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TERM PAPER ON NIKE

TERM PAPER ON NIKE

Term Paper of Brand Management


ON

“Nike Brand equity & Marketing


Planning”

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Submitted to: Submitted by:


Lect. Dr. Bharat Ahuja Vikrant Kumar,
MBA(Int. Expo.)
Reg no. 10900372

NIKE INTRODUCTION:

Nike, Inc. is a major publicly traded sportswear and equipment supplier based in the United States. The company
is headquartered in the Portland metropolitan area of Oregon,near Beaverton. It is the world's leading supplier of
athletic shoes and apparel and a majormanufacturer of sports equipment with revenue in excess of $16 billion
USD in 2007. As of2008, it employed over 30,000 people world-wide. Nike and Precision Castparts are the
onlyFortune 500 companies headquartered in the state of Oregon.

The company was founded in 1962 as Blue Ribbon Sports by Bill Bowerman and PhilipKnight, and officially
became Nike, Inc. in 1978. The company takes its name from Nike, theGreek goddess of victory. Nike markets
its products under its own brand as well as Nike Golf,Nike Pro, Nike+, Air Jordan, Nike Skateboarding, Team
Starter, and subsidiaries including ColeHaan, Hurley International, Umbro and Converse. Nike also owned Bauer
Hockey (laterrenamed Nike Bauer) between 1995 and 2008. In addition to manufacturing sportswear
andequipment, the company operates retail stores under the name Niketown. Nike sponsors manyhigh profile
athletes and sports teams around the world, with the highly recognized trademarksof "Just do it" and the Swoosh
logo.

MISSION: To bring inspiration and innovation to every athlete in the world.

VISION: Innovate for better world.

Unleashing potential through sport. In the last two years, Nike has invested $100 million worldwide in
community-based sports initiatives. By 2011, NIKE is expected to invest another$315 million. These
investments will be used to give excluded youth around the world thechance to play because as access to sport
can enhance their lives.

Nike will provide products, resurface playing fields, support community-basedprograms, and help young people
create their own communities. This is all will be the NIKE “LetMe Play commitment.”

Three core values of the company arehonesty, com petitiveness, and tea m work.Despite its size, Nike operates
with a minimum of hierarchy. As a result, there is a lot ofcollaboration and consensus decision-making.
Commonly held values are imperative in such amatrix organization.

NIKE’S PRESENCE IN INDIA :

NIKE has been present in India from 1996 and headquartered in Bengaluru. India is a cricket crazy nation, NIKE
understood the importance of cricket and in December 2005, it tiedup with coaching schools like the BCCI's
National Cricket Academy. Now NIKE became official kitsponsor for BCCI Indian Cricket Team.

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By paying Rs.196 Crores (Rs. 1.6 Bn) to BCCI, NIKE wrested the rights to become the kitsponsor upto 2011.
The first "Just Do It" cricket ad also made its appearance during the Champions Trophy."
We want to look at what drives the passion for cricket in India. We aim to connect
Emotionally with our customers," - Sanjay Gangopadhyay,marketing director, Nike India.

Target Market :

1 Nike is targeting young people in India.

2 Paying attention to other popular games in India.

3 Partnership with the All India Football Federation in March 2006.

4 Signed on India's leading football star Bhaichung Bhutia

5 Entered into a deal with Bhupathi Tennis Academy

The target market of NIKE is the urban youth with the brand proposition competition to

lifestyle.

The principle consumption centres namely the metros are also a potential target market.

TYPES OF OWNERSHIP :

1.Licens ing
2.Franchising
3.Own Subsidiary

MARKET SEGMENTS

Geographic segmentation

Density: Urban and semi-urban cities

Demographic segmentation

1. Age: 15 to 35
2. Income level: >Rs. 15,000
3. Social class: Upper middle, lower upper and upper class
4. Gender: Male and female

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Customer Profile :

1 Athletes
2 Gym regulars
3 Sports enthusiasts
4 Brand freaks
5 Image seekers

Segmentation, Targeting and Positioningof Nike

Nike has been in the market for a long period now. Thus it has already sought out the STP

analysis that it would use to promote and sell its products.

Market Segments:

The market segments that Nike can mainly differentiate are high, medium and low end
customers with varying income levels. Thus, Nike needs to segment on various fronts such as
economic, demographic, geographical differentiations.

Economic segmentation:

High, medium and low income levels that can be clubbed with there lifestyles of high, medium

and low end customers.

