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TheCor oration Brand Buildin SOLESURVIVOR Nike limits AFI runs to pique demand All the Rage Since R~n Nike's Air Force 1, introduced in the '80s, still grabs attention-and huge margins NCE THE WORD HITS the street, hundreds of teens start lining up at stores. So strong is demand that new releases happen only on weekends-so kids won't skip school. When the doors open, they sell out in hours. Tickets for the current Eminem tour? The new iPod music player? Nope. We're talking about a basic basketball sneaker, Nike Inc.'s Air Force 1. Launched in: 1982, when Ronald Reagan was in the White House, the sneaker is almost pathetically low-tech. Yet the Air Force 1 remains the definition of urban cool. And while Nike Shox runners, Air Jordans, and the Cole Haan and Converse brands helped drive record earnings of $1.2 billion on sales of $13.7 billion in the fiscal year ended June 27, the AFI played a big role, too, helping Nike reach No. 48 on the BusinessWeek 50 list of top corporate performers. AFI racked up an estimated $1 billion in sales and generated profit margins of 70%, say analysts-double that of other hit sneakers. Says Tashala Spellman, a 16-year-old AFI devotee: "I like the style." She'd better: Spellman owns 10 pairs. How do you keep a basic sneaker hot for a quarter-century? Nike's genius is 68 I BusinessWeek I July 25. 2005 that it has managed to market a classic without alienating teens. At the same time, Nike creates consumer longing by keeping supplies tight and releasing collectible versions with minimal hype. "Air Force 1 is maybe the most dominant basketball franchise in this industry," Gary M. DeStefano, president of Nike U.S., says. "But there's a way to keep it fresh." The Air Force 1 hit the basketball courts and urban play grounds in the '80s and quickly caught with black youth, thanks to on basketball star endorser Charles Barkley. But soon Nike began building mystique-eschewing regular wide, and each store gets about 25 to 30. "Nike continues to control the marketplace so diligently they create pent-up demand for the shoe," says John Shanley, analyst for Susquehanna Financial Group,aninvestrnentbank. Analysts say retailers caught discounting Air Force Is receive a smaller allocation the next time or none at all. And retailers are happy to play ball: After all, the Air Force 1 makes money and drives traffic. Retailers get full price for the shoe, basic versions of which sell for $85 to $100. Collectible versions, such as one designed by famed gnifitti artist Mr. Cartoon, retail for $180. And the AFI boosts demand for other Nike footwear, says Shanley. Nike's sell-through rate-how fast a product flies off shelves in the first week-averages 20%-plus of inventory, compared with an industry average oflO%. The sell-through rate for AFls is 100%. The Air Force 1 is a Nike profit machine. Shanley estimates that the company sells each pair to retailers for about $48.50 butpays just $12 to make them in Asia. Since the design has re- ~ mained essentially un-:;;: changed, there are few devel- I ~ ~ opment costs; all of the molds ~ ~ a nd lathes have been fully de- ~ p marketing channels even as it The Best Performers restricted supply. AFI adver. tising is minimal today. Mostly, Nike lets the customers-and the rappers-do the talking. In 2002, for example, hip-hop's Nelly rapped about "my Air Force Is" and generated a No.1 hit. And such is the shoe's cult status that teenagers hang out at NikeTalk.com and other chat rooms to find out when the next AFI is coming. Every two months or so, Nike unleashes a newly tweaked shoe-a camouflage version, say, or one timed for Mardi Gras. Each release involves roughly 350,000 to 500,000 pairs of shoes shipped nation ~ reciated. And, of course, ~ N ike no longer pays anyone to promote them. "It drives a much richer margin because ~ 1;; :>." it doesn't carry an endorsement fee," ~ ~ Shanley says. ~ There's no telling how long the Air ~ Force 1 will remain hot in the faddish ~ sneaker business. "If they ever get greedy E: with the Air Force 1, or ifkids feel they're ~ being manipulated, you can see a prof- ~ itable business disappear in a hurry," says 2 Jefti-ey Bliss, president of sports marketer: Javelin Group. Until then, take a number ~ and stand in line, as Nelly says, "So I can ~ get to stompin' in my Air Force Is.". S -By Stanley Holmes in Seattle 2