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The many industries that make up the world of freight have undergone tremendous change over the past several decades. Each week, FreightWaves explores the archives of American Shipper’s nearly 70-year-old collection of shipping and maritime publications to showcase interesting freight stories of long ago.
The following is an excerpt from the January 1987 edition of American Shipper (pages 49-52).
A few years ago, the folks at Nike Inc. of Beaverton, Oregon, the nation’s largest athletic footwear firm, were thinking about acquiring their own ships to handle the company’s soaring Asia-to-America shoe traffic.
Import business still was booming and freight rates generally were holding firm at a high level. With huge American consumer acceptance of Nike goods (the majority of which are made in the Far East), it was tempting to charter and fill up one’s own ships and drastically decrease those liner carrier charges.
But the people at Nike compromised between liner operations and company dedicated ships when Seawinds, looking for container traffic as a means of repositioning vessels for forest and agricultural product westbound movements, entered the increasingly crowded waters of the Pacific.
Recognizing the favorable economics involved, Nike not only entered into its first service contract for using a portion of the inbound space on Seawinds’ three chartered vessels. The import firm took a minority equity interest in the carrier as well.
As things turned out, Seawinds later failed to survive increased competition from carriers with newer, larger and faster ships and certain other difficulties, including lack of cargo balance.
Lessons learned
But looking back on the Seawinds experience and what Nike now has accomplished in terms of transportation and distribution, the lessons learned from being associated with Seawinds have made Nike more viable in today’s service contract market. The people at Nike were poised to take full advantage of deregulation of the shipping industry under the Shipping Act of 1984.
“What our Seawinds experience did for us, besides giving us very good service out of Southeast Asia which was developing at that time, was to give us insight into the transportation business,” reflected Virginia M. Hopkirk, Nike’s transportation manager, liner services.
“The other thing it did for us was to get us away from the conference mentality,” she said. When deregulation evolved, Nike was ready to derive benefits from the greater permitted flexibility in both pricing and service, she indicated.
At the time this transition was occurring, Nike was establishing a network of consolidators throughout Asia. So, the company was acquiring greater flexibility in accumulating cargo volumes for shipment to the United States — and for shipment directly to other foreign countries.
“We began to recognize that we were a big company and that our volumes could do things for us,” Hopkirk related in an interview with American Shipper at the firm’s suburban headquarters outside Portland.
Before Seawinds went out of business a few years ago, the firm was carrying 45 to 50% of Nike’s inbound surface business.
85% under service contracts
By the end of 1986, cut-rate service contract shipping accounted for 85% of Nike’s waterborne product movements from Asia to the U.S. Service contract carriers for Nike last year included Hanjin Container Lines, Evergreen Line, OOCL-Orient Overseas Container Line, American President Lines and ZIM Container Service. On a noncontract basis, Sea-Land Service also was a key carrier for Nike.
As of this writing, Nike had not yet firmed up service contracts for the new year. But Hopkirk said it was the company’s intention to stay aggressive in the service contract arena.
“Our philosophy is to work directly with the carriers,” she said. The Asia North America Eastbound Rate Agreement (ANERA) conference has been trying to rein in independent-minded members, but she noted that several key carriers either have bolted from ANERA or were seriously thinking — at last report — about doing so.
Like many other shippers, Hopkirk sees red when the subject of shipping industry re-regulation surfaces for discussion.
“I’m outraged that many carriers want to jettison the Shipping Act,” she declared. “We want to make sure we are not captive again — looking down the barrel of a loaded gun.”
Negotiating strength
As the nation’s largest seller of athletic footwear, Nike is in a position of considerable strength to negotiate favorable rates under service contracts.
During the 1986 fiscal year that ended last May 31, the company shipped 40 million pairs of shoes for the U.S. market, generating revenues of $649.5 million. Apparel items ancillary to the sports shoe market accounted for another $164.6 million in U.S. sales.
Foreign markets
In addition, foreign revenues totaling $252.7 million were generated during the last fiscal year. Nike markets its products in about 50 foreign countries. Foreign sales last fiscal year accounted for 24% of overall company revenues.
Most of the foreign sales involve shipments received directly from other foreign sources. But some shoes imported and stocked in the U.S. find their way into foreign markets.
Sometimes, new dealers overseas, such as in Switzerland, are stocked with some shoes out of U.S. inventory so as to quickly build retail selection. At the other end of the spectrum, cash customers buying shoes on a spot basis, for distribution in Ecuador, for example, are accommodated with inventories accumulated in America. Hopkirk said Nike now ships about 4,000 (40-foot-equivalent) container loads of shoes and apparel goods each year from foreign sources to the U.S. Foreign-to-foreign shipments run 600 to 800 container loads a year. For every 10 containers inbound to the U.S., Nike ships one container from the U.S. to foreign destinations.
Besides occasionally shipping foreign-made shoes out of U.S. inventory, Nike exports patented, cushioned soles. The soles, which Nike itself fabricates at Beaverton, are sent to all overseas suppliers of Nike-brand shoes.
In order to fully control its patented “Air” technology, Nike is continuing to produce its soles in the U.S. — even though higher fabrication and transportation costs are involved.
Shifting sources of supply
All of Nike’s finished footwear is manufactured overseas, although half of the company’s apparel items are made in the U.S. In terms of revenues, footwear accounts for 80% of Nike’s U.S. sales. At the outset of Nike’s shoe production, Japan was the origin of almost everything that the Oregon firm imported. Primarily because of increased labor costs in Japan, only some high-end apparel goods are imported from there now.
During the past year, Korea accounted for 57% of Nike’s foreign production. That was down, however, from 65% earlier — reflecting the trend toward lesser-developed nations producing goods for the U.S. marketplace.
