Economic factors affecting footwear industry

Purpose of the Paper

The aim of the paper is to apply the microeconomic models in the functioning of Nike to ensure that the firm undertakes effective business decisions. The paper will focus on analyzing the history of the Nike Company since its existence until today and evaluate the supply and demand conditions that Nike encounters in the sale of its products. Further, the paper focuses on the price elasticity demand by analyzing the available information that can affect the customer’s responsiveness to purchase their commodities (Distelhorst, Hainmueller, & Locke, 2016). In addition, the paper will discuss the cost of the production by analyzing the cost incurred by the Nike Company in the production process and explore its market performance to ensure that higher profit is generated. This can be done by avoiding and addressing the barriers that are encountered by the company in the marketplace. Finally, the paper will provide effective recommendations that are required to be addressed by the company to manage its future production. This is essential to ensure that the firm achieves its set goals through the evaluation of the demand trends and the price elasticity (Distelhorst, Hainmueller, & Locke, 2016). This paper, therefore, seek to critically analyze the history of Nike and the current information regarding the goods and services traded by the firm as well as the area of Nike’s operation to ensure effective decisions are made by the firm.

The history of Nike Company

Nike Company aims to ensure that it brings inspiration and innovation to the wide range of athletes in the world by providing them with athletic kits and sporting equipment (Chang & Ko, 2013). One of the most important aims of the firm is to make a profit and ensure growth in order to keep its stakeholders happy and in turn meet the customers’ requirements. Nike is a multinational firm that is involved in the designing, manufacturing and the development of footwear, kits, clothing, accessories and services. The firm was originally known as the Blue Ribbon Sports (BRS) that was founded in 1964 by a distance runner Phil Knight and his coach Bill Bowerman. Nike foundation was aimed at enhancing the performance of trainees in sports by improving their sports kits such as shoes to supplement the heavier kits that were viewed as a burden to trainees during their training sessions. The firm initially operated as a Japanese shoe distributor that facilitated its sales and enhanced profit due to the lower retail price as compared to the other German products (Distelhorst, Hainmueller, & Locke, 2016). The sale of Nike’s brand has improved over the years and its ‘swoosh’ logo is recognized across the globe. The firm has been signed by various organizations to design their products. The firm has seen a rise in its popularity over the year and has shifted its focus to various nations across the world and not only focus on the United States and Japan. This, in turn, has helped the company to break new records through its sales in the global setting (Chang & Ko, 2013). The company has moved to the designing and manufacturing of kits among other cross-training accessories that has led the company being signed by the international football teams such as Brazil football team and U.S men’s and women’s soccer teams.

Its headquarters is in Portland, United States of America. It is a public limited company traded in New York Securities Exchange (NYSE) as Nike Inc (Banjo, 2014). It designs and manufactures footwear and apparel products. Besides, it involves in active marketing and sales of these products worldwide. It has several stores that enable act as its distribution centers. Some of its major stores are established in Portland USA, Vietnam and China. It derives major sales revenues from the sales of sportswear. As such, it’s the world’s leading supplier of sportswear with over 44,000 employees in 2014 (Banjo, 2014). This paper analyses various costs that Nike incurred between 2012 and 2016 financial years and explores the market share of Nike against its major competitors in the footwear market.

Supply and Demand Conditions

Nike Inc. is a US based athletic footwear and apparel company, which has its stores in more than 50 countries around the world. This section is going to discuss the supply and demand conditions in case of this company. This section will evaluate the trends in demand over time for Nike footwear products and will explain its impact on the industry as well as firm. Similarly, the analysis of data concerning demand and supply of the firm’s product for recommendations will also be proposed in this section.

Evaluation of Trends in Demand over Time and their Impact

In 2015, it was reported that Nike Inc., the leading brand in the world for apparel and footwear, had experienced a 16% higher demand for its shoes. The company experienced higher margins while selling shoes to customers around the world. The demand in 2015 had been seen on the increasing trend, which went on the same even in the first two quarters of 2016 (Fox Business, 2015). The analysts have also predicted that future orders’ demand will further rise by 9% for Nike footwear products. Such demand has not only been strong in United States, but it has been so in other parts of the world too, such as Europe, East Asia and Australia. Over the period of time, the company through best performance, sustainability and innovation is meeting the consumer demand. This innovation and improved performance have also contributed towards the gradual rise in demand of the company’s products around the world. The graph below shows that the year 2015 had experienced a massive rise in demand of Nike products.

