in this way, executives imagine that their work is perfecting the company rather than anticipating customers’ desires. They project onto DEI the impulse to perfect themselves. And unfortunately, this sets up DEI to fail. My hypothesis: This inward turn dulled executives’ passion for understanding and satisfying their customers, leading them to privilege acquiring data rather than understanding experience.

A leader’s character influences the organization’s important decisions. My second argument is that Donahoe’s self-concept contributed to this inward turn. Consider the following. He has disciplined health practices. He reports, “I wake up at 5:45 every weekday morning. The first thing I drink 33 ounces of water and two cups of coffee, and then I stretch using the Hyperice Hypervolt [a massage recovery device]. I meditate for 10 minutes and then I have a Nike personal trainer—his name’s JC Cook. I work out from 7 to 8, four mornings a week with him. On sleep, “I target getting seven-plus hours a night. Sometimes that’s unrealistic, so I target getting 70 hours every 10 days.” He also gives his mind a “workout,” as he terms it, by engaging in mindfulness exercises focused on “appreciating the good things in life.” He has a spiritual advisor he met at a Buddhist retreat the year he stepped down from a seven-year run as the head of E-Bay. He has also, uncommonly, “established his board of personal directors—trusted friends he turns to for advice.” 

There are two ways to interpret these facts. First, following our common sense, we could say that Donahoe is simply protecting his well-being. Perhaps his seven-year run at E-Bay was exhausting. He is 64. He understands is aging makes him more vulnerable. As he notes, “Earlier in my career, I told myself I don’t really need that much sleep. And the reality is sleep’s really important.” 

Alternatively, and this is the explanation I favor, Donahoe is building a program of self-improvement and fortification, perhaps because he is 64, and this leads him to be self-absorbed. Just as Nike, the company, became the object of its own preoccupation, Donahoe has turned himself into a project. One indirect support for this hypothesis is that Donahoe emphasizes his role as a “servant leader.” As he reports, “I’m an advocate of servant leadership. When I understand that everything I’m doing is in service to a purpose, in service to others….My leadership role models have always been head coaches—you think about Phil Jackson, Coach K [Mike Krzyzewski], John Thompson, Tara [VanDerveer], who just won the NCAA [women’s basketball] championship—they’re leaders that lead from almost behind, serving their players, serving their programs, serving a broader cause.” 

 As Scott Mautz argues, servant leadership creates risks. Among them, the leader does not establish her executive presence, nor use the chain of command as a lever to achieve results, identify a goal she believes in, and persuade others to follow her. After all, while coaches are not players, executives are. Donahoe, however, has been a successful executive. As CEO of eBay, he doubled the e-commerce platform’s revenue during a seven-year stint that ended in 2015. My psychodynamic hypothesis: he understands subliminally that his focus on his well-being is potentially too self-absorbing. He needs to balance the attention he gives himself with an equally vigorous focus on what his subordinates need. Without this, he would feel guilty about neglecting them. But this has three untoward results. First, he moralizes his own leadership. Second, he doesn’t risk taking a stand on how to create value. Third, he treats his subordinates as his customers, and his customers as his subordinates; the first group to be elevated, the second to be downgraded. He turns inward. It is indisputable that Nike misunderstood its customers. The questions are what they failed to understand and why. My three hypotheses; dear reader: They did not understand shopping as a journey. Instead, they imagined the customer as a transaction, a data point. Second, Donahoe and the top executives turned inward. They projected onto DEI the fantasy that Nike could be a perfect organization. Third, Donahoe has a project to improve himself. He took the servant leadership role to compensate for this self-absorption, which further distanced him from customers, reinforcing the inward turn.

 For the reader interested in the dynamics of moralization, see my The Fall of Howell Raines and the New York Times