By Laura Stevens and Sara Germano
For years, Nike Inc. was one of the biggest holdouts against
Amazon.com Inc., refusing to provide its sneakers and athletic
clothing for sale on the hulking e-commerce site. Its products were
so cool, the company reasoned, it didn't need or want the help.
Recently, Nike reversed course. Behind that decision lies a
dramatic shift in the balance of power between brands and
Amazon.
For decades, big consumer brands carefully controlled which
retailers could sell their wares and at what prices. And for years,
Amazon left the brands alone.
Lately, the explosion of third-party sellers on the site has led
to authentic goods from companies such as Nike, Chanel, The North
Face, Patagonia and Urban Decay being sold on Amazon even though
they don't authorize the sales, undercutting their grip on pricing
and distribution.
Even though Nike didn't send Amazon its products either directly
or through approved wholesalers, Nike is the most purchased apparel
brand on the site, according to a Morgan Stanley survey. A recent
search for Nike products on Amazon turned up roughly 73,000
items.
These days, there are so many third-party resellers, who
generally are allowed to resell goods they have lawfully acquired
at whatever price they want, that companies see few ways to stop
them.
"It's a Whac-A-Mole situation," said Robert Payne, an attorney
who works with companies on the issue.
Nike's recent deal represents one strategy: Add Amazon as a
distributor to drown out the flood of third-party sales. Nike
agreed to start selling some products directly to Amazon in
exchange for stricter policing of counterfeits and restrictions on
unsanctioned sales, according to a person familiar with the
deal.
Amazon told sellers this month that they won't be allowed to
sell certain Nike items, including sneakers and apparel, starting
July 13.
Nike and Amazon declined to comment.
As traditional stores close and shopping moves online, Amazon's
dominance in retailing has grown, leaving even the most powerful
brands unable to ignore it. Some companies disdain Amazon's site
design, which doesn't conform to the tailored image they want to
project, according to lawyers and consultants who work with them.
They consider it a site that sells items, not one that builds
brands.
One reason for their capitulation is the collapse of a retail
distribution network they could better control, as malls flounder
and chains like Sports Authority Holdings Inc. shutter.
A company's power to dictate who could sell its products and
how, penalizing retailers that step out of line by withholding
inventory or other measures, has been a critical tool to preventing
unwanted discounting, which damages the ability to sell at full
price.
Controlling their distribution "eliminated the exposure and much
of the risk of having excess inventory in the market," said Ken
Seiff, a venture capitalist at Beanstalk Ventures and a former
retail executive.
Amazon, on the other hand, often gives third parties wide leeway
on products sold on its site. Its goal is to offer the widest
possible assortment of goods and bring down prices.
That has made it the first stop for e-commerce searches. Amazon
pulled even with Foot Locker Inc. as the preferred U.S. retailer
for buying sneakers in a spring consumer survey, according to
retail analysts at Cowen & Co.
And while some retailers offer discounts in certain markets and
stores, lower prices on Amazon can be seen by shoppers around the
world.
When Julie Wyatt, 32 years old, wanted to buy Nike sneakers
recently, she turned straight to Amazon. She filtered the selection
by shoe size and color, and knew she would find a low price with
free shipping. She ended up purchasing a $50 pair of gray and pink
basic running shoes.
"I feel like Amazon is just the go-to," said the Atlanta
resident, who estimates she does more than half of her total
shopping on the site. "It's just so much more convenient."
Adidas AG added Amazon as a distributor in 2014, part of its
strategy to grow in the U.S. Its market share of the U.S. athletic
footwear market jumped from 7% to 11% this year through May,
according to retail industry tracker NPD Group.
Amazon is where the U.S. consumer is, said Adidas Chief
Executive Kasper Rorsted, who estimates that nearly a fifth of the
sporting-goods market is now online. "Amazon is the best, without
any comparison, transaction platform in the world," he said. "It
might not be the best brand-building platform in the world, but
that's why we...separate crudely between transaction and
brand-building."
