Converse also provides Nike with label diversification. For consumers with name brand fatigue, or those who admire a cheap, low-tech sneaker with an evergreen aura of cool, Converse is one of the few options in the marketplace that is also well-made and aesthetically pleasing. When shopping for sneakers, you don’t have to buy an engineered shoe with the Swoosh logo, but many are unaware that when they are buying Converse, they are also buying NIKE, Inc. (NYSE:NKE).
The economics of a desirable global brand
Foot Locker, Inc. (NYSE:FL) is a $6.2 billion concern, and though its primary market is the U.S., it is also the largest retailer of athletic footwear in Europe, with a presence in 19 countries. The company uses the strength of globally renowned brands like Converse to entice young, urban, hip customers into its European stores. Converse enjoys a reputation among younger Europeans as an edgy and rebellious brand, and Foot Locker, Inc. (NYSE:FL) features Converse and Chuck Taylors prominently on its European home page. It also engages Converse for exclusive products and co-marketing, such as the popular “Street Ready Pro Leather Vulc” line of Converse high-tops. Foot Locker can ride Converse’s prominence in introducing itself to a younger consumer in Barcelona, Rome, London, Prague, and other major cities. The thrust is selling shoes, but it’s also about upping Foot Locker, Inc. (NYSE:FL)’s cachet in metropolitan areas. This is an example of how the economics of truly global billion-dollar brands extend beyond the company that owns the trademarks.
And there is a reciprocal benefit for Nike beyond Converse sales. If Converse entices young shoppers into European (and U.S.-based) Foot Locker, Inc. (NYSE:FL) stores, there’s not a small probability that NIKE, Inc. (NYSE:NKE) will get affiliated sales. This is due to the plethora of Nike items in a typical Foot Locker Store. In fact, Foot Locker, Inc. (NYSE:FL) might also be thought of as “Nike’s Locker” — last year, it bought 65% of its merchandise for resale from NIKE, Inc. (NYSE:NKE).
If you buy a killer brand, set it free
By avoiding the temptation to replace the old-school Converse star logo with the Nike Swoosh, NIKE, Inc. (NYSE:NKE) demonstrated 10 years ago a strategic understanding of what the Converse brand might mean to it in the future. And the best case scenario has largely come to pass. Nike has achieved revenue diversification without cannibalizing its flagship products. This is a very basic question in mergers and acquisition: What will create the most long-term value — to keep or change the branding of the acquired company? In the case of Converse, NIKE, Inc. (NYSE:NKE) answered correctly.
All of the characteristics that make Converse so valuable to Nike throw into relief a long-term risk that the overall company faces: it is primarily concentrated in a single brand, and is dependent on continuous innovation and technological advances to maintain sales, while being subject to fierce competition. NIKE, Inc. (NYSE:NKE) would love to acquire several more Converses. The problem is that there just aren’t many more originals like Converse around; rather, there are few options for Nike to replicate this success. Anyone who has hitched up a pair of long, flat, white laces through fourteen steel ringlets stamped into a featherweight canvas shoe, anchored by a surprisingly comfortable, thin slab of rubber, would recognize why.
Fool contributor Asit Sharma has no position in any stocks mentioned. The Motley Fool recommends Nike. The Motley Fool owns shares of NIKE, Inc. (NYSE:NKE).
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