Will Nike's Flyknit actually take off?

I recently stumbled upon an article on Businessweek that described one of Nike’s new ventures called Flyknit. If this project pans out it could have significant ramifications on Nike’s operations and its business model. In brief, this is some information about Flyknit and the lightweight shoe industry (collected from the article and reports from GMID):

• It requires only 2 parts to be assembled as opposed to 37 sewn pieces for the Nike Air Pegasus (used as a benchmark for this blog post). This cuts production time and cost significantly
• It weighs only 160 grams, which is almost half the weight of the Air Pegasus
• The rate of growth of the sports shoe industry worldwide is expected to decline, with Euromonitor International forecasting a CAGR of only 0.6% for men’s shoes, and 2.0% for women’s shoes between 2010-2015. Most of this growth is fueled by the lightweight shoe industry; in fact in 2011-2012, lightweight shoes accounted for 30% of sales and all of the 14% of growth in the $6.5 billion US sport shoes market
• Flyknit shoes would be priced at around $150, which is much higher than the price of most of Nike’s other running shoes

It is quite clear that this development has great potential, and that Nike has big plans for it. I do see some of the strengths, yet after doing some research I have also identified certain areas of concern.

The Benefits:

1. Growing Market in a declining industry: Most of the growth in the shoe industry has come from lightweight shoes, so entering this market early with a high-quality product would allow Nike to gain a firm foothold in the sector
2. Really High Margins: Nike is benefiting from both sides here. The production costs are getting slashed (wastage is reduced by 66%, lower labor costs, etc) and they are planning to sell the shoes at a premium price. Whether selling the shoes for $150 is feasible or not is something that I will discuss later in the post, but if they do manage it successfully, they will make a healthy profit on the Flyknit
3. Innovation: Nike is known to have high quality shoes, so simply innovating and offering the option to buy such a unique product would enhance their brand image as a market leader and a quality producer
4. Modified CVP: The quicker production for the shoes opens up many doors for Nike. One of the first benefits is that they could move production to the United States. This is an option that might cost them more in the production stage, but the savings in inventory costs, transport costs, and the higher revenue for offering more flexibility would more than compensate. The article also mentions that if Nike move part of their production to the US, they would have the ability to have scanners at stores to provide custom fit shoes. This is a niche they have not targeted in the past, and could be one of the ways they attempt to justify the higher price

The Concerns:

1. Can they sell for $150?: From the analysis so far it can be inferred that Flyknit shoes are highly differentiated from normal running shoes. However, their price is much higher than the average shoe, and for the customer a high degree of behavioral change would be required for them to be willing to spend on these shoes. This places this product in the long haul category, but if the price can be reduced over time, it would easily move into the smash hits category. At first I was a little perplexed as to why Nike would sell at such a high price despite low production costs, but after some deliberation I came up with a couple of feasible hypotheses. Firstly, the early adopters of a product tend to be more price inelastic in their purchases so they would be willing to pay more, and secondly, if they did not start off at $150, this product would cannibalize the sales of its other shoes. If this product is successful in the long run they could phase out other outdated designs and reduce price over time. It will be interesting to see how they change their pricing strategy in the future
2. Online sales: On their annual report Nike mentions that direct to consumer (including online sales) make up 16% of their revenue. At the time of launch, the online sales of Flyknit shoes might not do so well because people would not be able to see the tangible benefit of getting the shoe. Over time though, if prices start to fall and people become more aware of how differentiated this product is, online sales should pick up. For the launch I would anticipate most of their sales will be in stores because the observability of the product is low, hence, unless people try the shoes for themselves they might not be able to convince themselves to dish out over a hundred dollars

Overall this is a great step forward for Nike in an industry which has fierce competition. If they capitalize on their early entry to the market, they would benefit; however, they need to be cognizant of risks such as the price elasticity of shoes and the low initial sales though direct methods.