wide, and each store gets about 25 to 30. All the Rage Since...
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, The Corporation Brand Buildin SOLESURVIVORNike limits AFI runs to pique demand AlltheRage SinceReagan Nike's Air Force 1,introduced in the '80s, stillgrabs attention-and huge margins NCE THE WORD HITS the street, hundreds of teens start lining up at stores. So strong is de- mand that new releases happen only on week- ends-so kids won't skip school. When the doors open, they sell out in hours. Tickets for the current Eminem tour? The new iPod music play- er? Nope. We're talking about a basic bas- ketball sneaker, Nike Inc.'s Air Force 1. Launched in'1982, when Ronald Rea- gan was in the White House, the sneaker is almost pathetically low-tech. Yet the Air Force 1 remains the definition of urban cool. And while Nike Shox runners, Air, Jordans, and the Cole Haan and Converse brands helped drive record earnings of $1.2 billion on sales of $13.7 billion in the fiscal year ended June 27,the AF1played a big role, too, helping Nike reach No. 48 on the BusinessWeek 50 list of top corpo- rate performers. AF1 racked up an esti- mated $1 billion in sales and generated profit margins of70%, say analysts-dou- ble that of other hit sneakers. Says Tasha- la Spellman, a 16-year-oldAF1 devotee: "I like the style." She'd better: Spellman owns 10 pairs. How do you keep a basic sneaker hot for a quarter-century? Nike's genius is 68 I BusinessWeek I July 25, 2005 that it has managed to market a classic without alienating teens. At the same time, Nike creates COnsumer longing by keeping supplies tight and releasing col- lectible versions with minimal hype. "Air Force 1 is maybe the most dominant bas- ketball franchise in this industry," Gary M. DeStefano, president of Nike U.S., says. "But there's a way to keep it fresh." The Air Force 1 hit the basketball courts and urban play- grounds in the '80s and quickly caught on with black youth, thanks to basketball starendorserCharlesBarkle~ But soon Nike began building mystique-eschewing regular marketing channels even as it restricted supply. AF1 adver- tising is minimal today. Mostly, Nike lets the customers-and the rappers-do the talking. In 2002, for example, hip-hop's Nelly rapped about "my Air Force 1s" and generated a No.1 hit. And such is the shoe's cult status that teenagers hang out at NikeTalk.com and other chat rooms to find out when the next AF1 is coming. Every two months or so, Nike unleash- es a newly tweaked shoe-a camouflage version, say, or one timed for Mardi Gras. Each release involves roughly 350,000 to 500,000 pairs of shoes shipped nation- wide, and each store gets about 25 to 30. "Nike continues to control the market- place so diligently they create pent-up de- mand for the shoe," says John Shanley, analyst for Susquehanna Financial Group, an investment bank. Analysts say retailers caught discount- ing Air Force 1s receive a smaller alloca- tion the next time or none at all. And re- tailers are happy to play ball: After all, the Air Force 1 makes money and drives traf- fic. Retailers get full price for the shoe, ba- sic versions of which sell for $85 to $100. Collectible versions, such as one designed by famed grafitti artist Mr. Cartoon, retail for $180. And the AF1boosts demand for other Nike footwear, says Shanley. Nike's sell-through rate-how fast a product flies off shelves in the first week-averages 20%-plus of inventory, compared with an industry average oflO%. The sell-through rate for AF1s is 100%. The Air Force 1 is a Nike profit ma- chine. Shanley estimates that the compa- ny sells each pair to retailers for about $48.50 but pays just $12 to make them in Asia. Since the design has re- mained essentially un- changed, there are few devel- opment costs; all of the molds and lathes have been fully de- preciated. And, of course, Nike no longer pays anyone to promote them. "It drives a much richer margin because it doesn't carry an endorsement fee," Shanley says. There's no telling how long the Air Force 1 will remain hot in the faddish sneaker business. "If they ever get greedy with the Air Force 1,or ifkids feel they're being manipulated, you can see a prof- itable business disappear in a hurry," says Jeffrey Bliss, president of sports marketer Javelin Group. Until then, take a number and stand in line, as Nelly says, "So I can get to stompin' in my Air Force 1s." . -By Stanley Holmes in Seattle I~ , 1 TheBestPerformers
Transcript of wide, and each store gets about 25 to 30. All the Rage Since...
