Covid-19 pandemic completely upended retail, causing a huge pivot online as stores closed all over the world. With physical retail in shambles, online growth accelerated as an alternative. Because of this, the last two years saw an increase in online shopping and changing consumer habits. To reap the benefits of this shift, brands and retailers have also reacted by pivoting their business models.
Brands are prioritising digital commerce and accelerating direct-to-consumer (DTC) to deliver seamless omnichannel experiences, which they have more control over on their own channel. For the activewear market, this means changing from a largely wholesale business model to focus on its DTC efforts.
The likes of Nike and Adidas have built empires out of the wholesale business model and the majority of their revenues today still come from selling to retailers.However, DTC sales offer higher margins. This is why so many DTC startups have cropped up in recent years- most of them with a digital-first mindset. DTC is a profitable business model and brand can grow faster digitally.
A brand like Nike that wants even more control over how it is represented as well as more profits, can grow faster through its own channels. Since 2020, Nike adopted a radical DTC strategy - cutting ties with multi-brand retailers like Amazon and Foot Locker.At the same time, Nike is growing its ecosystem and strengthening omnichannel capabilities.
Nike isn't the only brand that figured out the benefits of selling directly to consumers. After increasing DTC sales to 40% in 2020, Adidas announced its objective for DTC to make up 50% of its sales by 2025. The sportswear giant plans on stepping back from wholesale to prioritise strategic partnerships.
It’s clear that industry leaders are prioritising DTC, which means that other activewear brands will follow down the same path in search of higher margins. But how does this shift affect marketplace performance? After all, Adidas andNike still do over 60% of their business through wholesale partners.
We analysed Adidas and Nike’s strategies and performances in their DTC channels vs. marketplaces to uncover:
1. Sell-out performance
2. Assortment mix
3. Pricing & discounting strategies
DTC’s Steady Growth
The rising popularity of exercising and e-commerce during the Covid-19 pandemic accelerated the activewear market's growth. Brands have more control over DTC operations and strategies, which can help them elevate the customer experience.And for sportswear giants like Adidas and Nike, who already have strong brand presence, it’s even easier to drive higher margins.
Adidas reported that its profit increased 166% in 2021 by lowering operating costs and improving margins. This is in line with our findings on Adidas’s performance in the US on its own retail channel. The company saw an increase in its sell-out rate by 5% from 2020 as shown in Chart 1.
As for Nike, there was a drop in sell-out performance last year as the company grappled with supply chain setbacks. In September 2021, Nike lowered its sale forecast as factory closures in Vietnam due to Covid-19 meant that Nike would not be able to produce enough merchandise to meet consumer demand. This was reflected in Nike’s DTC performance in the US as the sell-out rate dropped by 3% YoY to71%.
When it comes to launching collaborations or special drops, Adidas and Nike take a different approach. Adidas reserves most of its collaborations for its wholesale market. Collaborations with Ivy Park, Stella McCartney, Prada, Alexander Wang and Wales Bonner were only listed on Nordstrom in the US and not on Adidas’s own channel. This is a good strategy for the brand to tap into the audience on Nordstrom who are loyal customers of the brands Adidas is collaborating with. These collaborations also have stronger fashion elements, which suits the demand of Nordstrom customers than customers on Adidas or JD Sports.
Meanwhile, Nike relies on strong branding for its collaborations. The brand launches its collaborations almost exclusively on DTC channel. As the biggest sportswear brand in the market, Nike is able to draw in customers without relying on its collaborator’s brand presence. This is proven as Nike collaborations such as Nike x MMW and Nike x Sacai are only found on aftermarket reseller sites like Stadium Goods and Stock X. Nike’s strategy benefits the brand by creating exclusivity and help to further grow its market share.
Brands typically employ different strategies for its DTC platform and wholesale. Every platform has its own audience who are looking for something different than on other platforms. For this reason, the difference in top categories are expected between the two channels.
Overall, the sell-out rates for most of the key categories are higher on Adidas DTC. Active Shorts, Shoes and Outerwear are the top categories on this channel. On marketplaces, Active Shorts remain as the top performing category, followed by Active Tops & T-Shirts and Shoes.
Nike’s category performance also differed between platforms. The sell-out rates for the key categories are much higher on marketplaces than on its own channel, as seen for Active Tops & T-shirts and Shorts. The top categories for Nike DTC are Active Outerwear, Tops & T-shirts and Shoes. But on marketplaces, Nike’s Active Tops & T-shirts reign supreme, followed by Shorts and Outerwear were the top three categories.
Markdowns are part and parcel of retail - especially in the digital landscape. While discounts are inevitable, brands can still protect their margins by being tactical and giving offers strategically.
Adidas offers varying discount depths depending on the channel. On its own retail platform, the majority of Adidas products are discounted at 20-29% off. However, there are more SKUs in the deeper discount brackets on Nordstrom, from 30-49% off. This way, Adidas can entice customers to purchase across multiple platforms, as there are both deep and shallow discounts.
Compared to Adidas, Nike’s products have conservative markdowns across all channels, but especially on its own platform as there are minimal SKUs discounted at more than 39% off. By reserving more aggressive markdowns for external channels, Nike is able to minimise discount fatigue on its DTC platform while maximising margins.
