The nipple is broken. My guess it the flare is rolling around inside the rim.
My new TokyoBike Mini Velo arrived with the EXACT same problem....essentially a packaging shortcoming.
Since I didnt opt for an LBS to unbox and assemble it, I snagged a nipple off of a wheel I have laying around and not using and Im good to go.
But...1) How does a LBS NOT have a spoke nipple of the needed size available? And how does the online seller of the bike NOT reply in a timely fashion. (Hint, the threat of a credit card charge dispute for the bicycle purchase usually gets their attention)