The Economics Behind Sneakers

Sneakers have been a part of popular culture ever since Converse introduced Chuck Taylor canvas basketball sneakers in 1921. Cutting-edge footwear technology by leading companies, such as Nike (NKE) and Adidas AG (ADDYY), combined with youth-influenced designs, fuels demand for sneakers, especially among young consumers.

Today's retail sneaker prices—which typically range from $70 to $250—reflect an overall rise in manufacturing and marketing costs as sneaker companies compete to build and maintain brands desirable to their target markets. Celebrities and social media also play an important role in the prices at which sneakers sell.

Key Takeaways

  • Nike and Adidas make some of their profits by selling sneakers at prices that exceed the cost of manufacturing.
  • Labor is an important manufacturing cost, which companies attempt to minimize by using low-cost labor in Asia.
  • Another way companies are reducing costs is by using robots instead of manual labor.
  • Deals with star athletes and celebrities can help shoemakers sell sneakers at a substantial markup.
  • Creating media buzz, while keeping supplies just below demand, can help shoe resellers maximize their profits.

Manufacturing Costs

Sneaker companies, such as Nike and Adidas, outsource production to more than 1 million workers in factories in China and other countries around the world where the labor costs are relatively cheap. As an example, in 2014, Nike reported $28.50 as the general cost to manufacture one pair of sneakers and ship them to the United States. Nike's cost breakdown includes approximately $27.50 per pair for Chinese factory labor and overhead costs, plus $1 in shipping.

In recent years, rising costs of labor in China have impacted profit margins, and in response, some companies have moved their manufacturing operations to Vietnam, Indonesia, or Thailand. In addition, the big shoemakers are continuously shifting some manufacturing tasks from human workers to robots in order to reduce labor costs.

Branding Partnerships

A significant part of sneakers' value includes the price companies pay celebrity endorsers to attract consumers and build long-term loyalties. In the 1980s and 1990s, sneaker companies partnered with top athletes to develop footwear designed to boost athletic performance. The high-performance shoes also offered to regular consumers the promise of superior quality.

Nike's Air Jordan brand sneakers—first introduced in 1985—are the most famous example and have made Michael Jordan one of the richest athletes in the world. Roughly 20 years after his retirement from the basketball court, the slam-dunking superstar banked $145 million in the 12 months ended May 2019, including $130 million from the Nike shoe label. Nike's Jordan brand now includes Russell Westbrook, Chris Paul, and dozens of other professional athletes.

Furthermore, as young consumers associate sneakers as much with fashion as they do with sports, companies have partnered with key trendsetters in arts and entertainment to design and market sneakers. Adidas signed a partnership with Kanye West, for example, to create Yeezy Boost sneakers. The sneakers, priced at $315, sold out within minutes of their February 2015 launch, mainly because enthusiasts pre-ordered the shoes online. Rihanna, Kendall Jenner, and Jay-Z are among other celebrities that partnered with shoemakers to launch unique brands.

The competition for sales among leading sneaker companies also drives sneaker prices. For example, the up-and-coming Under Armour (UA) extended a partnership and equity agreement to National Basketball Association (NBA) player Stephen Curry. Sneaker companies spend money on celebrity endorsers, such as Kanye West and Stephen Curry, because their target customers are willing to pay premiums for shoes they associate with their favorite figures in sports and entertainment.

Social Media and Resellers

When a celebrity is involved with a line of limited-edition sneakers, some consumers want them, and they want them at any cost. Social media helps to fuel their desires. Private collectors generate buzz by posting pictures of the latest sneakers on social media. The resale market also fuels demand for sneakers. Resellers typically wait in line outside brick-and-mortar stores for limited editions, so they can resell them online at a profit.

The fact is that avid sneaker fans are often willing to pay a significant markup for popular designs. For instance, soon after retailers sold out of the limited-edition Yeezy Boost sneakers at $315, enthusiasts paid up to $1,000 for the sneakers on eBay. Social media trends and the impact of resellers indicate that sneaker companies can maximize their profits by manufacturing sneaker quantities at levels just below demand.

Article Sources
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