{"id":22053,"date":"2017-11-13T22:26:44","date_gmt":"2017-11-14T03:26:44","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/cutting-out-cotton-can-nike-do-it\/"},"modified":"2017-11-13T22:26:44","modified_gmt":"2017-11-14T03:26:44","slug":"cutting-out-cotton-can-nike-do-it","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/cutting-out-cotton-can-nike-do-it\/","title":{"rendered":"Cutting out Cotton: Can Nike do it?"},"content":{"rendered":"

Nike, the world\u2019s largest producer of athletic apparel and footwear, uses cotton in 98% of its products.[1], [2] Growing and producing cotton is a very water intensive process, responsible for 32% of the total water use across Nike\u2019s total value chain.[2] As factors such as temperature, CO2<\/sub> levels, and water levels vary as a result of climate change, Nike must prepare itself for fluctuations in the pricing and availability of cotton.<\/p>\n

Extreme weather has disrupted Nike\u2019s supply chain in the past. In 2008, Nike was forced to temporarily shut down four factories in Thailand due to flooding.[3] More recently, droughts in cotton producing regions of the world directly affect the company\u2019s bottom line as cotton prices are driven up and the market becomes more volatile. For example, the 2011 drought in Texas had a crippling effect on cotton production as 55% of cotton acres were left abandoned, resulting in an economic loss of $2.2 billion.[4] Although Nike is improving its own practices to leave a smaller environmental footprint by way of employing low impact materials, transforming waste into product, and investing in disruptive renewable energy technology, it must plan to rely less heavily on the cotton it currently uses that is likely to become scarcer and more expensive as a result of climate change.[2] Cotton\u2019s price volatility and overall upward trend has the potential to greatly affect Nike\u2019s bottom line if the company is unable to find suitable alternatives or more stable varieties of cotton. As shown in the charts below, cotton price has been volatile over the last few years and expectations of volatility remain high. Although Nike does not report how much it spends on cotton, it cites in its 10-K that the volatility of the price of cotton could have a \u201cmaterial adverse effect on\u2026costs, gross margins and profitability.\u201d [5]<\/p>\n

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Source: Statista<\/a><\/p>\n

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Source: Bloomberg<\/a><\/p>\n

In order to mitigate these risks in the short term, the company is focusing on sourcing a larger proportion of its cotton more sustainably (i.e., organically or through recycled materials) and using BCI-Certified cotton, which ensures the cotton is more sustainable and that farmers have been trained to reduce the use of water in growing the plants. In 2015, 26% of Nike\u2019s cotton was more sustainable and 19% was BCI-Certified. The company hopes to source 100% of its cotton more sustainably by 2020.[2]<\/p>\n

Looking further to the future, Nike is innovating to create a new \u201cpalette of sustainable materials.\u201d[2] By creating platforms such as LAUNCH as well as the MIT Climate CoLab, Nike collaborates with organizations to develop material production processes that are less susceptible to external factors and more environmentally responsible.[2], [6]<\/p>\n

In addition to its current endeavors, Nike should be incentivizing farmers to focus on planting cotton that can withstand drought and other harsh climate conditions in order to mitigate the risks of cotton supply and price fluctuations. Cotton can be bred for more extensive root systems that allow the plant to increase water uptake in times of drought.[7] Furthermore, the genes of wild, perennial cotton can be used to improve the ability of the cotton to cope with harsh climate changes.[8] Coordination with farmers, and investment in the technology available to farmers, could allow Nike to benefit from cotton varieties that are more resistant to extreme weather conditions and, therefore, are more price stable.[9]<\/p>\n

Nike could also explore the option of leveraging high-technology products already on the market that function as substitutes for cotton. Creative options are becoming available such as SeaCell, an innovative fiber made from brown Algae and Crailar, a technology that makes Hemp and Flax, which require much less water than cotton, feel like cotton.[10], [11]In addition, Nike could assess the option of using recycled materials, which other retailers have begun exploring. For example, H&M recently invested in Re:Newcell, a company that improves the quality of recycled cotton and other cellulosic fibers, making it suitable for usage in new clothing.[12]<\/p>\n

The path forward for Nike is far from straightforward as several unanswered questions remain, including:<\/p>\n