Nike - Living in a Variable Expense World

Nike is a famous global athletic brand. The story of early Nike is perhaps best captured in the 2016 memoir, Shoe Dog, written by co-founder Phil Knight. In a 2022 podcast with Bill Brewster, retail analyst Simeon Siegel had the following to say about the company:

A bunch of years ago, we published a report called Deconstructing an Athletic P&L, and the conclusion was that athletic P&Ls are variable. So before COVID, before eCommerce, we just found out that if you’re Nike, Adidas, Puma, Under Armour — if you’re an athletic business, you have a 10 to 12% sales on marketing spend. I don’t remember the exact percentage, but they aligned. And it was mind blowing. Why would Nike and Under Armour, which at the time were 8x apart in terms of revenues, why would they have the same opex structure as a percent of sales? (emphasis added). That flies in the face of everything you and I learned. That as you build a business, you scale and you get margin (improvement). And so initially, that made me very negative on Nike. So my gut reaction was, that’s really bad because you’re never going to get margin — and by the way, up until now they (Nike) haven’t — but then what I realised was, no actually, that’s really negative for Under Armour. And this was what prompted the Under Armour sell (rating) before I started digging in. Because if you live in a variable expense world, the best thing you can be is the largest (emphasis added).

And so I try to be intellectually honest. Any single client that calls me and asks me about Nike, I have to suspend intellectual honesty for a second and just tell you that their size and scale is their competitive advantage. No one can compete on R&D, no one can compete on advertising and because of that I’m never going to be able to justify their PEG (Price/Earnings-to-Growth) ratio ever again. But you can either fight that or you can internalise that it’s expensive for a reason.

In a separate Wall Street Journal article on Under Armour, Mr Siegel notes:

(...) athletic brands are dominated by variable costs such as sponsorship and marketing. That means these companies must continue to spend in order to grow, and Nike’s superior marketing budget gives it a built-in advantage (emphasis added).

It's tempting to think that scale advantages only occur when there’s a unit production cost advantage. But if Siegel is right, then the structure of the athletic apparel market forces players to spend for brand growth, and the player with the largest advantage in this game is the one with the scale advantage — that is, the one with the most cash.


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