Demographic segmentation:

The company can segment the market into age, gender and class segments.

Geographical segmentation:

The company can segment the market into segments of north, west, east and south.

Target Market:

The company needs to target the market as per the brand image and equity in different
markets. Thus, the company has targeted the market of high-end, high income level between
the age of 16- 55 with a pan India location. Thus the market segment it is targeting is quite
essential to differentiate itself from its competitors i.e. Reebok, Puma, Fila and local brands like
Bata.

Positioning:

The brand Nike has positioned itself in the minds of the consumer as a high-end product which
is quite costly but gives the value for money with its service, quality and designs. All this
analysis provides Nike with the customer satisfaction and thus loyalty that it needs to achieve
high volumes and profitability.

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Sportswear major Nike is way ahead in the race for leadership in sportswear. It shot to a40 per cent share of the
US sportswear market -- the biggest in the world -- which gives it a leadin the global market, even though Adidas
leads in Europe.

But the head start hasn't helped the global sports brand in the Indian market so far. Andthat's despite the huge
brand awareness the brand enjoyed in India even before it set up shophere in 1996.

According to retail consultancy KSA Technopak, while Reebok has a 45 per cent share,Adidas has 30 per cent
and Nike accounts for just 25 per cent of the Rs 375-400 crore brandedsportswear market.

The biggest hurdles for Nike in India were its entrymodel and its lack of aggression. When the global sports
majors entered the Indian market in1995-96, government policy dictated that they had to have a local partner.

Nike agreed to an exclusive distribution agreement with a Delhi-based trading firmSierra, in early 1996; Adidas
signed up a licensing agreement with Bata for retailing at its hugenetwork of stores; only Reebok entered India as
a subsidiary with a 20 per cent equity stake byPhoenix, a distribution and trading firm and Reebok's distribution
partner.

Financial Information :

Revenue : US$19.2 billion (FY 2009)

Operating Income : US$1.87 billion (FY 2009)

Net Income : US$1.49 billion (FY 2009)

Total Equity :US$8.69 billion (FY 2009)

Employees : 30,200 (2008)

NIKE Supply Chain :

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Nike has contracted with more than 700 shops around the world and has offices located in 45countries outside
the United States.Most of the factories are located in Asia, including Indonesia,China, Taiwan, India, Thailand,
Vietnam, Pakistan, Philippines, and Malaysia.

Nike Brands

Cole Haan: based in Maine, sells dress and casual footwear and accessories for men and women under the brand
names of Cole Haan, g Series, and Bragano.

Nike Bauer Hockey, based in New Hampshire, manufactures and distributes hockey ice skates, apparel and
equipment, as well as equipment for in-line skating, and street and roller hockey.

Hurley International, based in California, designs and distributes a line of action sports apparel for surfing,
skateboarding and snowboarding, and youth lifestyle apparel and footwear.

Converse, based in Massachusetts, designs and distributes athletic and casual footwear, apparel, and accessories.

Competetor Marketing
•One of Adidas biggest Marketing schemes was to merge with Reebok to compete with the powerhouse Nike.
•The Germany-based global power announced a $3.8 billion deal to buy Canton, Mass.-based
Reebok, uniting two of the world's top sports companies and creating a much stronger challenge to Nike,
particularly on the global giant's home turf: the prime North American market that accounts for about half of the
category's sales worldwide.

Implementation Actions:

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• Women:
1 Open 25 specific stores specialized only for women.
2 Increase R&D expenses by 7% in women products.
3 Increase Marketing expenses by 10%, designing a specific campaign for women using female endorsements.
4 Create a new logo for women market which would be associated with fashion trends and introduce new
products.
• Kids:
1 Increase R&D expenses by 7% in kids products.
2 Increase Marketing expenses by 10%, designing a specific campaign for kids.
3 Introduce more soccer and basketball products targeting potential youth market.
• Research in international market to find out what are the new trends related with women and kids products
(Long-term).

REASONS TO BUY

1 With a market cap of nearly $32 billion, Nike is the industry leader by a stretch in the U.S. footwear
and athletic apparel industry. Furthermore, a strong portfolio of globally recognized brands, including
Nike, Cole Haan, Converse, Chuck Taylor, Hurley and Umbro provides a competitive advantage to
the company and bolsters its dominant position in the market.

2 In an effort to achieve its long-term sales target of $23 billion by fiscal 2011, Nike recently executed
a restructuring plan, which reorganized its geographic segments, slashed management layers, and
enhanced customer focus. Moreover, in order to reduce its operating costs, the company has
retrenched about 5% of its 35,000-strong global workforce.

