NKE Nike Inc

By Sara Germano 

Nike Inc.'s business is booming but mom-and-pop sneaker shops find little reason to cheer.

The world's largest maker of sportswear and sneakers is making a renewed push to boost its direct-to-consumer sales that has smaller athletic retailers feeling squeezed. Independent sportswear companies, already struggling with the expansion of online sales and industry consolidation, now worry that they may not be able to compete toe-to-toe with vendors like Nike.

Results from Nike's most recent quarter underscore the effort: business on Nike.com rose 50% for the period ended Nov. 30, while all direct sales jumped 26%. It is part of a larger endeavor by the company for direct sales to grow faster than wholesale. By 2020, Nike projects the segment will more than double to $16 billion and account for a third of revenue, up from roughly a fifth today.

"In this day and age, with all the athletic brands doing direct to consumer on their own websites, if customers ever start to view your store as just a place where they go and pick up an item, like they go to the grocery store to pick up a loaf of bread, your value in the equation is diminished," said Brian Shelton, the founder and owner of Foothills Running Co., a specialty store in Cookeville, Tenn

.

It doesn't help these specialty retailers that athletic gear is now everywhere. The so-called athleisure movement of wearing sporty clothes for non-sport activities means sportswear has moved beyond athletic retail to fashion boutiques and department stores. Traditional sellers of sports gear have to work harder to hold on to their customer base.

Mr. Shelton sees the competition creeping up around him, so he has cut back on ordering athletic apparel after visits to the local TJ Maxx showed the store "packed to the gills" with $30 running shirts. Sometimes, he said, he'll spot his regular customers, wearing models of running shoes in colors he knows his store never stocked.

Ray Pugsley, co-owner of the Potomac River Running chain in the Washington, D.C., area, said as Nike ramps up its direct-sales business, he is seeing other brands in the sportswear industry, like Brooks and Saucony, attempt to follow suit.

"They'll tell us with a straight face that online sales really doesn't do that much volume and it is to increase awareness of the brand, that we shouldn't be afraid," Mr. Pugsley said. "Time will tell whether that is a good story to put us at ease, or whether it could be the truth."

The wholesale ordering process puts small businesses at a distinct disadvantage. Most of athletic retail operates on a future-ordering system, whereby retailers place bulk orders for products from manufacturers like Nike upward of six months ahead of delivery. But fashion tastes change quickly, and it is tougher for smaller stores to keep up, since changing orders is costly and larger chains like Foot Locker Inc. can afford to ship products directly from Nike or vendor's factories to their own facilities.

"We have [set] our buying pattern by [the] year, and now they have color changes every three months," Mr. Pugsley said. "That causes heartburn for us because people don't realize how the product cycles work, and people say, 'if they can get it, why can't you get it?'"

Nike too has more work to do on the logistics front. Inventories for the most recent quarter rose 11%, largely driven by an 8% rise in wholesale products. On an earnings call with analysts last week, executives said Nike's new North American distribution center, opened in Memphis in June, isn't fully online yet. As Nike continues to expand its direct sales and clear excess inventory, Chief Financial Officer Andrew Campion cautioned that margins may suffer in the short term.

Some smaller retailers have been hit hard by Nike's logistics issues, saying that in recent months they have faced product-shipment delays. At least two retailers, who spoke on the condition of anonymity, said they have seen their orders delayed for as many as a few weeks to up to three months, in some cases with products never being delivered.

While such issues appear to be limited in nature, they underscore Nike's immense presence in the athletic retail world. The company already controls roughly 60% of the U.S. market for all athletic footwear, according to industry tracker SportsOneSource.

Some analysts are questioning whether Nike's growth will come at the expense of other retailers. Asked about the impact of Nike's strategy on Dick's Sporting Goods Inc., Chief Executive Ed Stack said, in a conference call last month, the concern is "overblown" and that retailers like Dick's have an advantage in offering consumers a place to shop where they can view products from Nike alongside competing brands.

City Sports Inc., the Boston-based sportswear chain targeted at urban professionals, failed to find a buyer in its chapter 11 bankruptcy proceedings. The chain cited increased competition in the athletic retail market as among the factors that led to its demise.

The closing of City Sports "was a wake up call," said Mr. Shelton of Foothills Running. To differentiate himself from the bigger chains and online retailers, he is now working on rolling out a free next-day delivery service for loyal customers. At most other sites, he said, "they get free shipping, but it ain't going to get here the next day."

Write to Sara Germano at sara.germano@wsj.com

(END) Dow Jones Newswires

December 27, 2015 18:37 ET (23:37 GMT)

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