This article is written by Shraddha Vasanth pursuing Diploma in Business Laws for In-House Counsels from LawSikho.
Table of Contents
Shoes evoke a strong feeling in most of us, it brings various emotions associated with our favourite sport or favourite sportsman/ sportswoman or favourite team. Blend that with fashion and it’s a deadly combination. Many brands like Adidas, Nike, Reebok, Puma, Skechers have combined the two as part of their marketing DNA and what we have is huge sales for the brand and a much-coveted prized possession for the buyer. Behind all the glamour of the brand lie economics, market strategies, and financials.
This article aims to throw some insights into the nature of the market of the sports goods industry and how Nike functions in this environment.
In common parlance, a market is a place where goods and services are bought and sold. In economics, the market is not limited to one physical place where buyers and sellers meet, rather it is a concept where the exchange of goods and services takes place. This market is regulated by forces of demand and supply, and these, in turn, regulate the prices of the goods and services that are offered and purchased. This gives rise to competition among the sellers that are providing goods and services.
Economic theories categorize market conditions into 4 types;
- Perfect competition
- Imperfect competition
- Oligopoly
- Monopoly
Both perfect competition and monopoly technically, exist only in theory; what is real is an imperfect competition wherein there are multiple sellers and buyers, different kinds of goods and services, different pricing, different positioning, etc.
In between the multiple players and the single player, there exists a condition called ‘Oligopoly’; derived from the Greek words ‘Oligoi’ meaning few and ‘Pollien’ meaning to sell. Oligopoly, thus, is a market condition where there are very few players, typically, 3-5 large entities. These entities either compete or collaborate with each other to manipulate the forces of demand and supply as well as dictate prices. Such conditions, hence lead to unhealthy competition among the players as they are always up to grab the ever-shrinking market share. Such conditions also offer very limited choices to the customers/ buyers. The reality, however, is that they do exist. Some thriving examples of oligopoly market are branded sportswear and sports goods (Nike, Adidas, Puma, Under Armour), entertainment (Universal, Sony, Warner), e-commerce (Flipkart, Amazon), telecom (Reliance Jio, Airtel, Vodafone), airlines (Indigo, SpiceJet, Jet Airways, AirAsia), etc. And the sports goods industry is a case in point.
The sportswear and sports goods industry is dominated by very few global players, like Adidas, Nike, Fila, Puma, Champion, Wilson, etc. who clash in almost every market, thereby creating similar oligopolistic conditions globally.
We analyse the nature of business and strategies of Nike vis-à-vis the characteristics of an oligopolistic market. Some of the key features of an oligopoly are listed below.
1. Few players, each with a large market share
The sports goods industry has a handful of large multinational companies, mostly competing with each other in the world market and against some small players in each domestic market. Companies such as Adidas, Nike, Puma are the top brands today, with some others like VF Corp, Asics, Skechers, Lotto Sport, etc. in this segment. In India, there are local brands such as Nivia Sports, Sareen sports, Tyka, HRX, Vector X that take on these multinational brands, however, a lot of them are not as old and long-standing as Nike or Adidas.
It is also interesting to note that Nike operates in several markets in the sports goods space. Some of the key markets are:
- Sportswear i.e., track pants, t-shirts, jerseys, etc. for men, women, and kids, sports footwear.
- Footwear for men, women, and kids
- Sports equipment like bats, balls, gym bags, etc.
- Most of the above products can also be cross-classified into ‘trite’ and other general products; for example, footwear that is specific to a particular sport like skateboarding or skiing and the general ‘all-purpose’ wear shoes respectively.
The competition is severe in each of these segments as they are all different markets in their own rights. Couple that up with the different countries and that results in huge market potential. Right from its incorporation by Bill Bowerman and Philip Knight as Blue Ribbon Sports (BRS) in 1964, Nike has been a market leader in several of these segments and has had a market share of about 30%-40% (approx.). The biggest competition has mostly been Adidas. The 2 companies together have a concentration ratio (i.e., the size of the firm in relation to the market/ industry as a whole) of about 52.7% (as per 2011 reports in the athletic footwear segment). As of 2021, Nike Inc has a market share of 56.61% by total revenue.
With a rise in awareness about health and fitness the world over, the sports goods and sportswear industry are only growing. And with this growth, brands like Nike have an inherent advantage of market leadership for several decades. And these numbers only reiterate one of the biggest characteristics of an oligopoly.
2. High product differentiation
The next important feature of an oligopolistic market is that there is very high product differentiation, with each product showcasing its distinctiveness over the other. Moreover, oligopoly is not only about price, it also depends on marketing strategies, product diversification, product quality, innovation, cost reduction, etc.
