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

I've always wondered why the supply chain has exponential price increase at each step. The example given (guessed at) is the factory produces the shoe for $12.5 and sells it to Nike for $25. Nike then sells it to Footlocker for $50 and they then sell to a customer for $100. Everyone expects to mark up their costs by about 100 percent. Why is that the case? Even if we say the markup isn't 100 percent, why is it a percentage of cost at all? If the shoe factory can make $12 then why can't Nike and Footlocker both make $12 and retail the shoe for $50?

I'm not saying things should be different, just wondering why it is the way it is. If Footlocker was also selling some cheapo shoe for $50 presumably they do the same amount of work to bring that to the store. Are they only paying $25 for those? Why does it cost half for them to handle a cheaper shoe?

Isn’t this simply taking advantage of what the market is willing to pay?

Because then one unit of thing is theoretically one standard deviation from being profitable. So you can have a break even price.

The numbers at each step is only considering the marginal cost. There are various overheads that are fixed, some described in the article. And of the day the actual profit at each step isn’t necessarily very high.

On thing you have to consider is the scale at which these shoes are sold at each step. From the factory they're processed and shipped in giant containers. The overhead of handling each shoe is fairly small at that stage.

When it comes to the retailer, there's a huge increase in the amount of work and overhead for each shoe sold. And the labor cost for that work is much higher than on the Asian side of the supply chain. That's also where you get potential waste from returns and discarded inventory and such. The retailer also have their own marketing costs.

I don't find it strange at all that the retailer expects a 100% markup.

Real estate is insanely expensive - you have to sell a lot of shoes with your "100% markup" to make rent.

The flip side however - e-commerce with its totally different cost structure and same traditional RRP as brick and mortar retail - should be - a gift from above for retailers.

Can you clarify that? It sounds like there may be theory behind it, or are you trolling?

because businesses have overheads? and customers have brand preferences that stop (or limit the success of) Footlocker just selling generic models without Nike's involvement?

It's more of a work backwards thing. The price is set by demand, what the market will bear, etc. Then for well established supply chain / commodity goods overhead tends to rise to meet COGS. The reason is that there exists profit taking at every level of "overhead" but when the cost of revenue exceeds the cost of goods it becomes a marker of inefficiency. In the same way when manufacturers recognize that their cost are less than the retailers overhead to generate sales they see room to raise costs so markets trend to 50/50.

But consider Footlocker sells a lot of other shoes for much less than Nikes. Those shoes don't cost any less to manufacturer and depending on the brand are just as well established so the 50/50 ratio still applies. It's just that at each level the overhead adjusts to meet the ratio over time.

For fringe brands the retailers markup can be huge 10x or more.

In some cases, in e-commerce your trading rent for shipping expenses. It helps you scale quicker as you have wider reach but the variable cost of shipping and taking returns can go sideways.

The good thing about rent is it’s relatively fixed so it’s possible to gain leverage with volume. That is also a risk if volume shrinks, etc.

Nike's margin is brand.

Footlocker probably doesn't have much of a margin, the price they charge is due more to high labor and real estate costs in the US which are being passed on.

> chain has exponential price increase at each step.

The amount of risk increases at each step.

That $24 in "discounts." Almost certainly some amount of that is "shrinkage." Storefronts are expensive in more ways than one.

You could take your monthly rent and costs and then divide by size of a product times the average hold time before sale. Each item has to pay this price plus whatever you want in profit to "earn" it's place in your store. That time multiplier gets worse at each step with an extra kick in the behind if you took those items on credit.

The manufacturer holds the product for almost no time. The retailer may hold it for months.

> when the cost of revenue exceeds the cost of goods it becomes a marker of inefficiency

Welcome to Europe