Taiwan accounted for 15% of Nike’s foreign production last year. Thailand logged 10 to 12% of the firm’s traffic and the People’s Republic of China accounted for 5 to 7%. Nike has been receiving goods from China since 1980. The firm now is working with four factories there. Good growth potential for Nike is anticipated out of China, according to Kevin R. Brown, the firm’s director of corporate communications.
Most of the overseas shoe and apparel manufacturing for Nike occurs in Asia. Some apparel goods also flow from South America and a small quantity of footwear from Italy — Nike’s only European source now that the company has stopped having shoes produced in Yugoslavia. Nike was involved in Yugoslavia for only the past three years.
“We thought it would be a great place to manufacture the budget soccer shoe line for Europe” because of truck transportation ties with Yugoslavia, Brown said.
But the price of shoes made there was pegged to the German mark. So, as the dollar got weaker, the price of Nike’s Yugoslav shoes got higher. Another factor was that Nike started up some Yugoslav production of sport shoes for the U.S. market, only to discover that freight rates became too high for the product to bear.
When Yugoslavia was shut down as a Nike source and production was shifted to Asia, Taiwan became the biggest beneficiary. Containerized ocean shipments account for the vast majority of Nike’s U.S. import freight — even though air freight frequently played a dominant role in the company’s early years.
Air cargo
Sometimes an entire plane — for example, a DC-8 — was chartered to fly in shoes from [Asia].
In those days when Nike received a big order, the company had too little inventory in the U.S. to fill such an order. So, the entire order was filled via airfreight so as to quickly deliver the time-sensitive shoes. In doing so, Nike early established itself as a firm with the reputation for providing quality dealer service.
Today, with some 13,000 retail accounts in the U.S., the company has a high volume but widely dispersed base of customers. In most cases, airfreight receipts now are limited to rapid introduction of new shoes and apparel for dealers.
A few years ago, a new model of sport shoe might be in hot demand in the U.S. for at least 18 months. Now, a new shoe’s popularity period may be limited to as little as eight months, Brown observed.
“The consumer is very fashion-oriented, almost fickle,” he said. So, airfreight remains necessary at times for Nike.
Also making the shoe and apparel import business more challenging these days is the trend towards retailers stocking less inventory. Not only does this hold down physical costs, it helps assure that the stock being sold is more current — provided that the supplier is capable of making fast deliveries.
West Coast
As a consequence, fewer customers are ordering container loads of shoes or wearing apparel. Usually, the loads must be broken down for distribution rather than delivered directly. Also contributing to this situation for Nike is the firm’s entry into specialty product markets — such as shoes for lower-volume bowling alleys, tennis shops and bicycle stores.
In order to facilitate import arrivals without taking to the air too much, Nike routes most of its shipments via the West Coast rather than the Panama Canal to inland and eastern destinations. Nike is a heavy user of stack train services.
The Pacific Northwest ports of Seattle and Tacoma are Nike’s primary points of entry, according to Hopkirk. She said this is due to intermodal connections and lack of congestion relative to Southern California. Los Angeles and Long Beach, though, are large-volume ports of entry as well.
Nike’s home town of Beaverton is not far from the Port of Portland. But because Portland lacks first-port-of-call inbound liner services, the company’s Northwest-received cargo comes off the ships at the Puget Sound ports, she explained.
Today’s system of receiving Nike shoes and apparel is much improved from the days of Seawinds’ operations. While Seawinds initially was a good fit for Nike because of the firm’s need for intermodal as well as cost-effective service, Nike now has sizable shipments hitting port every three or four days instead of every 10 days via three Seawinds ships.
Three distribution points
Nike has three U.S. distribution facilities — a 635,000-square-foot warehouse at Memphis, Tennessee (which handles almost all of the firm’s U.S.-sold apparel as well as handling shoes), a 405,000-square-foot structure at Greenland, New Hampshire, and a 250,000-square-foot building at Portland, Oregon. The company has about a dozen direct-delivery customers.
Two years ago, Nike stumbled in its race for continued profits in the athletic footwear market. The firm experienced financial losses during two quarters and managed only a modest profit for the fiscal year.
“We were six months to a year behind” in reacting to a major change in American consumer tastes in the sports shoe and apparel business, Brown cited as being the key reason for the temporary sag in Nike’s fortunes. As a result, the company got stuck with some high, hard-to-move inventories.
Reflecting how fast things can change in the sports shoe and apparel business, though, the 1986 fiscal year was Nike’s best ever. Total revenues surpassed a billion dollars for the first time and net income reached $1.55 per share of common stock.
Brown said Nike has managed to cut its inventory of footwear by more than 50% during the past two years, has “inched up” prices of new products and had a phenomenally successful sales drive last fiscal year on one particular shoe line.
Also generating some savings was a tighter rein on transportation and distribution expenses. Greater use of service contracts and intermodal services contributed to that effort.
25¢ per pair for freight
Ocean freight costs, for example, now amount to an average 25 cents per pair of shoes sold by Nike in the U.S., according to Hopkirk. That’s considerably less than a few years ago prior to the firm’s entry into service contract shipping, she noted.
Based on her experience at Nike, Hopkirk has this advice for other shippers looking for ways to save on transportation costs: “Stay close to the market. Develop a long-term relationship with your carriers — carriers that serve you in both good times and bad.”
FreightWaves Classics articles look at various aspects of the transportation industry’s history. If there are topics that you think would be of interest, please send them to fwclassics@freightwaves.com
Dive into American Shipper’s archives:
FreightWaves Flashback: Customs X-rays containers
FreightWaves Flashback: UPS picks MD-11, sets financial course
FreightWaves Flashback: Miami airport theft estimates range from $100,000 to $3M
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