In addition to the merchandise Adidas allocates to Amazon, more
Adidas products end up on the marketplace without its permission
through third-party sellers. "We can't police that," Mr. Rorsted
said, adding that the company tightly controls supply of its
most-desired shoes, like Yeezys, to minimize reselling.
In recent years, Nike has focused on bulking up sales via its
roughly 1,000 named stores, its apps and its own website.
When the sportswear company first started selling on Nike.com in
1999, it didn't see Amazon -- then a 5-year-old Seattle startup
still selling mostly CDs, DVDs and books -- as a threat.
Nike, after some experimentation, "ended up deciding that
direct-to-consumer was stronger than using a third-party entity"
for online sales, because it allowed it to better differentiate its
offerings and was more profitable, said Vada Manager, a former Nike
executive who worked on developing the company's online strategy
and left in 2009. "That was the right decision" at the time, the
now-consultant said, allowing Nike to sell online at higher margins
while keeping its traditional, brick-and-mortar retail
partners.
By 2008, Amazon was aggressively selling everything from TVs to
diapers to its own Kindle e-reader. It wanted to boost its
offerings in apparel.
That year, Jeff Wilke, a top deputy to Chief Executive Jeff
Bezos, flew to Nike's headquarters in Beaverton, Ore., to explain
the merits of a direct sales relationship with Amazon, according to
a former Amazon executive who was briefed on the meeting.
Third-party sellers were already selling thousands of Nike items on
the site.
Other sports names such as TaylorMade and Under Armour were
eager to take advantage of Amazon's rapid growth and were signing
on. Baltimore-based Under Armour initially joined as a third-party
seller and later became a direct seller to Amazon, which Chief
Executive Kevin Plank in an interview called a "great partner."
Nike executives balked, saying the online retail giant was a
product pusher that didn't know how to treat premium brands and
goods, according to the former Amazon executive.
These companies typically expect control over everything from
the arrangement of a product display on the wall to the way brands
are marketed and described online.
Nike held firm year after year when Amazon executives returned
to Beaverton. Amazon hosted Nike executives in Seattle around the
turn of the decade, shortly after Amazon bought online retailer
Zappos.com, which had a selling relationship with Nike.
While the meetings were friendly, Nike was clear: It had no
plans to add the online retail giant as a distribution partner,
according to another former Nike executive. It wanted to maintain
its branding and sell through its own stores, website and existing
partners.
In 2012, Nike launched a new product, its FuelBand fitness
tracking device, and wanted to try a new distribution strategy. In
addition to using electronics retailers like Best Buy Co., Nike
decided to experiment with selling on Amazon.
The online retailer, it conceded, was a major marketplace for
selling electronics, and therefore a necessary partner for the
FuelBand, the former Nike executive said.
But while Amazon's distribution was key, Nike wasn't thrilled
with its merchandising strategy. Scrolling through the site's
"Activity Trackers" page showed row after row of black- and
neutral-colored wristbands. Click on one, and the landing page
looked the same.
Ultimately, Nike scrapped the FuelBand in 2014, deciding it
couldn't make enough headway in the fitness-tracker industry, and
instead partnered with Apple Inc. on a smartwatch released last
year. Selling FuelBand through Amazon reinforced Nike's opinion it
had better options for retail partners.
Around the same time, the sportswear market started to take a
turn. Nike's dominance as market leader was under attack as Adidas,
Under Armour and Puma all found success with new celebrity
endorsers. The athleisure boom took off, giving rise to
nontraditional competitors like Fabletics. Traditional retailers
were also under pressure, and the liquidation of major U.S. chain
Sports Authority last summer sent sportswear companies scrambling
for new ways to reach customers.
Meanwhile, more and more of the sales of Nike and other goods on
Amazon's site were by third parties. The growth in the third-party
segment had been fueled by rapid adoption by sellers and an
offering in which Amazon warehouses and fulfills orders.
