Factories in Vietnam shut, leaving Nike to cater to a strong demand with poor supply.
Footwear giant Nike witnessed a 3% dip in its shares as supply chain problems worsened. About three-fourths of Nike’s shoes are manufactured in Southeast Asia. Over 50% of them are made in Vietnam, where factories are shut due to Covid resurgence. Chief Financial Officer of Nike Matthew Friend said, “Over the last 90 days, two things have happened in the industry that we didn’t anticipate. First, already long transit times worsened; and second, local governments mandated shutdowns in Vietnam and Indonesia.”
Nike is not the only footwear company to bear the brunt of these supply chain disruptions. It could cost Adidas up to US$600 million in sales. This is eye-opening for big companies and startups which have their manufacturing plants far from home.
Lost about 10 weeks of production
Owing to the government-mandated shutdowns in Vietnam, Friend declared that Nike “lost 10 weeks of production”. Additionally, they are also facing “longer transit times” as the shipping duration between its Asian manufacturing plants and North America has increased. Friend explained, “Transit times in North America deteriorated during the last quarter, now almost twice as long as pre-pandemic levels.” Reduced production along with longer transportation time will cause inventory shortages for Nike “for the next few quarters”.
As fans returned to stadiums and sporting events resumed, Nike gained popularity again. The company’s direct-to-consumer channel grew 25% this quarter, with sales increased by 16%. According to Friend, “Consumer demand has never been higher.” Still, because of the supply chain disruption, they are not looking forward to a positive sales season this year. Nike expects this to lower revenue growth in the second quarter to mid-single-digits instead of low-double-digits.
The next steps
Friend admits that the company’s performance would have been “stronger” if there had been no supply chain congestion. He doesn’t expect the factories to reopen until October. Even then, he believes that “it will take time”—several months perhaps—to pick up manufacturing again. He affirmed that for the rest of the fiscal year, Nike expects “strong marketplace demand to exceed available supply.” Though the company has all but given up on this year’s sales, it doesn’t intend on just sitting back and letting the disruption take control. Nike plans on spending more on air freight to bring in supply for the holiday season.
In the spirit of “Just do it”
Chief Executive Officer of Nike John Donahoe said that, over the past year and a half, Nike has demonstrated their ability to “manage through turbulence”. He added, “That’s what we’ll continue to do as we navigate through these current supply chain issues. We’ll focus on what we can control.”
All things considered, Nike is not worried about losing customers. Donahoe affirmed, “The competitive advantages of innovative products, brand strength fueled by compelling storytelling, and a roster of the world’s best athletes and digital experience will continue to create separation from competitors,” even with a pandemic disrupting everything.
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