When we look into the annual income records of Nike Inc., we see that income has been increasing annually with a variable percentage. The rise in annual income does show that there has been gradual rise in demand for Nike footwear products, which also shows that the market share of this company has been on the rise for the last few decades. Similarly, price of related goods produced by Nike has been increasing, and this increase is both due to the price increase in raw materials and production cost as well as the rise in demand. The consumer tastes have also developed up to a larger extent and Nike has been manufacturing versatile footwear products in order to accommodate the higher demand of its shoes. Similarly, the rise in population around the world and the company’s subsequent expansion have also led to the consideration of this fact that people are demanding the Nike’s footwear products more. Apart from that, the manufacturing efficiency of the company has also led to the accommodation of greater demand of Nike’s products. In this regard, company’s expansion and overseas manufacturing have also helped the company in meeting customer demands. The impact of this rise in demand in case of Nike Inc. has also been great, as the company has been able to maintain its position as the leading footwear brand in the world.

Recommendations for Firm’s Future Actions based on Supply and Demand

In the recent times, the economy on the global scale has slowed down. Due to this, the consumer purchases are also down. In this respect, over the last few years, the major threat for Nike Inc. has been the economic recession. The economic crisis in Asia has also mildly affected Nike’s business, because the Nike’s products are mainly manufactured in Asia. This is in turn because the material prices and labor costs are increasing. Additionally, not only the local economy is affecting the growth of this company, but also the international economy has not been so kind over Nike’s business. Therefore, a weaker global currency and recession in Asia would mean weaker sales for Nike.

However, it should be noted that the footwear industry is quite old, so the companies in this industry have been more focused on grabbing the most market share rather than having more market growth. The graph shown below will highlight the largest market share of Nike Inc.

The competitive strength of Nike is also due to the significant recognition of its brand around the world. Based on the past data, it can be said that the supply and demand of Nike is represented by a downward sloping demand curve and upward sloping supply curve (Waddock & Rasche, 2012). Over the past years, the product influence of this company has increase amid emergence of the major sports events in different parts of the world. Due to these sporting events, the popularity of the company has increased quite significantly and it has also permitted the company to establish as well as maintain high prices for its products.

Based on these facts and analysis, it is recommended that Nike Inc. should produce the quantity where its supplies are limited enough so as to keep the prices higher. One example of this suggestion is that when the company will release a new shoe product, the production will be made at a high price so that customers will anyway be interested to buy that. This tactical strategy will help Nike use its influence for maintenance of its profitable production in the future as well.

Examination of Price Elasticity of Demand for Nike’s Products

Determination of Price Elasticity of Demand for Nike’s Product

Price elasticity of demand is generally defined as measure of the relation between a change in the price of product and change in the quantity demanded of the same (Hubbard, & O’Brien, 2015). This is also used for the evaluation of price sensitivity. It also determines the measure of responsiveness of demand to the change in price of a product. Based on the past data, it can be seen that the price of the Nike’s footwear products has been on the rise. There has been a gradual rise in the price of Nike footwear products. Similarly, amid several factors, the demand for Nike’s products has also been rising even when prices are kept high. Although there are substitutes available to the Nike’s products, but still there has been a higher demand for the Nike’s products. It can be said that the price elasticity of demand for the case of Nike is less than one. This is also because the change in quantity demanded for Nike’s products is smaller than the change in price maintained or kept by the company for its footwear products. This is also because the company has a fixed market share and which is more than any other company in this industry. This is why the Nike’s products are not substituted much by the consumers and therefore change in demand is not much. So the price elasticity of demand for Nike can be considered as less than 1.

Factors Affecting Consumer Responsiveness to Price Changes for Nike’s Footwear Products

The pricing decisions are very important for the companies such as Nike Inc. The main reasons for this fact are that pricing is one of the most significant parts of marketing mix, which also brings the revenue for company. Similarly, for the case of Nike, once it has set a price, then the customers will demonstrate a higher resistance for any attempts of change in price. Price also has an important implication for the product positioning.

