--:-- [Theme music fades out]
--:-- Host (Jessica Mendoza): Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza.
--:-- Host (Jessica Mendoza): In 2020, John Donahoe became CEO of one of the most storied sports brands in the world, Nike. And he came to the job with one mission: to not screw it up. I think those were his words.
--:-- [Audio clip of Inti Pacheco speaking]
--:-- Inti Pacheco: That's our colleague, Inti Pacheco. He covers Nike.
--:-- Host (Jessica Mendoza): When Donahoe took the helm, achieving that mission of not screwing it up seemed simple. Because Nike was doing really well. Sales were growing. You know, they had this goal to reach $50 billion eventually. And it was happening. You could see the trajectory that it was going. It would reach those $50 billion very soon.
--:-- Host (Jessica Mendoza): Three years into Donahoe's tenure, Nike achieved that goal. But then shortly after, the company took a turn for the worse. Now, sales have plummeted. Nike has lost its cool factor. And John Donahoe is stepping down.
--:-- Host (Jessica Mendoza): So really, what went wrong? A lot.
--:-- Host (Jessica Mendoza): A few months ago, John Donahoe sat down with Inti. Inti, hey.
--:-- Inti Pacheco: Hi, hi, John. Nice to finally meet you.
--:-- Host (Jessica Mendoza): Nice to finally meet you, too.
--:-- Host (Jessica Mendoza): Inti wanted to ask Donahoe about the struggles Nike was facing. But they started the conversation talking about Donahoe's basketball obsessions and his leadership style.
--:-- John Donahoe: To me, my role models have been head coaches. Phil Jackson, right? John Thompson, who I was fortunate enough to serve on the Nike board with. Coach K and then Tara Vanderveer, the two winningest coaches in college basketball history, men's and women's.
--:-- John Donahoe: It's not about the coach. It's never been about me. It's about your players. And when you have a win, it's about the players. And when you have a loss, you say it's on me.
--:-- Host (Jessica Mendoza): Right now, Donahoe's facing a loss as the coach of Nike.
--:-- Host (Jessica Mendoza): When he had joined the company back in 2020, he seemed primed to bring a big win. Nike has typically been led by company insiders, people who knew the culture and the staff, and who spent most of their careers there.
--:-- Host (Jessica Mendoza): Donahoe was not that. He had consulted with Nike in the 90s and been on the board since 2014. But when he took over as CEO, he came as someone with a different kind of background.
--:-- Host (Jessica Mendoza): He'd previously run eBay and a cloud computing company. And that tech experience is exactly what Nike said it wanted.
--:-- Host (Jessica Mendoza): He was there to, you know, turn Nike, in theory, into a tech company, try to harness all the data that the company was getting from consumers through their apps to try to translate that into more sales for the company.
--:-- Host (Jessica Mendoza): Even though they sell footwear and apparel, the idea was to really use that data, really use all their digital channels to sell more of those things to people.
--:-- Host (Jessica Mendoza): Was that the mandate that was given to him when he stepped on?
--:-- Inti Pacheco: It was a mandate that was given to him. Actually, yeah, when they announced that John Donahoe was joining the company, it was former chief executive Mark Parker who said that Donahoe was the perfect person to lead Nike into this digital transition that they had been planning for a while.
--:-- John Donahoe: Donoho moved quickly to make that transition to digital happen. One of the major decisions he made was to lean heavily on the digital side of the business which means how Nike sells to consumers through its website and its apps
--:-- Host (Jessica Mendoza): Donahoe saw projections that led him to believe that half of Nike revenue would come through those digital channels.
--:-- Host (Jessica Mendoza): So he thought that Nike could make more money if they sold more directly to consumers through those channels.
--:-- Host (Jessica Mendoza): This was in 2020, at the height of online pandemic shopping. Online sales are up 70 percent.
--:-- Host (Jessica Mendoza): Nike shares popping after hours. A strong online sales helped the company top revenue estimates.
--:-- Host (Jessica Mendoza): Those sales numbers seem to be proving Donahoe's strategy right.
--:-- Host (Jessica Mendoza): Here's what he said to Inti about that period.
--:-- John Donahoe: We grew through this period of time. So the strategy was the core part of the strategy was basically working. Our digital business exploded during that period of time.
--:-- Host (Jessica Mendoza): Now, to be honest, consumers were shopping from home because retail was closed or they were tentative to go out in physical retail.
