The channel's margin pays for two things. Going direct only replaces one
Nike cut wholesale to own the consumer, watched inventory balloon 44%, and rebuilt the partnerships it had cut. Fourteen channel decisions on record and the same omission in each reversal.
What you are actually buying back
Fourteen distribution decisions are on record and eleven were never reversed. The three that were not share an omission, and it is the same one every time.
A wholesale or retail partner takes a margin, and companies going direct model that margin as the prize. The margin pays for two different things: shelf, and demand. Shelf is easy to replace — you build a site, you open stores. Demand generation is the part nobody prices, because it does not appear on an invoice.
Nike bought the shelf and had to rent the demand
Nike decided in June 2017 to bypass wholesale distributors and sell direct, cutting retail partners to serve the consumer personally at scale, keep the wholesale discount, own the data and control the story. Every one of those objectives is real and Nike achieved most of them.
In September 2022 inventory ballooned 44% and Nike missed its revenue projection for the first time in two years. Nike Direct reached $21.3 billion of $51.2 billion of total revenue in 2023, about 42%, against a 60% target. The record's verdict is that Nike paired a return to wholesale with a cost-savings plan and rebuilt the partnerships it had cut.
The discount was recovered. The traffic those partners had been generating was not, and had to be bought at market rates by a company that had just increased the volume it needed to move.
The ones that worked replaced the demand, not just the shelf
Apple opened its own stores in 2001 and they became the most productive retail in the world by sales per square foot. The stores were not a replacement channel; they were a demand-generation machine that happened to also sell things.
Nordstrom took the opposite route in 2012 with a strategic investor model, drawing direct-to-consumer brands like Skims, Reformation and Everlane onto its floor and site. eBay acquired PayPal in 2002 and phased out its own Billpoint. Dell exited retail for direct-only in 1994, recovered gross margin to 21.2% and swung from a $35.8 million loss to $149.2 million of net income — and later walked back into retail channels anyway.
Macy's tried to turn its small-format off-mall store from a hedge into a growth engine in 2023 on strong early comps, reached 24 stores against a 30-store target, and folded four of them into the first closure wave.
How to run this decision
Drawn from what separated the records that stuck from the ones that were undone. A step nobody in the record can be seen taking is not here.
- 01
Split the partner's margin into shelf and demand, with a number on each
Ask what proportion of sales through that partner would have happened anyway. Whatever is left is demand generation you are about to start paying for directly, and it is the number missing from every reversal here.
- 02
Model the marketing line after the cut, not before
Your customer acquisition cost rises the day the partner stops promoting you, and it rises while your volume requirement is unchanged. Nike's inventory problem was a demand problem arriving as a working-capital problem.
- 03
Go direct where you add something the channel cannot
Apple's stores offered a experience no reseller could. If the direct channel is the same product at the same price with a different logo on the receipt, you have taken on cost and given the customer no reason to change.
- 04
Cut partners in order of dependence, slowly, and measure between each
The reversals in this record cut broadly and discovered the effect in aggregate. Cutting in tranches converts an irreversible strategic bet into a series of measurements.
- 05
Keep a wholesale capability you could restart
Nike had to rebuild relationships it had ended, on worse terms than it left them. Whatever you wind down, keep the contracts, the terms and the people who know them, because the record says roughly one in five of these comes back.
- 06
Set the share target against a date and a margin, not a share alone
Nike's 60% direct target was a share of revenue with no profitability condition attached, and it reached 42% while margins and inventory went the wrong way. A mix target that can be hit by discounting is not a target.
What it looks like when this is going wrong
- The business case values the partner's margin and not the partner's traffic.Nike, 2017.
- The direct channel offers the same product at the same price.The three reversed channel decisions on record.
- Partners are being cut broadly and simultaneously rather than in tranches.Nike, 2017.
- A format is promoted from hedge to growth engine on early comps.Macy's, 2023.
- The mix target has a percentage and a date but no margin condition.Nike, 2017.