Based on these facts, we can say that demand curve of the company’s products is downward sloping. This mainly shows that the consumers will likely to have lesser demand of the product when the price is going up. Since the price elasticity of demand for Nike Inc. is less than 1, so the customers will still be highly responsive to the products of the firm even when prices are raised. One factor that will affect the responsiveness of the customers to the changes in price would be that when the company does not release new products. The customers have always been impressed with innovative footwear products that Nike introduces every year. Similarly, most of the products of the company are region-specific. If the quality of the products is not high, then the customers will not be interested in buying the products of this company. In addition to that, the customers will also not be responsive much to these price changes when the substitute products are for sale in low prices and have higher quality.

Assessment of Impact of Price Elasticity of Demand on Pricing Decisions and Revenue Growth of Firm

In business economics, it is often heard that the price elasticity of demand has a great important for pricing decisions. In case of Nike Inc., the price elasticity of demand of less than 1 shows that consumers are least bothered by the manipulations in the price of Nike’s footwear products. From the Nike’s point of view, price should demonstrate a clear reflection of the production as well as advertising costs that are included in bringing the products to the market place. When we talk about the impact of price elasticity of demand, it is known that the Nike Inc. will have to take it into consideration before increasing the price. The less than 1 price elasticity of demand for this company will be true to some extent to which the price can be increased. However, the company should stop increasing the price, or maintain the fixed price, or it should decrease the price when in future the price elasticity of demand becomes more than 1 or becomes zero. This situation means that the customers are already not much responsive to the company’s products after price changes and further change in price will mean the decline in the product’s demand. Therefore, the company should make sure that the price elasticity of demand is less than 1 when price change decisions are to be made. When the price elasticity of demand is more than 1, then it will badly affect the Nike’s price decisions. Similarly, it will also affect the revenue growth of the firm if price decisions are not taken with respect to the value of price elasticity of demand.

IV. Examination of Nike Inc's Cost of Production

a. Analysis of Nike Inc's Various costs, their trends over time and how they have impacted the profitability of this firm

Nike Incorporation incurs various costs. Such costs include Costs of raw materials and labor. These are categorized under Cost of goods sold (COGS). The second category of costs that Nike incurred is operating expenses. Nike’s fiscal year ends on June 30th every year. Therefore, its expenditure for five financial years was examined in this paper. The years under consideration ranges from financial year ending June 2012 to financial year ending 2016 as presented in the table below:

Table 1: Nike Inc Costs of operations for financial year ended 2012 up to 2016

The Year Ending June 30th

2012

In Billion $s

2013

In Billion $s

2014

In Billion $

2015

In Billion $

2016

In Billion $

COGS plus D&A

13.62

14.41

15.34

16.76

17.99

COGS excluding D&A

13.23

13.95

14.82

16.15

17.34

Gross Incomes

10.53

10.93

12.44

13.94

14.47

Operating Expenses

SG & A

7.41

7.77

8.77

9.89

10.47

Unusual Expenses

0.017

0.148

0.071

0.615

0.072

Pretax Incomes

2.98

3.27

3.54

4.21

4.62

(MarketWatch Inc, 2016)

Cost of Goods Sold (COGS)

This cost involves finances that Nike uses for purchasing, transporting and storing its raw materials. Such raw materials include leather and plastic. These raw materials enable Nike to produce footwear used for athletics. However, it's essential to note that this company outsources most of its footwear products (Locke, Kochan, Romis and Qin, 2007). For instance, its independent contractors manufactured 43%, 28% and 25% of its products. These percentages represent contractors from Vietnam, China, and Indonesia consecutively.

The amount that Nike uses for COGS shows an increasing trend from the financial year ended June 2012 to fiscal year ended June 2016. Such amounts include $ 13.62, 14.41, 15.34, 16.76 and 17.99 respectively (Lechner, Lorenzoni, Tundis, 2016). These figures are in billions of United States dollar ($). This increasing trend in COGS shows that Nike incurs an increasing expense in materials and labor. The company has a better strategy of outsourcing raw materials in countries like Vietnam and China (Helper and Krueger, 2015). However, the cost of labor increases with a higher margin compared to the cost of raw materials. Such increase in the cost of labor compels its contractors to spend more on hiring. They transfer such expenditure to Nike.

Operating Expenses

These costs include overhead, rent and indirect expenses incurred in producing a community or a service. For instance, Nike Inc committed $ 7.41, 7.77, 8.77, 9.89 and 10.47 billion respectively under the period of five years. This trend shows a continuous increase in Nike's operating expenses. Such growth in costs occurs due to increases in insurance premiums and overheads that this company remits. These costs fall under operating expenses. Therefore, their increase increases overall costs of production in this company.