--:-- Host (Jessica Mendoza): But we had the two best retail or mobile apps in the industry with the Nike mobile app and the sneakers mobile app.
--:-- Host (Jessica Mendoza): As he pushed harder towards digital, Donahoe pulled back from brick-and-mortar stores.
--:-- Host (Jessica Mendoza): Nike broke up with some of its major retail partners like DSW and Macy's. And it started sending less product to Foot Locker, all with the goal of getting as big a chunk of the profit as possible.
--:-- Host (Jessica Mendoza): You say, I'll cut the middleman, right? Because if I sell to the middleman, I got to sell it at a reduced price. I'm not making as much of a profit.
--:-- Host (Jessica Mendoza): And so that's what Donahoe pushed for.
--:-- Host (Jessica Mendoza): There were some at Nike who warned Donahoe that he was overcommitting to the direct-to-consumer approach.
--:-- Host (Jessica Mendoza): They suggested going slower. But Donahoe forged ahead.
--:-- Host (Jessica Mendoza): The company invested heavily in consumer insights and data analytics to better understand what customers wanted.
--:-- Host (Jessica Mendoza): It hired thousands of new staff to help drive the push.
--:-- Host (Jessica Mendoza): Donahoe also looked at the data around Nike's classic sneaker lines, Air Jordans, Dunks, and Air Force Ones.
--:-- Host (Jessica Mendoza): And he saw that those sneakers were big sellers and were making Nike the most money.
--:-- Host (Jessica Mendoza): So the company started making way more of those shoes.
--:-- Host (Jessica Mendoza): They released an incredible amount of versions of the Air Jordan 1, the Dunk, and the Air Force 1.
--:-- Host (Jessica Mendoza): And they kept talking about it, you know, during earnings calls when the executives are giving results to investors.
--:-- Host (Jessica Mendoza): They kept saying, like, these are three cash cows.
--:-- Host (Jessica Mendoza): Executives were excited about these sneakers bringing in so much money.
--:-- Host (Jessica Mendoza): And at first, sneaker fans were also pumped about the new kicks.
--:-- Host (Jessica Mendoza): 2022, people who are into sneakers all of a sudden said like, wow, this is very cool.
--:-- Host (Jessica Mendoza): They're releasing so many different versions of, I don't know, the Jordan 4s.
--:-- Host (Jessica Mendoza): So it meant on the one hand that Nike was selling a lot of it because those were always considered like limited edition releases.
--:-- Host (Jessica Mendoza): And those sell for like $200 a pair.
--:-- Host (Jessica Mendoza): So it means that the company is making a lot of money.
--:-- Host (Jessica Mendoza): And because of the demand, it means that they sell out very quickly.
--:-- Host (Jessica Mendoza): But now, that kind of backfired.
--:-- Host (Jessica Mendoza): The worst sneaker release of all time.
--:-- Host (Jessica Mendoza): And a dump, man. Oversaturated? Oversaturated like crazy.
--:-- Host (Jessica Mendoza): Every time they get something good for the last, what, 10 years now, it's like, bro, they just spam it.
--:-- Host (Jessica Mendoza): They sold so many shoes that people had enough.
--:-- Host (Jessica Mendoza): Like, it's that simple.
--:-- Host (Jessica Mendoza): You don't think people get tired.
--:-- Host (Jessica Mendoza): The market became flooded with these sneakers.
--:-- Host (Jessica Mendoza): Part of the appeal of these shoes was the fact that they were exclusive.
--:-- Host (Jessica Mendoza): And now that everyone could get their hands on them, they started to lose their cool.
--:-- Host (Jessica Mendoza): And doubling down on these re-releases of older shoes also meant that Nike wasn't making a ton of new or innovative shoes.
--:-- Host (Jessica Mendoza): And that innovative spirit was what Nike was known for, especially around running sneakers.
--:-- Host (Jessica Mendoza): And at Nike, we're putting that knowledge to work, making shoes that actually help athletes to run faster and safer.
--:-- Host (Jessica Mendoza): Nike's co-founder, Phil Knight, was a track athlete.
--:-- Host (Jessica Mendoza): The company initially sold its products directly to runners at track meetings across the Pacific Northwest where Nike is based.
--:-- Host (Jessica Mendoza): And that face appeal was part of its strategy for decades.
--:-- Host (Jessica Mendoza): But during Donahoe's tenure, running wasn't a focus.
--:-- Host (Jessica Mendoza): Inti says that if you go out for a run, you'll probably notice.
