Every company has its own hero’s journey – a tale of the trials and tribulations it endured to get where it is today.
With the exception of Apple (Nasdaq: AAPL) and a handful of other tech giants, most companies rarely have their origin stories told.
One such company is Nike (NYSE: NKE), which has become one of the world’s most recognizable and valuable brands.
Its hero’s tale is worth telling.
Silicon Valley’s Unlikely Startup
Silicon Valley is well known as the home of world-beating startups like Apple, Alphabet (Nasdaq: GOOGL) and Tesla (Nasdaq: TSLA).
But few investors realize that Nike also began in what was once the orange groves of San Francisco’s South Bay.
In 1962, Phil Knight, a former track star at the University of Oregon and a student at Stanford Graduate School of Business, wrote a business plan to import low-cost athletic shoes from Japan.
After graduation, Knight traveled to Japan to explore his idea further. He arranged a meeting and factory visit with Japanese shoemaker Onitsuka Co.
At the time, Americans had great pride in the quality of American goods. They viewed Japanese imports as inferior. But Japanese manufacturers had one great advantage: cheap labor allowed for much lower prices.
Upon returning from Japan, Knight reached out to his former track coach at Oregon, Bill Bowerman. Each invested $500 to fund Blue Ribbon Sports, and the company began importing shoes from Japan.
After four years, Knight had earned enough from Blue Ribbon to quit his job. By 1972, the company was selling nearly $2 million worth of Onitsuka shoes in America.
But not much later, Onitsuka cut out Blue Ribbon as the middleman.
Knight and Bowerman decided to develop their own shoes. They named their brand Nike, after the Greek goddess of victory.
They hired local student Carolyn Davidson to design the famous Nike “swoosh” logo. Her payment for what became one of the world’s most recognizable trademarks was $35.
Nike benefited from the boom in jogging and running that captured America in the 1970s. (I remember getting my first pair of Nikes at that time – the new cool brand at my elementary school.)
Nike sales reached $28 million in 1977.
Japanese labor soon became too expensive to produce low-cost goods like shoes, so Nike opened its own factories.
By 1979, it had become one of the larger employers in Maine and New Hampshire, with 1,500 employees across three factories.
A Quintessential Growth Stock
Nike went public on December 2, 1980, just a few days before Apple did.
At the time of Nike’s first annual report, most of its 2,700 employees and operations were based in America. That, however, turned out to be temporary.
Soon, Nike began producing its shoes in Thailand, Malaysia and the Philippines. It also began the long process of setting up shop in China, one of the first Western companies to do so.
By 1981, the company’s annual sales had soared to $457 million.
The last of Nike’s American factories closed in 1985.
As sales slowed in the 1980s, Nike realized that its primary business wasn’t shoe manufacturing. Instead, its most valuable asset was its ubiquitous trademark swoosh.
Nike shifted its focus to designing and testing shoes and building its brand. It could outsource the actual manufacturing to cheap factories.
Nike’s business model became a potent mix of high-margin, high-value American intellectual property and low-margin, low-value foreign labor.
Nike, much like McDonald’s (NYSE: MCD) and Coca-Cola (NYSE: KO), became a global symbol of American success.
Michael’s Magic Marketing
A shift to high-impact marketing was critical to Nike’s new strategy.
It already had an endorsement deal with tennis star John McEnroe. But the legendary Michael Jordan was crucial to elevating Nike’s brand.
Rookie Jordan had initially wanted to sign with Adidas. But, pressed by both his agent and his father, Jordan made a trip to Nike’s headquarters.
Nike offered Jordan $500,000 per year for five years, along with royalties from shoe sales. That was more than Jordan’s annual salary with the Chicago Bulls.
Nike also offered to design a unique shoe branded for Jordan with his design input.
As the story goes, when Jordan suited up for his first game, the NBA banned the custom shoe for not matching the Bulls’ uniform, but Jordan wore it anyway. The NBA allegedly fined him $5,000 per game.
When the shoe finally went on sale six months after it premiered on Jordan’s feet, the demand was off the charts.
Nike had expected $3 million in first-year sales. But the first Air Jordan exceeded $100 million in revenue by 1986, when it was replaced by the Air Jordan II.
A Brand With Staying Power
Today, Nike is a blue chip stock with a $231.1 billion market cap. It generated $44.5 billion in sales with a net income of $5.7 billion in fiscal year 2021.
Its brand alone is worth $39.1 billion, the 13th most valuable in the world.
If you’d invested $10,000 at Nike’s IPO, your investment would be worth about $8.1 million today ($13.9 million if you reinvested dividends).
The stock has generated an average annual return of 19.4% since its initial public offering.
Today, Knight is worth $54.5 billion.
And Stanford Graduate School of Business – where Knight first hatched his plan – now calls the Knight Management Center home.