I often get asked about the pricing of my shoes. Some are amazed at how expensive they are, others are amazed at what a great deal they are. Many people have no experience assessing the value of the basic materials used or any idea how much work is involved in making them. In this series of articles I’ll go over the economics of shoe production to help develop an understanding of the way shoes are priced. This will help you understand how shoes are priced in general, and eventually, to understand how my shoes are priced.
In this article, I will cover the general economics of shoes most of us find in stores. It is from seeing the price of shoes in stores, after all, that we develop a familiarity with the price of shoes.
Mark up and Mark down
In the world of retail, the price of a shoes will typically double each time it changes hands. The number of hands a pair of shoes passes through on their way to your feet has a big impact on the price you pay. Let’s say a finished pair of shoes cost a factory $10 to produce, they will need to make some money on them, so they deliver them to the contractor for $20. From there they go to distribution where distributors will pay $40 for the pair. When the stores pick them up for inventory at $80, of course they will want to sell them for more than they paid. Prices may vary, but this is the game. You can see there is some room to mark the price up or down and still make some money.
Effects of Mass Production on Pricing
To have shoes produced in a factory, minimum orders are required. A footwear brand may have good relationships with the contractors who manage manufacturing contracts, or they might have a good relationship with the factory itself, which might allow them to start with smaller orders or spread them out over time, but a simple way to understand the most common type of shoe contract is to consider it in terms of 100,000 pairs of shoes.
The logic behind this kind of production is to accept the fact that a large number of those 100,000 pairs will not sell, but the ones that do should generate enough profit to make it worthwhile enough to go through the cycle again. They won’t sell because they don’t fit – too big, or small, or too wide or narrow. They may not sell because they don’t look good to the buyer.
100,000 pairs of shoes is a big commitment, so companies become conservative about the kinds of shoes they would produce in that number. 100,000 pairs of shoes requires a lot of material, and in most cases uniformity of the material is the highest priority. In attempt to lower the risk of this kind of purchase, a lot of effort is made to make sure the cost of materials and labor are as low as possible.
The trade off for such large orders is leverage on the price of any individual component. The cost of individual components is orders of magnitude less on a large order than they would be for a small order. Some materials simply can not be procured in small quantities – just try to get an injection mold made for your one-off custom trainers…
Currency Policy and Pricing
From the perspective of the average American shoe consumer, most shoes are made overseas. Of those shoes, the majority are made in China. China has made itself the premier manufacturer of shoes by keeping material and labor costs low. One way this is achieved is by producing the materials needed to make shoes in China, and near the shoe factories themselves. Tanneries, plastic component manufacturers, rubber soling manufacturers, etc. are all conveniently located near the factories. A tight local supply chain provides many efficiency gains that result in a low cost of basic materials. Another way is through currency policy.
The US Dollar has declined significantly against major world currencies, especially since the Fall of 2008. China has adopted a policy of matching the dollar’s decline by lowering the value of their own currency. That means, for instance, as an American buying from Europe, the prices have been getting more expensive as the dollar buys less, but buying from China prices remains the same. See Paul Krugman’s article in the New York Times: http://www.nytimes.com/2010/01/01/opinion/01krugman.html and James Fallows: http://jamesfallows.theatlantic.com/archives/2010/01/krugman_protectionism_and_the.php
On the one hand this would appear good for American shoe brands who can continue to bring in their products at the same prices and keep their profits up, but it artificially keeps the price of shoes low. It allows Chinese manufactured goods to avoid charges of “dumping” – selling them at less than cost, because the currency policy is set at a national level. Indeed, it’s difficult to see that anyone other than the body setting the exchange rate could be held accountable for this price disparity.
Where the Rubber meets the Road
My good friend Matt Menely at Mountain Soles has long maintained that there is a conspicuous disparity between the price of materials required to repair shoes and the price of new shoes. In the case of repair, we can experience the direct effect of the leverage of the 100,000 pair contract on an individual pair of shoes. To buy a replacement rubber sole from a distributor here in the US to be used in repair can costs more than the shoe originally cost to produce in China. Add to that the labor cost of removing the old sole and putting on a new one and mark it up so there’s some profit and the consumer is faced with a big dilemma. For the low cost and low quality shoes, repair is simply not economically viable. Toss the old shoes in the landfill and feed the cycle by buying new shoes or pay more for a quality shoe that can be repaired. Not and easy choice.
I provide some information here on my site to understand how shoes are made, but it takes a very keen eye to spot a quality pair of shoes. It’s a skill most shoe consumers don’t yet possess. Currency manipulation and leveraging large contracts also distorts our standard benchmark for quality – price. It is often repeated that consumers demand higher quality and lower prices, there are reasons that these don’t go together well in the world of leather shoes, as you will see in part two.