--:-- Host (Jessica Mendoza): I went to Portland, Oregon earlier this year, and I met with a runner, and she was telling me about her run club.
--:-- Host (Jessica Mendoza): Then she started telling me about how brands showed up all the time to like raffle products like sneakers.
--:-- Host (Jessica Mendoza): And it's like a party.
--:-- Host (Jessica Mendoza): And they kept telling me that all these brands were showing up except for Nike.
--:-- Host (Jessica Mendoza): And, you know, Nike is from Oregon.
--:-- Host (Jessica Mendoza): So it was pretty weird that I kept hearing that.
--:-- Host (Jessica Mendoza): And that's when I think I noticed that, oh, no, this is like real.
--:-- Host (Jessica Mendoza): They've lost a significant portion of the running category to other brands.
--:-- Host (Jessica Mendoza): Of course, a lot of people are using Nike, but you can see it also in their sales.
--:-- Host (Jessica Mendoza): I think in their annual sales report, Nike shared that they actually sold 7% less pairs of shoes than they did last year.
--:-- Host (Jessica Mendoza): Which suggests that these other brands are sort of like chipping away at their market share.
--:-- Host (Jessica Mendoza): Well, I mean, those other brands like Hoka, On, New Balance, they're growing.
--:-- Host (Jessica Mendoza): They're not declining.
--:-- Host (Jessica Mendoza): So somebody is getting that 7% chunk that Nike lost.
--:-- Host (Jessica Mendoza): Executives at the company have acknowledged that they've lost ground in the running category.
--:-- Host (Jessica Mendoza): So Nike had lost its connection with the running community.
--:-- Host (Jessica Mendoza): It had become uncool to sneakerheads.
--:-- Host (Jessica Mendoza): And it had hurt its relationships with retail partners.
--:-- Host (Jessica Mendoza): Things weren't going well for Donahoe, and they were about to get worse.
--:-- Host (Jessica Mendoza): That's next.
--:-- Host (Jessica Mendoza): By December of last year, Nike needed to cut costs by $2 billion, and Donahoe announced that they would lay off about 1,600 workers.
--:-- Host (Jessica Mendoza): In February, a month before the layoffs were set to begin, Employees were on edge and morale was low.
--:-- Host (Jessica Mendoza): So Donahoe called the virtual all hands.
--:-- Host (Jessica Mendoza): 20,000 employees logged onto the Zoom call as Donahoe spoke.
--:-- Host (Jessica Mendoza): When Donahoe started talking about accountability, saying that he and his team held themselves accountable for all the mistakes that had happened at the company,
--:-- Host (Jessica Mendoza): Somebody in the chat said that if they were really holding themselves accountable, why didn't he give himself a salary cut?
--:-- Host (Jessica Mendoza): Another chimed in, typing, quote, accountability. I do not think that word means what you think it means.
--:-- Host (Jessica Mendoza): And then people started, you know, like adding the laughing emoji.
--:-- Host (Jessica Mendoza): They were criticizing his ability to be a leader.
--:-- Host (Jessica Mendoza): They were criticizing all the decisions that he made.
--:-- Host (Jessica Mendoza): And someone said, I hope Phil Knight is watching this right now.
--:-- Host (Jessica Mendoza): I think that was very indicative of how people were feeling.
--:-- Host (Jessica Mendoza): I'm talking about like dozens of people writing comments like this in a very public chat that is monitored by human resources.
--:-- Host (Jessica Mendoza): So it was a very brave and risky thing to do.
--:-- Host (Jessica Mendoza): Yeah, it feels like the kind of thing you do when you feel like you don't have very much to lose anymore.
--:-- Host (Jessica Mendoza): It was literally like a protest, like an online protest against the CEO of the company that you're employed by.
--:-- Host (Jessica Mendoza): When Inti sat down with Donahoe a few months ago, he asked him to reflect on that disastrous all-hands.
--:-- Host (Jessica Mendoza): There was that episode of the Zoom call, and I just wanted to, you know, hear from you.
--:-- Host (Jessica Mendoza): Like, how does that make you feel, and do you need to address it?
--:-- John Donahoe: One of the things that I think is special and unique about Nike is how much our employees love sport and how much they love Nike.
--:-- John Donahoe: And just like in a locker room of a sports team people have different opinions.
--:-- John Donahoe: And so we welcome and encourage that.
--:-- John Donahoe: Our employees have been through a lot.
