Financial Strategy? Just Do It.

Every business is doing its best to optimise its performance and cash conversion cycle in tough times. Nike operates a future orders based business model. This means that the majority of the company’s business is with wholesale partners that book orders with Nike approximately six months ahead of when they are to be delivered to the marketplace. This enables Nike to have a constant robust point of view as to how the business is going to be performing over the next six months. This gives the company the opportunity to see changes in circumstances and consider how it will adapt to those changes.

"The environment in which all businesses operate will change continuously and of course all businesses need to adapt," says Simon Kemmett, EMEA CFO at Nike.

"However, the strongest businesses are those that have a sound business model, clarity of strategy and operational excellence to support that strategy. If you have these building blocks then staying true to that strategy and being consistent in how you execute is critical. Clearly, a strategy should be reviewed and adapted as business fundamentals change and evolve over time, not something that is completely rewritten fundamentally every 12 months."

"Once we have set our strategies we are very targeted with our resource allocation against those priorities, and try to deploy that allocation consistently over time," Kemmett continues.

"We try to be very clear about how our resource allocation model relates to strategy and our financial model. This gives our internal business partners the transparency they need to be able to move forward and develop a long term strategy with confidence. Nike is a business that has opportunities to both expand within the markets it operates in and to take market share across all of the geographies it operates within.

"Clearly we cannot resource fully against all of the opportunities that our business leaders see in all of those geographies. Therefore we have robust internal planning processes to dissect and challenge the size and quality of those opportunities. Our business leaders at the country level know that there is an internal competition for resources and therefore have well through-out plans which become crucial to influencing resource allocation decisions. They know success brings with it more resources and therefore to some extent it is a virtuous circle. As an EMEA leadership team we will look at both the quality of the plans, the size of the opportunity as well as the strength of the historical performance of that business in choosing the resources we free to those opportunities."

Efficiency drive

Regardless of whether the business climate is prosperous or challenging, businesses need to strive to be as efficient as possible. Kemmett accepts meeting the heavy weight of corporate expectations is tough in this current environment. However, often challenging times can force more focus on resource allocation and challenge some of the fundamentals. Around 18 months ago Nike EMEA started an initiative called

‘Back on the Attack,’ which sought a broader view on some of the resource allocation decisions we had been making.

"We took a deep dive into our operating overhead allocation and we reviewed that against certain benchmarks. We also did a series of one-on-one interviews with senior management," Kemmett says. "We had brain-storming sessions to generate core ideas and once we’d determined the key areas on which we wanted to focus, we created working teams to determine in detail what the opportunities were and how we could execute against them."

The review was divided into three phases: diagnostic, blueprint, and implementation. If a business stands back and asks where it would put its resources if it had a clean sheet of paper, the answer would not necessarily be where they have in fact been allocated.

"The project has demonstrated that we can always continue to refine resource allocation. It is a dynamic piece because your opportunities and challenges continue to evolve. We have made some significant organisational changes. We have modified the resource allocation model against our findings and clearly it was extremely good to do this ahead of the economic cycle, as we do carry some of those benefits forward."

It is often said that there are two clear procurement strategies in challenging economic times, to go with a large number of suppliers to mitigate counter-party risk or to focus on a small core of suppliers to drive the benefits of discounts and incentives. Kemmett says, however, that it is not always that straightforward.

"We are in unprecedented times and we need to make sure that we carefully review our sourcing portfolio. Given this environment, there are a number of opportunities and we’re seeking to grasp them to understand how to optimise our business, and set ourselves up to address current and future challenges.

"Most of the actual negotiation for the cost of sourced goods – direct procurement – is actually done on a global level, to enable the benefit of scale, so we’re not directly involved in those conversations. Over the last few years we have seen the benefits of better sourcing, despite some very big changes in some of the input costs."

"However, the majority of our direct procurement is in non-euro currency," Kemmett adds. "Therefore when it comes to direct procurement one of the things we do need to consider locally is the foreign currency exposures. We have a sophisticated treasury team which sits locally, physically close to the business planning people and connected to the key business planning processes. This enables much greater insight into what and how we should hedge the future exposures. We do hedge significantly into the future."

Diving board

With regard to indirect procurement Nike operates a steering committee. The objective of the committee is to dissect the cost base and to highlight the biggest opportunities then to dive into those specific opportunities. This deep dive will look at internal processes, usage, supplier consolidation and sourcing.

Nike, says Kemmett, also runs a sales and operations planning process. This consists of various forums at both local and regional level and the outputs consolidate to a regional management team level bi-weekly meeting. This process is critical to gaining a cross-functional alignment on the business goals. The process demands a high level of consideration of key analytical information in the business looking at long, medium and short term view of both demand and supply factors. By having firm orders from its wholesale customers six months ahead Nike can reduce its inventory exposure by only placing orders for manufacture of product against those firm orders.

As part of the process the company also reviews credit exposures. Nike maintains a healthy cash position, according to Kemmett.

"I think the path includes many challenges as we work through these unprecedented times. Our credit and collections team are integrated business partners and have a close, collaborative relationship with the sales team. I think many of our customers don’t have such strong liquidity, so we use all available information to continually assess their positions and ascertain their working capital needs, ability to pay and inventory balances."

Kemmett indicates that some of the largest liquidity problems are occurring in emerging markets.

"Many of these customers pay in US dollars so, because their local exchange rates are in flux and in many cases devalued, their exposure becomes higher in local currency terms. These are the kinds of situations we’re grappling with and, while there certainly isn’t a one size fits all solution right now, we are very careful about how we approach each individual situation."

It’s just marketing, marketing, marketing

Nike has one of the most sophisticated websites on the internet, promoting its all-important brand via eye-catching sports pages, not least of all for football. A key part of this marketing exercise is the sponsorship of top sports personalities. Nike, as one of the leading sportswear companies, is challenged by rivals Adidas and Puma.

Adidas has gone on record as saying it will not cut its sponsorship of top flight individuals, but there have been rumours that Nike is reviewing its sponsorship deals.

Simon Kemmett, pointing out that sponsorship is dealt with at a global level, declines to comment but asserts.

"Sponsorship is core to our business. Having high quality sports marketing assets is absolutely a pivotal component of what has made Nike what it is today." What he might have added is that in the current economic climate, fresh sponsorship opportunities are likely to occur more cheaply.

With consumer demand

Although Nike products are premium within the athletic/sportswear space, even with depressed incomes, consumers would rather save to buy the real deal than make do with cheaper options.

"Sport and sportswear are becoming more popular within society. If you look at it on a per capita basis, the US is still way ahead of Europe, so the trend is definitely there. A key theme in the media is staying healthy and keeping fit and we’re well-positioned to take advantage of this," says Simon Kemmett.

"While we continue to gain market share, we are cautious and not unrealistic in this environment. In previous downturns, traditionally strong, established brands have faired better through tough times than smaller, less-established brands. We believe some of the weaker players will ultimately not be with us on the other side and are confident that we are doing everything possible to place us in a stronger position without compromising ourselves for short-term gains by sacrificing long-term principles."