In a socially conscious society, do you stop to think where your shoes originated from? Or pondered if the price is worth the shoe?
We can all agree that good shoes come with a high price. You may spend time trying to find the best bargains on a great shoe, or stand in line on Black Friday to find your perfect shoe at a ridiculously low price.
As consumers, we tend to ignore the reality of prices, or simply do not question the world's methods. Perhaps the information is just not clear about product costs and how much companies are actually making on a shoe.
So here is the truth about high cost of shoes. It is different than you may think.
The Origin of the Shoe
In the age of globalization, the shoe begins its journey in countries that have cheaper rent, labour, and materials.
Nike has received the brunt of scrutiny for practicing poor labor practice and being stingy on paying better wages. In reality, Nike experiences the same burden that other major companies face. Taking a business overseas gives opportunity for growth, as well as providing jobs for the local culture. It made sense in the 80's for companies to move their production overseas to save on cost and increase profits.
With new technology, many companies are shifting to automated production. However, oversea working conditions are frequently under questioning and constantly being researched.
Material and Labour Costs
The cost of materials to make one shoe averages around $15, while labour costs around $3.70 per shoe.
Researched rounded up by choice.com, revealed shoe companies willingness to reveal their labour practices. The companies who participated, all had responsible labour practices in their factories, except for the extreme amount of overtime. Companies do not own their own factories, but they hire a factory to make their product overseas. It is difficult for companies to have full control in what happens when their product is being made. With local work culture and different business practices, it can make finding common ground on human rights and wages more challenging to define.
Wages often depend on the minimum wage where a factory is located, but some companies pay more than the minimum wage. In Indonesia, a shoe factory worker is paid around $2.50 a day, while the cost of living per day averages at $4.00.
In 2012, Nike had to face paying over $1 million in unpaid overtime for Indonesian workers. The lawsuit served as a warning to other companies to be more aware of factory practices overseas. With better labour protection and higher paying wages, shoe companies actually are helping local economies overseas by providing jobs and specified skills.
Adidas produced a video that provides a visual understanding of how a shoe begins its journey. Shoes have more complicated design processes than friendly Mr. Rogers showed on TV before.
Once the shoe is carefully assembled by the hands of workers, it moves to the shipyard and sets sail…
The Shoe Sets Sail
The shoe first is loaded into a semi-truck size container with around 5,000 pairs of other shoes. The journey across the sea is usually easy going, with only minor mishaps across international waters. The cost to send a pair of shoes from Asia to the United States is only $1.00, but that does not include taxes. Custom duties and insurance charge around $3.00, which brings the total cost of revenue to an average of $25.00.
Custom duties are based upon HTSA (Harmonized Tariff Schedule) which can range from 10% to 20% for each shipment. Traders refer to this process as FOB (Free on Board) and CIF (cost, insurance, freight). Simply meaning when the shoe trades hands from the seller (FOB) to the buyer (CIF). The seller holds liability until the shipment reaches its destination, then the buyer assumes responsibility for the CIF as the shoe continues its journey.
Landed cost is a popular term used to mean cost of sales or revenue. Landed cost is the combination of fees just before the retailer takes the shoe in its custody. Each shoe has a different landing cost based on production cost, shipping, customs, and insurance. Depending on the model, a shoe can cost more to make or potentially can be taxed more.
So here comes the shocking part in the shoe's journey…
The Shoe is Harboured in a Store
Once the shoe reaches its destination, it is taken in by either the brand or a retail store. A brand makes more profit if they sell their product within their own stores, but there is more potential for brand recognition when using retailer stores.
With a shoe only costing between $24.00-$28.00 to make, you may be questioning why a shoe costs so much when you buy it. When the shoe arrives at a store, it meets a team of employees within a building that have rent to pay, lights to keep on, wages to give, and customers to keep happy. After paying for all taxes and expenses, a retailer is left with a small net profit. They are only able to keep the retail store alive by marking up the price by 100%.
A brand sells a shoe to a retailer, which in turn motivates the retailer to double the cost it charges to consumers. For example, Nike may sell a shoe to a retailer at $50, but it is charged $100 in the store. That way the store can stay afloat, the brand gets paid, and the consumer is happy with their purchase.
In paying for your shoe, you are also paying a whole chain of employees who play a piece in the shoe industry.
Retailer stores have to make some profit in order to stay afloat in the shoe industry. With shoes being a supply and demand product, retailers have to monitor and market to certain demographics.
A shoe retailer store who operates in a high income neighborhood will most likely make more profit than a retailer store in a lower economic neighborhood. The expense rate of a shoe is affected by location and the expected mark-up price set by the brand.
Shoes are a mass production that reaches from the economic powers of China and the United States to the streets of Indonesia and Thailand. Total sales of shoes came to $17.2 billion in 2015, which was a 5% increase from the previous year. It is an industry that steps across the globe with confidence that people will always need shoes.