How COGS and Operating Expenses affected the profitability of Nike Inc

The Gross incomes had an increasing trend for the period studied. These include $10.53, 10.93, 12.44, 13.94 and 14.47 billion respectively. These statistics shows that the increase in COGS was directly related to increasing in Gross Incomes. Therefore, there was an offsetting balance by increasing incomes when COGS increased. Likewise, the increase in Operating expenses corresponded to the increase in pretax earnings.

b. Application of the Concepts of Variable and Fixed Costs to Nike Inc for Informing its Output Decisions

Nike can incur variable costs in labor, Research & development, and raw materials. Nike can increase its production if it reduces expenditure per unit of raw materials. As such, it can acquire larger quantities of raw materials at lower prices. Likewise, it should cut spending on a unit of labor. Such process implies that Nike will hire many employees thus increasing its levels of output. However, Nike Inc should increase expenditure on research and development to boost its sales and manufacture skills. However, it should reduce its fixed cost since such loss reduces retained profits. Such profit is essential to invest in research and development activities.

V. Exploration of the overall market in which Nike Inc Operates

a. Discussion of Nike Inc and Its Competitors’ Market Shares and its Trend over Time

The competitors of Nike Inc are Adidas, Puma, Sketcher and Under Amour Inc (Park and Kincade, 2010). However, analysis of Nike, Adidas and Puma will be conducted in this section. First, analysis of individual market share controlled by these firms is calculated from their respective revenues. The period under consideration is 2010 to 2015. The calculations for Nike, Adidas and Puma’s Market shares are shown below.

Revenue in 2010 (in $ billions)

Nike Inc 11.52, Adidas 7.14 and Puma 1.89; Total Revenues = 20.55

Nike's Market Share=11.52/20.55*100% = 56.0583= 56.06%

Adidas' Market Share= 7.14/20.55*100% = 34.7445 = 34.74%

Puma's Market Share = 1.89/20.55*100% = 9.197 = 9.20%

Revenue in 2011(in $ billions)

Nike Inc 13.43, Adidas 8.08 and Puma 1.99: Total Revenues = 23.50

Nike's Market Share = 13.43/23.50*100% = 57.1489 = 57.14%

Adidas' Market Share = 8.08/23.50*100% = 34.3830 = 34.38%

Puma's Market Share = 1.99/23.50*100% = 8.478 = 8.48%

Revenue in 2012 (in $ billions)

Nike 13.51, Adidas, 9.14 and Puma 2.11: Total Revenues = 24.76

Nike's Market Share = 13.51/24.76*100%= 54.56%

Adidas' Market Share = 9.14/24.76*100%= 36.91%

Puma's Market Share = 2.11/24.76*100% = 8.52%

Revenues in 2013 (in $ billions)

Nike 14.64, Adidas 9.07 and Puma 1.88: Total Revenues = 25.59

Nike's Market Share = 14.64/25.59*100% = 57.2098 = 57.21%

Adidas' Market Share = 9.07/25.59*100% = 35.44%

Puma' Market Share = 1.88/25.59*100% = 7.3466 = 7.35%

Revenues in 2014 (in $ billions)

Nike 16.21, Adidas 8.1 and Puma 1.56: Total Revenues = 25.87

Nike's Market Share = 16.21/25.87*100 = 62.659 = 62.66%

Adidas' Market Share = 8.1/25.87*100 = 31.31%

Puma's Market Share = 1.56/25.87*100 = 6.03%

Revenues in 2015 (in $ billions)

Nike 18.32, Adidas 9.13 and Puma 1.65; Total Revenues = 29.10

Nike's Market Share = 18.32/29.10*100 = 62.9553 = 62.96%

Adidas' Market Share = 9.13/29.1*100 = 31.37%

Puma's Market Share = 1.65/29.1*100=5.67%

Nike Inc. has the highest market in the footwear market. It has continued higher revenues from the market as opposed to its closest competitors. This company maintains a market share above 50% for the period considered. Such trends show that Nike Inc is a market leader in the footwear industry. Adidas has managed a second place after Nike for the whole period under consideration. However, it had a market share of 8% for the period under consideration. Such percentage was lower than Nike's share. Puma Inc was the worst performer at this time. It had a market share at around 6% for the entire period. This shows that it posed worst sales revenues for the period under consideration.