These days, analysts estimate third-party sales in total have
surpassed Amazon's own sales on the site, and the number of sellers
has swelled to over two million. Amazon doesn't report the value of
sales by third-party sellers, but it confirms that about half of
units sold on its site are from third-party sellers.
Third-party sales are generally more profitable to Amazon than
its own, because it collects fees from the sellers without having
to take on inventory risks. Amazon said its revenue from such
sellers jumped 34% in the latest quarter from the previous year to
$6.44 billion, nearly a fifth of total revenue.
The third-party sellers typically buy legitimate merchandise
from distributors, big box stores such as Wal-Mart, or discount
retailers such as T.J. Maxx, circumventing the retail networks
companies have built up. The sellers then offer the items on Amazon
at a slightly higher price than they bought them for, but typically
lower than the suggested retail price, undermining companies'
control over pricing.
Two years ago, Mike "Reezy" Rezendes II started selling footwear
on Amazon. Already a seasoned book reseller, the 33-year-old heard
shoes were easy to get and profitable. So he and three full-time
employees started scouring Marshall's, Ross, Nike Outlets and even
Nike.com.
"Nike is a large focus for us. We just keep sending them in and
they keep selling," he said. Nike makes up more than half of his
current 2,500 pairs in stock. He said he makes an average of $20
per pair of shoes.
Nike has added controls to try to keep resellers away, limiting
the amount a consumer could spend in one go, according to several
resellers. Mr. Rezendes found ways around the restrictions. He pays
other mall customers $20 apiece to make his transactions, and he
places small online orders of about 10 pairs of shoes during sales
on Nike.com to get around detection, since large orders are
flagged.
The bankruptcy of Sports Authority, one of Nike's biggest
wholesale clients, unleashed a flood of Nike products on Amazon. An
estimated $400 million worth of merchandise in total was
liquidated, according to Edward Stack, chief executive of
competitor Dick's Sporting Goods Inc.
Sam Cohen, a New Jersey-based seller, waited for discounts of
80% to 90% to buy roughly $200,000 worth of merchandise, including
Nike shoes, hoodies, sports bras and golf equipment. Within a few
months, he grossed about $1 million from his Sports Authority
bounty, he said.
Nike is his best-selling fashion brand, helped by its lack of
direct presence on the website. "That's how I make my money. Amazon
is the No. 1 marketplace. Nike is the No. 1 brand," said Mr. Cohen.
"If they're not in bed together, that's my opportunity."
Nike noticed. In recent months, Nike realized it was losing
negotiating leverage to argue for better brand presentation or
eliminate counterfeits as long as Amazon could make money off
unsanctioned sales of its product, according to one of the people
familiar with the deal. That triggered internal conversations among
senior Nike executives about its relationship with Amazon,
according to people familiar with the deal.
In recent weeks, Nike and Amazon executives held intensifying
talks about cracking down on the proliferation of unsanctioned
third-party sales and counterfeit products on the site, according
to the people.
In the new deal, Nike will sell a small amount of product to
Amazon in exchange for Amazon telling resellers not to sell those
products, according to one of the people. The agreement is likely
just the first step in a broader partnership, although Nike remains
concerned about how its products will look on the site, the person
said.
Unique product numbers should immediately identify the blocked
items when a seller tries to list one. Last year Amazon also
started requiring third parties to provide more information to list
certain popular names, including Nike, requiring in some cases
proof of permission to sell and a one-time application fee.
On the night of June 13, Amazon seller Mr. Cohen started getting
hundreds of automated emails from Amazon informing him that he had
30 days to sell off certain items from his Nike inventory before
the products would no longer be allowed.
Mr. Cohen immediately told his staff to stop buying swoosh
products for resale. "I have a bad feeling that Nike and Amazon are
about to get into bed together," he said.
Write to Laura Stevens at laura.stevens@wsj.com and Sara Germano
at sara.germano@wsj.com
(END) Dow Jones Newswires
June 28, 2017 11:22 ET (15:22 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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