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Nike Just Poured Gasoline on the Retail Bonfire

It's already been a terrible year for traditional retailers.

Thus far, the industry has announced plans to close 6,700 stores this year, more than any other year on record, and there's still two months left in 2017. 

It's clear what's driving this shake-up. The rise of e-commerce is making brick-and-mortar stores less appealing, and mall traffic has subsequently declined, pressuring even strong companies.

For those hoping that 2017 would be a blip rather than a trend, Nike's (NYSE: NKE) latest announcement shows that recent rash of closures could just be the start of a great retail unraveling.

Nike is leaving retail behind. Image source: Nike.

Leaving stores in the dust

At its biennial Investor Day conference on Oct. 25, Nike talked up its digital efforts over and over. The Swoosh expects digital revenue to increase from 15% of total sales this year to 30% over the next five years when it aims to hit $50 billion in overall revenue. In other words, more than two thirds of growth is expected to come from the digital channel during that time. 

In North America, where overall revenue growth was guided in just the mid-single-digits, sales at physical stores in that region could flatten or even decline, based on its digital growth expectations. 

More importantly, Nike announced a massive revamp of its wholesale strategy, which includes emphasizing just 40 retailers out of the current 30,000 retailers it distributes to. Those 30,000 retailers give Nike 110,000 points of distribution.  

Nike was careful to say that it would not cut off its vast network of retail partners but that it would focus on 40 retail partners, including Foot Locker (NYSE: FL) and Nordstrom Foot Locker shares swung wildly during the conference but emerged significantly higher.

The company is favoring retailers that will give them dedicated in-store space for Nike products, with Nike-trained employees to help customers. It will reward them with exclusive product, marketing efforts, and shoe drops. 

Nike Brand President Trevor Edwards didn't mince words when he said that "undifferentiated, mediocre retail won't survive," adding, "We will be shifting away from this over the next five years."  

The sportswear brand has shown what it means by differentiated retail with its concept store in New York's SoHo neighborhood and the nearby 45 Grand, Nike's exclusive showroom and design studio where guests can get custom Presto X's in less than 90 minutes. 

The customizable Presto X. Image source: Nike.

It's clear now that the company's focus will be on the digital sales channel and premium in-store experiences like the ones above. Simply distributing sneakers to stores is no longer a priority. The internet makes those access points unnecessary.

Retailers are watching

Nike has more power than any apparel or footwear brand in the world, and many retailers depend on a consumer-driving label like the Swoosh to bring traffic into their stores. More than 60% of Foot Locker's sales come from Nike, and the company is a key partner for retailers like Finish Line and Dick's Sporting Goods as well as those outside the sportswear sphere. 

With $35 billion in sales, Nike has the ability to rewrite the rules in retail, and its peers are likely to follow suit. It's already clear that direct-to-consumer is the way of the future. After getting burned by retail bankruptcies, Under Armour is increasingly betting on direct-to-consumer, where revenue grew 20% in its most recent quarter, and Adidas expects e-commerce revenue to quadruple from from 1 billion to 4 billion euros from 2016 to 2020.  

It's not just sportswear. Ralph Lauren is cutting back on its wholesale distribution to retailers like department stores and closing its own underperforming stores. Other luxury brands like Coach and Michael Kors are operating from a similar playbook, trimming inventory it ships to its traditional retail partners. 

The old industry saying, "Pile 'em high and watch 'em fly," no longer plays. Retailers who want to survive will need to heed suppliers' wishes and become more experience-focused. In the digital age, the storefront, that once-crucial middleman, is no longer necessary. As Nike's Edwards said, some retailers will inevitably get left behind.

If 2017 was a bonfire for the retail sector, the coming years could turn it into a full-fledged inferno.

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Jeremy Bowman owns shares of Nike and Under Armour (C Shares). The Motley Fool owns shares of and recommends Coach, Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool owns shares of Michael Kors Holdings. The Motley Fool recommends Nordstrom. The Motley Fool has a disclosure policy.