As explained above, Nike operates in multiple sub-segments, thus, the number of products offered is vast. Nike’s product differentiation strategy for the sportswear and footwear segments has been to focus on the latest technology that produces clothes that allow the skin to breathe, footwear that reduces chances of injury, new devices that aid in exercise and fitness, air cushioning for shoes, etc. The branding message of Nike has been on personal excellence, aimed at inspiring people into health and fitness. Moreover, Nike is very actively promoting its brands on social media platforms and has various celebrities like Michael Jordan, Tiger Woods, Serena Williams, Michelle Wie, Gretchen Bleiler, etc. endorsing their various brands. This kind of research and positioning has added an emotional touch and made them a trusted brand for celebrities and common buyers alike.
On comparing that with Adidas, we see that they also have similar celebrity endorsem*nts, have a social media outreach, and a mission to be a leading sports brand. What’s important, however, is that both Nike and Adidas, and other brands in this segment have distinctive campaigns that create a uniqueness about them though the products are very similar, if not the same – another typical feature of oligopoly.
3. High entry barriers
Oligopolistic players thrive because of their massiveness, this poses a number of barriers to other new players even enter the market. Patents, brand loyalty, high setting up costs, funding, R&D costs, restricted distribution, order cancellation, etc. make it extremely difficult for smaller players to build a market presence and attract customers.
Nike and other such players have large funds at their disposal, which they easily deploy in engaging the most successful sports celebrities to endorse their brand. For instance, Nike had spent about $9.42 billion on endorsem*nts as of 2015; in fact, a lifetime deal was signed with LeBron James for about $1 billion and this is a huge departure from deals that lasted for a few years, especially in times of high performance from the sports stars.
Similarly, Puma had signed Kylie Jenner for $1 million, Adidas engaged Lionel Messi for about $27 million and Steph Curry was signed by Under Armour for $42 million, and so on. With deals like these, it is impossible for other players to penetrate the market. It also adds to the aura of the brand and results in higher sales.
Moreover, with increased sales, revenues are ploughed back to fund research and development (R&D) activities to create better product differentiation, diversification, and positioning in the market. All this adds up to entry barriers in the sportswear and sports goods industry.
4. Economies of scale
With large resources comes the advantages of economies of scale, which oligopolistic firms naturally benefit from. And the biggest benefit is that while the cost of the large firm reduces, it simultaneously increases costs for the other smaller players, resulting in dual benefits for the oligopolistic firm.
One of the biggest advantages that Nike reaped was from never manufacturing their products in the initial years. This enhances margins, lowers inventory costs, minimizes price fluctuations, and ensures on-time delivery. This was because Nike outsourced all their manufacturing to factories in Asia and other countries, where the cost of production and labour is low. Nike’s supply chain sources most of its raw materials locally, in the manufacturing country, which reduces the overall cost of production. This has also made Nike a pioneer in the manufacturing outsourcing space. Additionally, Nike has license agreements that allow third parties also to manufacture and sell Nike products, digital devices, and other sports equipment.
Apart from all these indirect sales, Nike has also been focusing on direct-to-customer sales and has recently also started its own manufacturing facilities. This also accounts for a large chunk of their revenues.
5. Fierce competition and combined market power
An oligopolistic market is a highly interdependent market, meaning all players react based on their assumption of how their competitor might react. This is called ‘Prisoners Dilemma’ in Game theory. This reduces the competitive power, to some extent, of all the players. At the same time, it also leads to similar marketing strategies, pricing, differentiation, etc. from all the players in the market, thereby increasing competition. And such manipulation also ensures that other competition is kept out.
It is often seen that Adidas and Nike hike or reduce their prices in a similar manner at almost the same time. Nike has about 643 products and Adidas about 2625 products, all following within the price range of Rs. 900/- to Rs. 36,000/-. Nike offers discounts of about 40% on some of its products and Adidas follows suit with a discount of about 60% on some of its products. Although the price range of the products and markets differ, the timing is almost always the same. For instance, when Adidas was going strong in 2017, Nike offered a 25% discount to leverage competition.
This creates a combined market power for these entities. The combined market share of Nike, Adidas, and Reebok in India is about 75% in India in 2015, meaning that they control 75% of the market, pricing, and entry.
6. High prices
Needless to say, that with such severe competition, pricing is literally dominated by a few large firms. However, every price reduction is carefully planned as any reduction by one firm is followed by a similar price reduction by competitors, and overall, the price of the products in the market itself reduces. This means a loss of value and revenue to all players.
