How much do you think it costs to make a pair of Nike shoes in Asia?

Because the market recognized value add is the capital investment and returns, including the credit basis on which inventories flow. These people are operating on a per $ basis, not a per shoe basis. If the margins % lower then the capital will flow to something else more profitable and then prices rise until the margins are relatively flat across similar productive investments.

Gains and losses are measured in % not in quantity because a dollar (or ant currency) has no fixed value.

Sorry: I intended to reply to the grandparent.

That doesn’t really make sense to me.

The market cares about dollar returned vs dollar invested. If some piece in the middle of the chain goes up and end customer prices go up as well, that doesn’t directly affect investors at all.

The way it could and likely will affect investors is if people start buying fewer shoes, but that is a different process than what you are describing.

If I’m off base can you help me understand what you are saying?

The market cares about dollar returned vs dollar-x-time invested. A shoe sits on a shelf until it is sold. If it costs 1.5 times as much to stock a store with shoes, then you need to earn 1.5 times as much money after the same time-delay.

Think in the extreme. $1 billion can probably earn more in a saving account than as a shoe that generates $50 profit after 2 weeks.

Surely you can see that putting in $75 to make $150 for a $75 profit is significantly different than putting in $10075 to make $10150 for the same $75 profit, yes?

Selling shoes that you purchase wholesale for $75 has costs that go beyond selling shoes that you purchase wholesale for $50. There's the cost of money to buy the inventory, the cost of holding the inventory (and insuring it), the cost of shrinkage, the risk of being unable to sell some of that inventory. Most of those costs scale with the wholesale cost of the product being sold, although not necessarily fully linearly. As a result, a top line $50 margin on a $75 product gains you less than a $50 margin on a $50 product -- in a world with cheap capital. If you're restricted to holding $N of inventory due to cost of capital, this becomes even worse -- not only are your bottom line margins going down as much as 15%, but you're able to do it on only two thirds as much inventory, which (depending on turnover rates, etc) can drive you even lower.

Take this to the logic absurdity, you have a car you previously sold for $2 for $1 COGS. Tomorrow COGS is $1M for the car. Could you sell it for $1M+1? No you would lose your ass because your line of credit and investments would not be able to be supported by the returns, in fact if this is your only option you would probably stop making cars altogether and invest in another business and sell your assembly line, eventually enough car companies would go out of business until the supply curve met a high enough % profit to normalize with performance of other businesses.

Now this analogy has a LOT of problems but the point is it directly affects investors, even if the interpolations inbetween are imperfect.

I don’t think this is quite a sufficient explanation. If I were an investor / owner of a distributor or retailer, I think I would observe that these businesses don’t scale arbitrarily and I would care about returns as a function of cost of goods sold, operating expense, and of cost of customer acquisition. In this context, cost of goods sold will include actual wholesale cost as well as associated costs that scale along with it: insurance, shrinkage, samples, etc. Cost of customer acquisition will not scale as strongly with wholesale cost — one would need to advertise a bit more to convince people to buy a more expensive shoe, but this should be less than linear. And operating expenses (retail square footage, warehouse space, cashiers, shipping and handling) are almost independent of the cost of the pair of shoes.

All that being said, tariffs drive up the cost of living, which drives up wages, which makes everything more expensive.

"putting in" is doing a lot of work.

A shoe doesn't sit for a year waiting to be sold.

It turns over quickly.

Sure, I can see the difference.

I hope you can see how spending $75 to make $150 revenue and $75 in profit is a much better position than spending $50 to make $100 in revenue and $50 in profit, if you are limited to how many transactions you can make in a day by physical infrastructure.

I think it's understandable for the store to charge more for their shoes, and for the stores to make more than $50/profit per shoe to cover higher capital investment and increased risk of loss, but I don't understand the logical leap where the store now can make 50% more profit per shoe.

If you can make $5k/year by investing $100k into shoe-selling, then those profits have to rise at the same rate as base costs, otherwise, people will just invest into eggplant-selling, instead.

Another perspective is that Footlocker would sell you those $25 Nikes for $300 if they could-- but if they tried, someone else would get active in the retail business and invest into a slightly less profitable operation (with lower margins) to eat into their market share.

But if the costs for everyone rise, raising the prices proportionally (instead of by fixed amount) makes total sense because it is not really gonna cost you market share (only decrease total market volume depending on consumer price sensitivity).

Note: We just observed those exact dynamics with Covid/Ukraine driven price increases, where retailers and other middlemen actually came out really good instead of sacrificing their margins to keep consumer costs down.

But you might not sell the COGS for $2M, you might do just fine with $1.5M.

From an investment perspective, $50 -> $100 is exactly the same as $75 -> $150. The difference in the number of transactions that actually occurred is trivial. I see the point you’re making but I don’t agree that it matters until the transaction value shrinks to the point where you’re selling things in huge batches (e.g a 5 cent part you sell for 10 cents, but you sell them by the 1000s)

Inventory costs money not just due to the cost of storage, but also because it’s bought on credit. The higher the price, the more money needs to be borrowed. The longer it takes to sell it, the more interest needs to be paid.

(If it's not bought on credit, there is still opportunity cost, since that money could have been used for something else.)

Okay I think I understand, thanks for explaining.

So basically the money a business uses to produce the next tranche of goods (so to speak) normally comes not from income from sales of the last tranche, but rather from external funding sources such as loans or capital injection from investors?

Is that really so common as to be universal and affect investor behavior like you suggest? Like for certain types of business, and especially for early stage businesses, I do expect this to be the case. But does it apply to the market broadly? Scary if so, since it seems like a destabilizing force.

It tends to affect larger companies even more because their cash flow is heavily buffered by lines of credit on both sides, their vendors and clients. Their customers might pay them on net 30 or even net 90 but many costs - like salaries for the people to service those contracts - need to be paid on shorter time horizons.

But profit for the investor is based on what they put in and get out, no? Profit calculated against the company’s cost seems like an implementation detail for the investor.

You can only raise prices so much before people look for alternatives to what you’re selling or do without. What we’re going to see with tariffs isn’t just price increases. We’re going to see some price increases, some reduction in selection, some stores closing, and some layoffs.

It's going to vary business to business, but if you have to spend money now to make money later, there's always going to be some preference to make sure that if the % return later is too small the money gets reallocated to something that can offer better returns.

Whereas a business that can figure out how to be paid significantly before it delivers can run on much slimmer margins.

Capital is capital. Just because you don’t need it for very long doesn’t make it free.