, The Corporation Brand BuildinSOLESURVIVORNikelimits AFI runs topique demand
AlltheRageSinceReaganNike's Air Force 1,introduced in the '80s,stillgrabs attention-and huge margins
NCE THE WORD HITSthe street, hundreds ofteens start lining up atstores. So strong is de-mand that new releaseshappen only on week-ends-so kids won't
skip school. When the doors open, theysell out in hours. Tickets for the currentEminem tour? The new iPod music play-er? Nope. We're talking about a basic bas-ketball sneaker, Nike Inc.'s Air Force 1.
Launched in'1982, when Ronald Rea-gan was in the White House, the sneakeris almost pathetically low-tech. Yet the AirForce 1 remains the definition of urbancool. And while Nike Shox runners, Air,Jordans, and the Cole Haan and Conversebrands helped drive record earnings of$1.2 billion on sales of $13.7 billion in thefiscal year ended June 27,the AF1played abig role, too, helping Nike reach No. 48on the BusinessWeek 50 list of top corpo-rate performers. AF1 racked up an esti-mated $1 billion in sales and generatedprofit margins of70%, say analysts-dou-ble that of other hit sneakers. Says Tasha-la Spellman, a 16-year-oldAF1 devotee: "Ilike the style." She'd better: Spellmanowns 10 pairs.
How do you keep a basic sneaker hotfor a quarter-century? Nike's genius is
68 I BusinessWeek I July 25, 2005
that it has managed to market a classicwithout alienating teens. At the sametime, Nike creates COnsumer longing bykeeping supplies tight and releasing col-lectible versions with minimal hype. "AirForce 1 is maybe the most dominant bas-ketball franchise in this industry," GaryM. DeStefano, president of Nike U.S.,says. "But there's a way to keep it fresh."
The Air Force 1 hit the basketballcourts and urban play-grounds in the '80s andquickly caught on with blackyouth, thanks to basketballstarendorserCharlesBarkle~But soon Nike began buildingmystique-eschewing regularmarketing channels even as itrestricted supply. AF1 adver-tising is minimal today. Mostly, Nike letsthe customers-and the rappers-do thetalking. In 2002, for example, hip-hop'sNelly rapped about "my Air Force 1s" andgenerated a No.1 hit. And such is theshoe's cult status that teenagers hang outat NikeTalk.com and other chat rooms tofind out when the next AF1 is coming.
Every two months or so, Nike unleash-es a newly tweaked shoe-a camouflageversion, say, or one timed for Mardi Gras.Each release involves roughly 350,000 to500,000 pairs of shoes shipped nation-
wide, and each store gets about 25 to 30."Nike continues to control the market-place so diligently they create pent-up de-mand for the shoe," says John Shanley,analyst for Susquehanna FinancialGroup, an investment bank.
Analysts say retailers caught discount-ing Air Force 1s receive a smaller alloca-tion the next time or none at all. And re-tailers are happy to play ball: After all, theAir Force 1 makes money and drives traf-fic. Retailers get full price for the shoe, ba-sic versions of which sell for $85 to $100.Collectible versions, such as one designedby famed grafitti artist Mr. Cartoon, retailfor $180. And the AF1boosts demand forother Nike footwear, says Shanley. Nike'ssell-through rate-how fast a product fliesoff shelves in the first week-averages20%-plus of inventory, compared with anindustry average oflO%. The sell-throughrate for AF1s is 100%.
The Air Force 1 is a Nike profit ma-chine. Shanley estimates that the compa-ny sells each pair to retailers for about$48.50 but pays just $12 to make them in
Asia. Since the design has re-mained essentially un-changed, there are few devel-opment costs; all of the moldsand lathes have been fully de-preciated. And, of course,Nike no longer pays anyone topromote them. "It drives amuch richer margin because
it doesn't carry an endorsement fee,"Shanley says.
There's no telling how long the AirForce 1 will remain hot in the faddish
sneaker business. "If they ever get greedywith the Air Force 1,or ifkids feel they'rebeing manipulated, you can see a prof-itable business disappear in a hurry," saysJeffrey Bliss, president of sports marketerJavelin Group. Until then, take a numberand stand in line, as Nelly says, "So I canget to stompin' in my Air Force 1s." .
-By Stanley Holmes in Seattle
I~, 1
TheBestPerformers
