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why sports shoes expensive

Is it Silly to Pay for the Latest, Branded Sports Shoes?

This is adapted from What does it cost to make a running shoe?, published on Solereview and is about 3,500 words long. Carry on reading for a concise version of the article. Otherwise, click here to read the original article. The writer compared costs of three different sports brands, but for this summary, we're only going to use Nike as an example. This post is also assumed to be in USD.

“Nike makes their shoes for $2.”

“Sneakers could be considerably cheaper if brands stopped paying all that money to Kanye West, Stephen Curry and Lebron James.”

Sports shoes have become a must-have for the style conscious; especially those who are into the athleisure look. However, comments like the ones above might make us question our buying decisions when it comes to the latest footwear from our favourite brands.

Perhaps you might start feeling guilty for splurging on your latest pair of Nike Flyknits. Or you might even feel silly for buying these shoes because it seems like brands are ripping us off—making a nasty profit from our hard-earned money.

We’re going to show you a breakdown of what sneakerheads really pay for. Then, you might find that it isn’t so silly after all.

A pair of Nike shoes priced at $100 is split this way:

sports shoes cost analysis infographic

 

Let us break it down into layman's terms for you.

 

$22 per $100 shoe goes into the cost to produce

What it takes to put a pair of shoes together (materials, manpower, etc.)

 

$5 per $100 shoe goes into freight, insurance, custom duty

Nike pays for:

• Freight—from the place to manufacture to your neighbourhood corner store

• Insurance—in the event where the products may go missing or lost at sea

• Custom duty—importing and exporting fees

 

$5 per $100 shoe goes into marketing

Why would a well-established brand like Nike need to spend marketing dollars? A listed company needs to show continuous growth. For that, the brand has to constantly innovate and create new products. Every new product requires branding and promotion to attract customers—which isn’t free. Each time you see a Nike billboard or video commercial, they have to pay for your attention.

 

$11 per $100 shoe goes into other expenses and overheads

Nike has to pay:

• Staff salaries—from designers to human resource

• Working space—Nike need a place for staff to work at

• Depreciation—cost of equipment, research facilities, or any other form of long term assets

• Other business related expenses—Legal fees, vendor fees, and a whole lot of other stuff a company needs

 

$2 per $100 shoe goes into taxes

To support public services such as roads and infrastructure, and government workers (for example, firefighters)

 

Nike earns $5 for every $100 pair of shoe sold

Out of the $100 that you paid for a pair of shoes, Nike will earn an approximate 5% profit margin. But you don’t have to start feeling bad for Nike. To put things in perspective, if they sell $30 billion worth of merchandise (which they did in 2015), they will earn a net profit of $1.5 billion. Consider the many years and large investments they put into building a company that reaches millions of customers worldwide, it’s pretty fair for Nike.

But wait—there’s still a large percentage of retailer margin that is unexplained.

Basically, Nike sells you shoes through middlemen, like Royal Sporting House or Leftfoot. These retail outlets buy directly from Nike at a lower price, in order to sell these shoes for a profit. In this example, the retailer’s margin is absorbed as a cost of the shoe.

Selling through distributors is great for the brand, because this translates to lower overhead costs. Just like how Coca Cola doesn’t own their own retail point, they make higher margins through wholesale distribution. But these costs still occur, merely passed on from Nike to its distributor.

How much profit can the retailer then make?

sports shoes cost analysis infographic

 

The retailer has to cover staff salaries, rental, and marketing costs. It also has to bear income taxes.

Retail is a highly competitive sector. Retailers have to offer discounts and run loyalty programs to attract customers.

$6 is all that’s left for the retailer after selling you a $100 shoe.

What about Nike’s own stores? Does it mean Nike can make $5 + $6 = $11 per $100 shoe if we buy from their stores? Not exactly. Nike will still incur the same costs of owning a retail outlet.

So, are brands ripping us off when we buy their latest, fancy sports shoes? Now that you know what costs go into a pair of branded sports shoe, you might think again.

 

Featured photo via Offnegiysem.com

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