3 Nike s business strategy is focused towards technical innovation, which acts as a key differentiating
factor in an industry characterized by rapid changes in customer preferences and technology. The
company employs specialists in the areas of biomechanics, chemistry, exercise physiology,
engineering and industrial design to drive in-house research and development efforts. Moreover,
Nike s advisory boards consist of athletes, coaches, trainers, equipment managers, orthopedists and
other experts, who provide valuable inputs for continuous product development in line with the latest
trends.

4 The company has a strong balance sheet with cash and equivalents of $2.04 billion and long-term
debt of only $459.6 million at the end of fiscal 2010 second quarter, which offers Nike the financial
flexibility to drive future growth.

Nike Gambles its Brand Equity with New Tiger Woods


The commercial is very different from any Nike commercial I had ever seen before. Gone were the elements of
athleticism, innovation, and energy and replaced with simplicity and stoicism.

If you fall into that group of people you may have seen, or most certainly will see, the new Nike commercial featuring
Tiger. In my mind, this commercial is perhaps the most shocking aspect of Woods's return to golf.

probably use words like sporty, energetic, sleek, innovative, and motivating. I think we all can agree on the
fact that Nike has built itself on those attributes. Your perception of Nike's image has been reinforced by the
company's very calculated advertisement strategies and perhaps your own experience with its products.

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Earnings NIKE

EPS (ttm) 3.97

as % of price 4.89%

P/E 20.43

MRQ 559,000,000.00

MRQ annualized 2,236,000,000.0


0

% of Market cap 5.7%

Op. Income/equity 23.1%

MRQ EPS 1.14

Annualized 4.56

% share price 5.6%

Owners Equity

Owners Equity 9,660,000,000.00

2006 6,286,000,000.00

2007 12% 7,026,000,000.00

2008 11% 7,826,000,000.00

2009 11% 8,693,000,000.00

'Q3 '10 12% 9,754,000,000.00

Proj. 12 mo. 10,886,491,845.46

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Avg 12%

w/ div. 13%

Proj. BV 1 yr 22.68

Oct 28 Prem. 91.41

Nike Equity Analysis

Portfolio Suitability: In the last three years, Nike’s correlation to consumer discretionary sector is at 0.01. In
simple terms, for the last three years, Nike’s stock doesn’t have any relation to the movement of consumer
discretionary sector. So, even though Nike is considered to be a consumer discretionary stock, its stock isn’t
behaving in line with the sector. The reason for this anomaly could lie in the fact that most consumer
discretionary stocks are heavily dependent on US for their revenues while Nike isn’t. Infact, Nike’s three year
correlation to the consumer staple sector is at 0.91 and at 0.89 to the utilities sector. This reinforces the theory
that Nike will not be severely affected by a further slide in the US economy.

Sector Performance: Nike belongs to the consumer discretionary sector, a sector which we have been
underweight since we started seeing some signs of an economic downturn in the US in June (2007) when an
inverted yield curve puzzled everyone. An inverted yield curve is almost always a leading indicator of an
economic slowdown since forward yields are low in one of the two circumstances; either the GDP growth is
expected to decline or inflation is expected to decrease. However, with central banks worldwide having trouble
keeping inflation at bay, the possibility of decline in GDP growth was more realistic. A decline in GDP wouldn’t
bode well for the consumer discretionary sector and so we have been underweight on that sector for quite some
time now. In the first half of 2008, we have seen a slowdown in GDP growth coupled with high inflation.
However, the yield curve is now upward sloping and so GDP growth is expected to pick-up sometime next year
(2009). This begs the question if it is a good time to get back into the consumer discretionary sector while it is
still reeling from an effect of a downturn and selling at a discount; XLY - Consumer Discretionary SPDR - is
selling close to its five year lows in the mid 20s. The yield curve is just one indicator of GDP growth and so I
looked at performance of XLY during the last economic

recession; I used the last recession as a point of


comparison since the macroeconomic conditions would be the closest, if not the same, for companies operating
in the last 10 years. As we can see in the first chart, XLY underperformed S&P only for one year – 2000 - during
the last recession. We want to check the performance of XLY in the last one year; the next chart compares

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XLY’s performance with S&P in the last one year and it

has underperformed the S&P by about 10


percentage points.However, given the current credit market turmoil, I was still a little wary of this sector.
Focusing on companies with extensive international exposure would mitigate the risk of a prolonged downturn in
the US markets and Nike tops that list, moreover, Nike is underpriced which makes for a good value investment.

