What It Actually Costs To Make A Sneaker

Nike makes their shoes for two dollars a pair

The yeezy costs ten dollars to make and adidas sells it for

350

Sneakers could be considerably cheaper if brands stopped paying all that money to kanye west

Steph curry and lebron james some of you might have read comments like these on the internet

But what is the true cost of making a running shoe and how much do nike and adidas earn when you buy a new pair?

The big brands are very discreet when talking about production costs, especially since the sweatshop controversy

The companies are very careful. What data to share with the public?

Luckily, there is a great piece about the cost of making a sneaker by industry expert rahul c that he published on his website soul

review

So what are the exact costs to make a running shoe and what kind of profits can ultimately be made in this business?

As you’ll soon discover factory costs happen to be only a tiny part of the entire story

Let’s get straight to the point we chose shoe models from adidas in nike and show what it cost to make each one of them

We looked at the average cost of different colors across a single model because factory costs differ based on the color

the individual costs mentioned here are 95 percent accurate because of currency conversion and are factory or

fob costs

Fob is short for free on board which is the cost of shoes when loaded on the vessel at the port of origin

Usually in the country where the factory is located

the term is

Self-explanatory by quoting the fob cost the supplier means. Hey, we’ll take care of transporting. The finished shoes till the shipping port

It’s free till that point and once the shoes are on board of the ship. It’s your problem

The numbers you see are the fob costs for specific shoe models based on ocean shipping data

There’s a good reason why we chose adidas and nike for this exercise

They are public companies giving everyone access to their income statements that allows us to tie in other

Calculations to the cost of the shoe and deduce the average profit made by brands on each pair

in the absence of any context these numbers seem obscene a shoe which sells for 160 dollars costs 30 to make

That’s a profit of 130 dollars per pair shoe companies are truly ripping us off

but that is as good as looking at a person who earns a salary of 200k a year and say

200k a year that guy can save a million dollars in five years

That makes no sense. Does it because out of the 200k salary?

One will have to account for mortgage and car payments education loans insurance food fuel costs taxes and whatnot

So while 200k a year is a comfortable salary to live on the actual savings left over after expenses are a mere fraction of that

A fitting analogy would be to equate your salary to the retail price of a shoe

And your savings to a brand’s net profit after tax?

In 2019 adidas made around 8

In net income after taxes and nike made around 10

But remember that brand income statements are based on wholesale revenue and not retail price

So if you had to calculate the brand margin as a percentage of the retail

Price then adidas and nike made around 4 and a 5

profit respectively

This is assuming that the wholesale revenue is half of the retail price. We’ll explain those terms in a bit

In other words for a shoe priced at one hundred dollars adidas earned just around four dollars and nike made five

But didn’t we just say that a hundred sixty dollar shoe is produced for thirty. So where does the rest of the money disappear?

The factory cost only represents the first step of a finished product’s journey

As it leaves the country of origin where it is manufactured

Additional costs get piled on leading to the landed cost

Since the fob cost only covers the stage of transporting the shoe from the factory to the local seaport

The brand has to cover the cost of transporting it from asia to the final destination

It is also possible the ship might run into a nasty storm and drop a few containers containing thousands of sneakers into the ocean

So the brand has to pay for insurance to cover for any unforeseen circumstances

This works exactly like buying personal travel insurance with your plane ticket

When the shoe finally reaches a us port the shipment is assessed for custom duties

There are different duty structures even for the same commodity

So one type of footwear can have a 10 rate of duty and another could be as high as 20

At this point the factory cost has turned into cost

insurance freight and custom import duties

This is known as the landed cost and is approximately 21 higher than the factory cost

The landed cost is used to derive the cost of sales

Basically, this is the amount the company has to spend until the shoe arrives in their warehouse

And what exactly does net sales or revenue mean for a brand when buying a pair of shoes?

You might not necessarily do so directly from the brand

You will probably head over to amazon or perhaps your local foot locker

These stores and chains buy it from brands such as adidas and nike who in turn offer them the margin to cover their operational expenses

And make a small profit

The discounted rate offered to retailers is known as the revenues or net sales for the brands

The industry average for retailer margins is approximately 50

Which means a brand like adidas or nike sells a 100 shoe to their partners for 50?

The calculations work differently when brands sell through their stores or websites because they are selling to customers directly

However, direct sales are a fast growing but still small part of a footwear business

The difference between the landed cost and price offered to retailers is known as the gross margin

As you can see a 100 shoe ends up being 22

Dollars in landed costs and the brand sells it to a third-party retailer for 50

For a brand the gross margin is 28

In percentage terms, it will be 56

This gross margin number is included in income statements made available to wall street so far so good

But we haven’t discussed other expenses like the cost of running a shoe brand. What do those numbers look like?

In 2019 adidas had a gross margin of over 50 percent while nike made around 45

Numerically astute viewers might notice a disconnect

It appears that some of the adidas running shoes cost much more to make than similarly priced nike shoes

So if nike shoes cost less to make than adidas, how can they end up with a lower gross margin?

We can make an educated guess from a product standpoint

Adidas sells a lot more apparel than nike and generally apparel is a higher margin business

Nike has always been a footwear brand and that shows in their

Numbers out of the total gross margin brands will have to pay for staff salaries distribution costs marketing

depreciation taxes and other business related expenses

Fortunately, most of these numbers are available for everyone to see as long as the brand is publicly traded

In 2019

Nike spent almost 10 percent of its net sales on marketing and adidas spent even more

for all expenses other than marketing nike spent 23 percent and the german brands spent almost 29

The taxman also needs his cut. So in 2019 nike and adidas paid 16 and 25 respectively

after spending all that cash what’s left is the net income as mentioned previously that happens to be 8

Of net sales for adidas and 10 for nike

Let’s look at the overall picture on a pair of 100 shoes adidas just makes a profit of four dollars

Nike fares a bit better making five dollars as profit on a pair of 100 running shoes

Now you have a general idea of what’s behind the price tag of your new sneaker. Do you think it’s reasonable or overpriced?

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