--:-- John Donahoe: They've had this growth. And we're going through a period of adjustment.
--:-- John Donahoe: And so anytime there's uncertainty, it creates anxiety and concern.
--:-- John Donahoe: And I understand that.
--:-- John Donahoe: Our leadership team understands that.
--:-- John Donahoe: It's a challenging time on that front.
--:-- John Donahoe: Or trying to communicate as clearly as we can.
--:-- Host (Jessica Mendoza): By the time of the All Hands, Donahoe already had plans in motion to change strategy.
--:-- Host (Jessica Mendoza): He was busy rebuilding relationships with retail partners and pulling back on digital sales.
--:-- Host (Jessica Mendoza): The company was also scaling back on the production of its classic sneakers and trying to reconnect with the running community.
--:-- Host (Jessica Mendoza): But unfortunately for Donahoe, it was too late.
--:-- Host (Jessica Mendoza): Were there any signs that, like, this effort from Donahoe, this sort of change in strategy was just not going to be enough and that Nike was thinking about getting new leadership?
--:-- Host (Jessica Mendoza): I think there was a sign and sources have mentioned this before, but Nike co-founder Phil Knight came out and said that Donahoe had his unwavering support.
--:-- Host (Jessica Mendoza): Which was a, you know, a very rare show of support.
--:-- Host (Jessica Mendoza): That's interesting.
--:-- Host (Jessica Mendoza): Like, why would a show of support be a bad sign?
--:-- Host (Jessica Mendoza): Because Phil Knight basically doesn't speak on the record.
--:-- Host (Jessica Mendoza): It's very rare that you see a public statement from the founder of Nike.
--:-- Host (Jessica Mendoza): And then what some people told me was that if you need to have the founder of the company come out and say something good for you while the company's delivering bad results, then there's probably something off.
--:-- Host (Jessica Mendoza): At the end of last month, Nike announced that Donahoe would be retiring.
--:-- Host (Jessica Mendoza): In a statement, he acknowledged that, quote, it became clear now was the time to make a leadership change.
--:-- Host (Jessica Mendoza): In his place, a Nike alum named Elliot Hill is set to take over.
--:-- Host (Jessica Mendoza): In a video to employees, Hill talked about what he thinks the team should focus on.
--:-- Host (Jessica Mendoza): First, we have to win now.
--:-- Host (Jessica Mendoza): We need to be serving the consumer, activating our offense, and making sure that we're delivering results while we're setting ourselves up for the future and our future success.
--:-- Host (Jessica Mendoza): Are there any lessons that Nike can take from Donahoe's tenure?
--:-- Host (Jessica Mendoza): I think for such a big company, it's difficult to make very harsh decisions without having to potentially face really harsh consequences.
--:-- Host (Jessica Mendoza): You know, they're going back to a guy like Elliot Hill because they want an insider.
--:-- Host (Jessica Mendoza): They don't want another outsider.
--:-- Host (Jessica Mendoza): Very few people have been at the helm of Nike.
--:-- Host (Jessica Mendoza): And it's like a big deal internally for the world because it's one of the biggest brands out there.
--:-- Host (Jessica Mendoza): This week, Nike released its latest earnings, showing the steepest quarterly drop in revenue the company has seen since the pandemic.
--:-- Host (Jessica Mendoza): Profits plunged 28 percent compared to last year and sales fell another 10 percent.
--:-- Host (Jessica Mendoza): So what's the path forward for Nike?
--:-- Host (Jessica Mendoza): Can it bounce back or has it lost too much ground?
--:-- Host (Jessica Mendoza): This is an increasingly fragmented industry where there are more competitors, people, investors, retailers and consumers, shoppers.
--:-- Host (Jessica Mendoza): Everyone's expecting Nike to deliver something new and great that will be memorable with the storytelling that always comes along with it.
--:-- Host (Jessica Mendoza): And, you know, I think for them to do design something for an athlete that is actually useful for sports and then actually becomes ubiquitous would be the definition of success.
--:-- Host (Jessica Mendoza): That's all for today, Thursday, October 3rd.
--:-- Host (Jessica Mendoza): The Journal is a co-production of Spotify and The Wall Street Journal.
--:-- Host (Jessica Mendoza): If you like our show, follow us on Spotify or wherever you get your podcasts.
--:-- Host (Jessica Mendoza): We're out every weekday afternoon.
--:-- Host (Jessica Mendoza): Thanks for listening. See you tomorrow.
