Who Profits from Making Sneakers?

adidas_superstar_shoes_pair
Yahoo! Blog via flickr || Creative Commons

A while ago, we have published an article based on an argument that if we really want to help third world countries and their citizens, we should buy T-shirts produced in sweatshops. Despite the low wages and demanding working conditions, this production still provides daily bread to some people. Although hard-earned, it is still better than going hungry. And this practice bears fruit: according to The Economist, the amount of middle-class households has increased from 5 to 225 million in the span of 25 years.

We are not under an illusion that a couple of articles and arguments can persuade those who strongly disagree with the conditions in these sweatshops to improve them. However, sometimes it is difficult to admit that even an honest attempt to help can make the situation even worse. These people usually understand that their requests for regulations and higher wages will bring additional cost increase. Thus, they are asking the textile corporations to absorb these additional costs by reducing their profits and margins. This raises the question whether such expectations are realistic?

Just imagine some fancy shoes which are sold in a shop for the price of 100 euro. How much do you think Adidas profits from this? People tend to think that production costs of these shoes are very low and based on that, they predict that the rest is profit for textile corporations. In fact, quite the contrary.

To cut to the chase, let us look what does the price of 100 euro for a pair of shoes consist of (these calculations are from the U.S.). Their production in factory costs 21 euro, later the product is transported by boat where the transport, insurance, and customs duties cost 5 euros. Another 8 euro is spent on marketing. 13 euro represents the overheads to manage the whole process and other costs such as development. 1 euro goes to the public budget and entire 50 euros are left for retail and distribution. If you sum it up, Adidas makes a profit of 2 euros on a pair of shoes (more efficient Nike makes 5 euros). So how can someone think that increasing the production costs on manufacturing shoes would be absorbed by their producer without any difficulties?

Scientific analysis of retail and distribution of shoes brings a lot of answers related to income regulation in developed countries – especially increasing the minimum wage rates. We already know that retail stores are buying shoes for half of their price. That is 50 euros. Out of those, 17 are related to costs of transportation and distribution management to retail stores (plus rent, labor costs, ect). 3 euros go to the public budget. And 24 euros are the costs for discounts, because retail stores are selling shoes with a discount of 24% on average. Thus, at the end of the day retail stores are left with a profit of 6 euros.

So what is the moral of this story? Competition creates pressure to decrease profits in every part of production. Therefore, if someone would like to “help” developing countries by restrictions and price regulations, there should not expect that all costs will be absorbed by the corporations. In real life, these measures bring more disadvantages to those whom we were trying to help – the ordinary people already living in bad conditions in the developing countries.

Translated by Martin Kristaly

Robert Chovanculiak
INESS