Nike has hence, adopted various pricing strategies like value-based pricing, price leadership, premium pricing, etc., whereas Adidas has adopted a market skimming strategy. However, since both of them are premium brands, their prices are normally high. Moreover, as explained earlier, prices are always a result of market trends and competition. All these forces in turn create the cycle of power in favour of large firms in an oligopolistic market.
As explained above, oligopolistic conditions essentially tip the power in favour of the larger companies that, many times thrive because of practices such as price fixing, bid-rigging, market manipulation, etc. Such practices put small players at a risk of being altogether wiped out. To regulate such market conditions, curb these unhealthy and unethical practices and protect the rights of consumers, most countries have formulated anti-trust laws, for instance, the US has formulated the Sherman Antitrust Act, 1890, Federal Trade Commission Act, etc., UK has passed the Competition Act 1998 and the Enterprise Act 2002 and India too has passed the Competition Act, 2002.
Anti-trust or anti-competition laws, across the world, broadly regulate the following practices
- Bid rigging: This is a practice wherein parties ‘bid’ to choose who will win a particular contract. More often than not, companies who indulge in such practices operate as a cartel and deliberately lose contracts such that the other company wins; and this process goes on with each company in the cartel winning at a particular time.
- Price fixing: This situation occurs when a company or a group of companies fix the prices internally rather than allowing the prices to be determined by market forces. This practice is followed to enhance profits.
- Market allocation: This is a practice wherein 2 or more parties allocate specific geographic territories or certain specific customers among themselves. The deal is that the parties do not interfere in each other’s markets, thereby creating a regional monopoly.
- Horizontal and vertical mergers, exclusive supply agreements, etc. are also regulated by anti-trust laws.
The role played by the Competition Act, 2002 in India
- Cartelization and anti-competitive agreements: Cartels are a group of independent market participants who collude with each other in order to dominate the market. This is typically done by entering into various horizontal and vertical agreements like price-fixing agreements, market sharing agreements, agreements relating to supply chain, etc. Agreements between/ amongst competitors called horizontal agreements and agreements between enterprises or persons at different stages or levels of the production chain are called vertical agreements and are collectively regulated under Section 3 of the Act.
- Abuse of dominant position: Dominant position is defined as a position of strength that an entity enjoys, which in turn enables it to override competition and/ or control market forces. This is regulated under Section 4 of the Act.
- Combinations: This refers to mergers and amalgamations, both horizontal and vertical. It also includes the acquisition of control over entities that might result in an unfair advantage to the acquirer. All these are regulated under Section 5 of the Act.
Since Nike is predominantly oligopolistic, it has not escaped the purview of anti-competition laws. In fact, Nike has been heavily penalized in various jurisdictions for indulging in unfair trade practices. Some instances are:
- In 2019, Nike was fined a whopping $ 12.5 million for breach of European Union competition laws for illegally restricting traders from selling licensed merchandise, both cross border as well as online, for 13 years].
- The Chinese Competition Agency fined Nike for imposing price-related restrictions and excessive pricing of basketball shoes.
- Nike has also been fined for unduly restricting competition in sports shoe distribution by the French Council for fair competition.
Nike has consolidated its position due to its sheer size and resources. These resources are invariably used in high-end celebrity endorsem*nts, product differentiation and diversification, R&D activities, heavy marketing, and positioning the brand among its competitors, which naturally result in higher turnover, thereby creating high entry barriers to other smaller players. Thus, market conditions dictate the strategies of an entity operating therein. And as seen above, entities, strategies, and practices adopted by Nike and its competitors contribute to creating market conditions. These factors have made Nike one of the largest oligopolistic companies in the world! The flip side of this is that they have come under the purview of various anti-trust laws and have been heavily penalized as well.
All said and done, the ongoing COVID-19 pandemic has hit the entire world and Nike is no exception! The revenues of the company had dropped by about 11% in North America and the company had to shut down about 45% of its stores in the Middle East and Europe. However, the good news is that the company’s online sales have increased by 59%. With the pandemic related restrictions easing out in some parts of the world, the company can expect better growth in the coming quarters. Nike is currently focused on transforming three core areas of business – innovation, the supply chain, and the marketplace. On the innovation front, the company has added new materials like VaporFly 4% carbon fiber plate and ZoomX foam to its sportswear line. The company is also looking at increasing sales through more direct sales, both online and offline modes, and more personalisations and memberships. For the supply chain, the company is looking at setting up manufacturing units closer to markets, better outsourcing partners, and automation.
With the expertise and innovation of over half a century, Nike will surely remain true to the tagline and ‘Just do it’ all to conquer the markets once again!
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