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

> 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.

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.

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?

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.

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.