Nike’s Stock Performance: NKE’s stock closely followed XLY during the first recession of this decade
and underperformed the S&P for about one year in 2000-

2001. In the last one year, Nike has outperformed


the S&P by about 15 percentage points while XLY has underperformed the S&P by 10 percentage
points. Clearly, Nike is not following declines of the consumer discretionary sector in this downturn and that
could be because of its extensive international exposure. In 1999-2000, Nike’s revenues from US were at 52%
while 34% of Nike’s TTMrevenues are from US. The recent slide in Nike’s price is attributed to flat orders from
US for the rest of 2008 and so a slowdown in the US is already priced in the stock. The market ignored Nike’s
excellent performance in the international segment. Nike’s revenues are well diversified and a slowdown in any
one region of the world is less likely to have a significant impact on Nike’s overall performance.

Growth Catalysts: In the short term, revenue growth from Olympics will continue to provide support to the
stock price. Nike is sponsoring 22 of China’s 28 Olympic teams. Moreover, Nike is expanding its distribution in
China to 500 cities in the next three years from the current 300 cities. Basketball is the most popular sport in
China and Nike is well established in that segment worldwide and has extensive experience in US basketball
segment. Soccer is one of the most popular games in Nike’s growth regions – EMEA, Asia Pacific and Americas.
Nike was historically a second rung player in the soccer segment but is now pursuing it aggressively; Nike
bought Umbro in 2007 to strengthen its position in the soccer segment. Nike’s soccer teams did extremely well in

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the 2008 European Championships with five of the eight quarter finalists sponsored by Nike. Nike’s focus on
Soccer will also boost sales in emerging markets such as Brazil and Russia.

Industry Analysis: The athletic footwear industry is in consolidation mode and Nike’s two top rivals, Adidas
and Reebok merged in 2006. The global sports footwear market is almost an oligopoly between Nike and
Adidas-Reebok. Oligopolistic competition could be good or bad for the participants based on whether the
participants engage in a price war. Oligopolistic competition between Intel and AMD proved to be destructive for
the industry due to a price war while the same between Pepsi and Coke without the price war is beneficial to both
companies. Fortunately, Nike and Adidas-Reebok have avoided getting into a price war. This may also be due to
the fact that consumers of Nike-Adidas sports gear are relatively inelastic to price since that expenditure forms a
small part of their total expenditure. The demand curve in such a market is kinked and so is inelastic to price
decreases; firms don’t gain a substantial number of customers by reducing prices. In such cases, firms utilize
non-price competition in order to accrue higher revenue and market share. By definition, participants in an
Oligopolistic market have significant economies of scale advantage and present strong entry barriers. Nike has
distribution deals with large retailers which guarantees shelf space; it also has a size advantage when negotiating
sourcing and sponsorship contracts.

Valuation: Our valuation model yields a price of $68/share while its current price is $57.24; undervalued by
19%. The valuation model uses a short term CAPM cost of equity of 8% and a long term CAPM cost of equity of
9%. Net profit margin is constant at 10% since Nike has an excellent track record of improving profitability and
its TTM net profit margin is at 10.11%.

Nike maintains a lower effective tax bracket (24.7% for the last quarter) since it doesn’t repatriate earnings from
international operations and instead uses it to grow in those regions. We view this arrangement to be very
beneficial since Nike’s stock value is extremely sensitive to net profit margins; a one percentage point change in
net profit margin is equivalent to $6/share while each percentage point in revenue growth is equivalent to
$3/share in Nike’s intrinsic value. In the last five years, Nike has traded in the range of 14x to 25x earnings and
at an estimated EPS of $3.95 for FY 2009, Nike’s stock should trade in the range of $55 to $98. Nike will also
have support on the downside from a $2.2 billion share buyback approved for the next two years; in Fiscal 2008
(May 2007 to 2008), Nike spent $817 million on buybacks. Nike is relatively inexpensive at a PEG of 1.1 and
has doubled its dividend in the last two years. Moreover, insiders haven’t sold a single share in the last one year
below $57.08 with majority of the sell trades above $66 levels. Given the current uncertain market conditions,
Nike is a perfect defensive (beta at 0.85), underpriced stock and has significant upside potential once the markets
get out of the bear territory. Overall, it’s a consumer discretionary stock with the downside risk of a consumer
staple and upside potential of a consumer discretionary stock.

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