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

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689 points taubek | 2 comments | 09 Apr 25 12:58 UTC | HN request time: 0.881s | source
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hx8 ◴[09 Apr 25 16:16 UTC] No.43633780[source]▶
> But if we bump the cost of freight, insurance, and customs from $5 to, say, $28, then they wholesale the shoes to Footlocker for about $75. And if Footlocker purchases Nike shoes for $75, then they retail them for $150. Everyone needs to fixed percentages to avoid losses.

I don't understand this paragraph. If Footlocker was okay with $50 profit/shoe, why do they need to claim $75 profit/shoe in their costs per shoe go up? The costs of handling the shoes, retail space, advertising, and labor are all fixed.

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crazygringo ◴[09 Apr 25 17:02 UTC] No.43634484[source]▶
It's a great question, and the answer is that you're missing the change in demand.

Let's say Foot Locker tries to keep the same absolute profit $50 and retails the shoes for $125 instead of the previous $100.

Now demand goes down, because more people will skip a new pair of sneakers. So Foot Locker's absolute profit goes down.

But they still have the same fixed retail space, advertising, and labor as you said.

So to try to keep their profitability, they need to increase the price more, which reduces demand even more, but it settles somewhere higher. And the place it settles (where total absolute profit is maximized) tends to be around the same 100% markup as before.

It doesn't need to be exactly the same, but as a general rule of thumb, these things do tend to work in proportional terms rather than absolute terms. And we're fortunate they do, because when manufacturing costs fall, that means absolute profit per unit can fall as well (while percentage remains the same), because it's made up for by more people buying.

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1. rvnx ◴[09 Apr 25 17:18 UTC] No.43634691[source]▶
There is also the fact that with each USD you can buy less and less as a private person.

So to have the same quality of life, you expect higher returns.

Which mean that you will choose to invest into companies that offers a better return, and for that, these companies will have raise their prices, which in turn, spirals into additional price raises.

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2. crazygringo ◴[09 Apr 25 17:51 UTC] No.43635079[source]▶
That's not the fundamental cause, though. Companies can't just raise prices to achieve whatever return they want, because once you go above the profit-maximizing price, the fall in demand outweighs additional revenue per item, and once you go above competitor's prices, demand similarly falls.

Yes investors look for maximal returns, but those are limited. Fundamentally the ceiling is set by demand and by your competitor's prices.