(Statista Inc, 2015)

b. Analysis of the Barriers to Entry in the Market Where Nike Inc Operates

Barriers to entry in a market occur due to five forces that define the intensity of competition in a particular industry (Mahdi, Abbas, Mazar and George, 2015). These factors include industrial rivalry, bargaining power of suppliers and buyers. The fourth element is the threat of substitutes and the fifth is the threat of new entrants. First, the amount of capital needed in an entry in footwear market is relatively high. As such, only Puma and Adidas are challenging Nike in this category (Mahdi et al. 2015). However, they are lagging regarding market share. Secondly, Nike offers specialized sports shoes. As such, athletes looking for shoes to run on will consider its products despite the existence of cheaper substitutes such as sandals. Thirdly, the intensive industrial rivalry would deter other firms from entering footwear market. However, Nike has devices mechanism that enables it to sell its products efficiently and maintain a higher market share in this industry. Therefore, barriers such as capital and technological advances enable Nike to stage appropriate competition in the market. As such, it new competitors in the footwear industry must invest massively to acquire a small market share in this industry. These facts show that Nike can control the footwear market in future.

c. Description of the Market Structure for Nike Inc and How it Impacts Nike's Ability to Influence the Market

Nike Inc operates a monopolistic competition market structure. This is evident in some ways. First, Nike Inc's main competitors are Adidas and Puma Inc. These incorporations have higher concerns in producing apparel products rather than footwear. Only Adidas provides sports shoes that offer direct rivalry to Nike. However, Nike applies differentiation strategies in manufacturing its products. It implies that Nike Inc targets particular market that other firms in the footwear market don't satisfy. As such, its products don't face the problem of substitution from other footwear such as sandals or open shoes (Auer and Schoenle, 2016). It specifically designs and manufactures products that meet the needs of athletes. Secondly, not all firms in footwear industry have similar resources. For instance, Under Amour and Sketchers are relatively smaller than Adidas and Nike.

Herfindahl-Hirschman Index (HHI) for three major firms considered in (a) above is calculated below. The base year is 2015; market share (MS) for Nike = 62.962= 3,963.96+MS for Adidas = 31.962 =1021.44 and MS for Puma=5.672=32.14. The totals of Market share squared= 3,963.96+1021.44+32.14= 5,017.54. Any value above 2,500 on (HHI) scale shows a higher concentration of the market. Since this figure is less than 10,000 (pure monopoly), it shows that Nike is operating a monopolistic competition market structure.

VI. Recommendations

a. How Nike Can Manage its Future Production

Nike subcontracts its production needs in China, Vietnam, and Indonesia. This process increases the cost of labor and overall costs of goods sold (COGS). Therefore, Nike should establish its production units in these economies. It can achieve this by merging or acquiring its current subcontractors in these economies. Such initiative would reduce its COGS and expenses incurred on rent and insurance. Different contractors incur various operating costs, and they transfer such payments to Nike.

b. How Nike's Position Within the Market Will Allow it to Achieve Recommendations For Future Production

Nike has the largest market share in the footwear market. This is evident from the bar graph in (Va) above. It has higher revenues that can allow it to receive adequate profits. It can utilize its massive after-tax profits to acquire its major contractors, especially in China and Vietnam. Such process would allow Nike to reduce disparities in expenses that such contractors incur in their respective economies.

c. Description of How Nike Can Sustain its Success Going Forward

Nike is currently the market leader in the footwear market. Therefore, it should invest in Research and Development (R&D). Such investment will enable its design team to understand the changing needs of its target market. As such, it will design and produce athletic shoes that meet current and future demands. It's unfortunate that Nike didn't have any investment in R&D for the period investigated in Table 1. Therefore, it should consider this proposal and increase its attractiveness to shoppers.

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Rise in demand by 2011 2012 2013 2014 2015 2016 2017 0.04 0.05 0.08 0.09 0.16 0.09 0.11
Market Shares in Footware Industry

Nike 2010 2011 2012 2013 2014 2015 56.06 57.14 54.56 57.21 62.66 62.96 Adidas 2010 2011 2012 2013 2014 2015 34.74 34.380000000000003 36.909999999999997 35.44 31.31 31.37 Puma 2010 2011 2012 2013 2014 2015 9.1999999999999993 8.48 8.52 7.35 6.03 5.67