Athletic shoes account for 41.5% of the whole shoe industry. It dominates with popularity in the casual comfort style that first originated with the sneaker in 1892. In the wave of disposable income, people were able to purchase more luxury goods, including shoes. Although the downturn of the economy in 2008 proved to affect shoe purchasing as profits went down for top companies. As 2016 progresses, there is some questioning as to the lower amount of consumerism occurring that may in turn effect future company profit.
How Retailers and Companies Understand Profits
Brand companies and retailers understand profits slightly differently. The brand takes care of the landing cost, while the price given to the retailers is referred to as revenue. The difference accounts for the gross margin, meaning, how much a brand or retailer makes in profits. After costs, sales, and taxes are taken into consideration, the total a company makes is understood to be the net sales or net income. Retailers make around $6.00 per pair of shoes, which is within your total cost of paying $100.
Each brand makes a different amount concerning shoe sales. Nike's main stock is shoes, while other companies like Adidas sell apparel, which help their profit overall. Brands can make slightly more by selling from their own stores, but only by an additional 10%. Retailers save some money by building or leasing stores with low costs. Stores just outside of cities pay much cheaper rent, and can often pay lower wages due to location.
There are 29, 360 shoe stores in the United States that total over $48 billion in revenue. With employees in retail stores totaling up to 188, 866. Footlocker alone makes $5.25 billion in annual sales with only 4,000 active stores.
Distributors hold much of the buying power when it comes to selling shoes, but big brands like Nike also hold a strong foot in the door that controls sales. Nike is spread across 45 countries and contracts with over 700 shops worldwide, while Adidas reaches 61 countries.
Discount Stores buy shoes at a higher rate, but in turn make the same profit percent overall as regular retailers. With the demand for more reasonably priced shoes and the rise of fast fashion needs, discount stores are making a growth in sales compared to regular retailers.
The shoe may be sitting in the same store for a short amount of time, or may continue onto a discount store as it becomes an older model. Either way, it awaits patiently to be found by its new owner.
The shoe is soon to fulfill its purpose in life...
The Shoe Finds a New Home
As a consumer, you peruse the stores or the internet in search of the right shoe that fits your mood, style, and purpose. Rarely questioning where the shoes came from as you walk out of the store, beaming from a new purchase. The shoe is now comfortably around your feet, basking in sweet existence. Filling you with empowerment during your run and opening a world of breaking in your shoe for future races.
Millennials and Gen Z generations are already changing how people buy shoes. History has shown the growth of stores and the excess of income to purchase high end shoes. As the age of the internet came, so did online shopping. Footwear now accounts for 23% of online sales, which mostly comes from Amazon.com.
The shoe breathes with existence along your run, but questions life…
The Shoe Questions High Prices
When the shoe finally completes it's journey of life, big companies like Nike only make around $5.00 per shoe. Which is shockingly low to how much you paid for your shoe. The answer as to why is simply the game of the industry. To make and create materials, it costs. Just like any other product in this world, the shoe has to go through its journey and pay each hand it passes through along the way. From brand design teams, to factory workers, to retailers, each section of a company plays a part in making the shoe that you take to the trail or a race.
In 1992, shoe sales amounted to over $18 billion, which increased to over $31 billion by 2014.
The profits of the footwear industry are only expected to grow in the coming years. The fashion trend of casual comfort has increased the style value of sneakers, which in turn creates a stronger industry driven by the consumer's wants. Although there may be a few challenging bumps along the way for the industry with the increasing desire for environmentally friendly shoes and the rising price of raw materials,
Social fitness and athleisure also contribute to the high cost of shoes. As trends become popular, it can drive up the price. When it comes down to it, a shoe is a collaboration of rubber, mesh, and glue. The money is really in the marketing and the brand name. When purchasing a shoe, you are also buying into a brand.
Knock-off brands can be seen as similar, but often are made in lower wage factories and have a questionable understanding about intellectual property rights. It is a battle still being investigated and sorted out to keep stores honest with manufacturing purchases.
As the shoe comes to understand its existence, it closes a chapter of life…
The Shoe Completes the Journey
The shoe completes its full cycle of life as you run the last mile before your sole gives way. The mesh torn from all the wear and tear you brought upon your feet while running. The shoe has traveled across the sea, through mountains, and onto your feet. It has made the treacherous journey from a factory in lands it may never see again that brings it to the store for your purchase.
As the shoe completes its journey it may end up retiring to donation, or being recycled for reuse of materials. It no longer questions the high cost of its existence, because it boils down to paying the hands that worked so hard to make it, and a general understanding of the shoe industry making profit.
You have the power to decide which companies you support when making a purchasing decision. If you are more environmentally and socially conscious, then double check the facts of how companies operate before choosing your next pair of shoes.
There are billions of shoes roaming around the world on their own little journey. The truth about high cost of shoes is simply that is takes people and money to make a product possible. Great shoes are expensive, but it provides jobs across the globe. Your purchase fuels families, and gives life to the economy.
Next time you tie on your shoes for that long run, ponder all the hands that made it possible for you to achieve your best mile.