Nike's 'Reverse Auction' Review Is a Bad Omen for Agencies

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Nike Hyperadapt 1.0
Nike Hyperadapt 1.0 Credit: Nke

Nike is taking a fresh look at its digital agencies with a "reverse auction" style global review in which it is collecting rate information, signaling it could put more pressure on fees. The sportswear giant recently initiated the process via its global procurement department, according to a document obtained by Ad Age.

Roster agencies are being asked to provide new information on their rates and capabilities. Nike then plans to run a "reverse auction sourcing event" for agencies and update its agency contracts with new pricing. Reverse auctions are generally frowned upon in the agency industry as a signal that clients are seeking the lowest bidders. The fact that a high-profile, marketing-driven company such as Nike is using the process could be a bad omen for the agency world, which is struggling to adapt to rising pressure from clients seeking lower rates.

Reverse auctions "are typically reserved for commodity-based industries," said one agency executive who has worked with Nike. The company's move to deploy one with agencies is "a very dangerous and slippery slope."

A Nike spokesman declined to comment. The document was addressed to Nike digital partners and suggests the company wants better visibility into its agencies. Several agency executives confirmed receipt of the document.

Nike works with a wide swath of agencies worldwide, such as R/GA, Wieden & Kennedy, Anomaly, Laundry Service, The Program and Mindshare, but it was not immediately clear which shops the reverse auction will affect.

Nike spent $3.17 billion on worldwide advertising in 2016, according to the the latest full-year data from the Ad Age Datacenter.

Strictly defined, reverse auctions—also referred to as e-auctions—occur when sellers compete to win bids for products or services by submitting prices they are willing to charge. Contracts are typically awarded to the lowest bidder. This is different from a regular auction in which buyers compete to win services.

Speaking generally about reverse auctions in advertising, Casey Burnett, founder and managing partner of The Burnett Collective, told Ad Age that they are not a common practice, but his consultancy is "starting to hear more and more about companies running these types of reviews."

"The line that I've heard from people who have used this type of system is 'it allows us to validate what fees the marketplace is willing to charge for our given statement of work,'" says Burnett. "However, I believe there are plenty of other ways to validate agency fees without this type of process."

He adds that this is a "talent-based industry" and the reverse-auction style review means that agencies are "judged on lowest common denominator criteria with very little distinction."

"I've yet to see selection criteria that can properly distinguish agencies in this type of evaluation," says Burnett.

The reverse auction could potentially help companies drive costs down, he says, but it may not work out in the long run. "Hiring the wrong agency or the wrong team simply because they were cheaper isn't going to grow the brand or business," says Burnett. "Chances are the relationship won't last long, meaning the marketer will likely run another review and onboard another agency within a short period of time." At the end of the day, Burnett says that "chemistry" between a client and agency is far more important in the long term for a brand.

Nike is undertaking the process as it battles a sales slump in its home market of the U.S. and spirited competition from Adidas. North American revenue fell 5 percent in the quarter ending Nov. 30, Nike reported. The loss was offset by gains in global markets including China, where revenue surged 16 percent.

On a Dec. 21 earnings call, CEO Mark Parker pointed to Nike's "strategic shift to digital," which encompasses everything from e-commerce investments to so-called connected products like Nike-branded NBA jerseys for fans that include embedded chips. After downloading an app, fans can tap the jersey to get real-time content delivered to smartphones, like game highlights and musical playlists for their favorite players.

This spring, Nike plans to run a pilot program with Stitch Fix, an online service that pairs shoppers with stylists that help consumers select apparel that fits their tastes. Parker also said Nike is extending its pilot with Amazon, where the company began selling its products for the first time last year (not including third-party sellers).

"Our digital footprint continues to scale to hundreds of millions through new partnerships," he said on the earnings call, according to a transcript. "Our strategy is to partner with platforms that advance our brand, as well as our business through presentation, pricing and consumer data to support our membership efforts."

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