Can’t help thinking how much it really costs to produce a pair of Adidas shoes? In essence, we have all the details, which could possibly surprise you. All things considered, the actual production cost of Adidas shoes is only a small amount of the last retail value.
Surprisingly, there’s a little presentation about the exact production cost for explicit models, despite this being such a widely discussed matter. Yet the cost data isn’t that difficult to arrive at.
There’s just one pertinent point of reference. In 2014, Mathew Kish (a journalist with Portland Business Journal) expounded on the standard cost to make a pair of $100 shoes.
Borrowing inspiration from Sole Review, the actual cost to produce a pair of Adidas Yeezy 750 models, is around $76, which is then retailed at about $350.
We found it to be necessary to have a look at the specific cost required to produce certain models, and what forms of profit the business entities end up making throughout the process. Because as you may have already figured out, manufacturing costs happen to be just a little aspect of the whole process.
For this case, we’ll toss in the actual production cost of the prominent Adidas Yeezy Boost 750 as well as the D-rose Boost in comparison to their counterparts in the same footwear category.
Moreover, we’ll get closer to the whole financial workings of the maximum factory cost against rebate or rather discount retailers, and other effects money has on the overall production cost of Adidas shoes.
Production Cost
Even though business strategies differ across shoe manufacturers, basic principles will always apply in the general retail model. First off, shoe factories are located in regions with lower renting costs.
Besides, most markdown or rather discount models operate with lower staffing. After all, the only thing that matters to consumers is attractive price tags. Factory and discount stores are designed to hold greater production.
When purchasing a pair of shoes, you don’t always do so right from the manufacturer. You’ll most likely head over to the local stores and shoe dealers. These stores and chains obtain the product from brands such as Adidas.
The brand thus offers them an edge to manage its operation cost with a small profit. Retailers purchase these shoes at a discounted rate, known as Revenue or Net Sales. The industry standard margin for retailers is roughly half of the brand’s selling price. That means big brands like Adidas sell a $100 shoe to their accomplices for $50.
Short of context, such info might appear to be obscene. A pair of Adidas Energy Boost 3, which comes in at $160 cost $30 to produce. That results in a profit of $130 per pair. Famous shoe brands are actually ripping us off.
If we could calculate the brand margin as the proportion of the retail price, this particular brand makes a 2.05% profit per pair, assuming that the wholesale revenue is half of the retail price. As such for a shoe valued at $100, Adidas makes just 2.05% profit. Yet, we stated that a $160 pair cost $30 to produce. So, how does the rest of the revenue disappear?
Also Read: How Much Does It Cost To Make Gucci Shoes?
Landed Cost, Wholesale Revenue & Gross Margin
Adidas is a public company. Thus it gives everyone access to their income statements. This allows reviewers to tie in different estimations to the cost of the shoe, and derive average profit made by the on each pair.
Digging deeper into the product cost, let’s consider a model from Adidas, with respect to their financial statements that show you how much an average shoe cost to produce. It’s also good to note that specific sizes do not have their individual Free on Board costs.
The specific cost stated here basically covers the factory cost or Free-on-Board Cost. This is the cost of the shoe when stacked at the port, which is mostly the country where the manufacturing plant is situated.
This cost represents the first step of a final product’s journey, and it’s only a segment of the shoe’s actual cost. Other costs on account of insurance, customs duties, and so on get accumulated, up to the final sticker price.
The term is pretty obvious to define. Free on Board costs simply means that the supplier will take care of the transportation of finished goods till the shipping point.
However, one thing that we’re yet to know is the material breakdown of this FOB cost, also referred to as Bill of Materials (BOM). This dictates the cost of every single component employed in the making of the shoe- material usage cost per pair.
For a standard pair of shoes, the Bill of Materials will include the incurred cost of synthetic leather, threads, mesh, midsole, outsole, logos, etc. Labour and overhead costs will also be incorporated in the final costing sheet.
Information about the BOM is mostly confidential, limited to the group involved in the development of that particular model. As such, it’s hard to obtain the specific BOMs and the costing sheets.
Another thing is that the ship might run into a life-threatening storm and drop a couple of compartments loaded with thousands of shoes into the ocean. As such, the company needs to take out insurance against any unforeseen events. This works just like taking personal travel insurance with your ticket.
Gross Margin
Upon arrival to a US port, the shipment will be subjected to customs duties. This mostly involves too complex calculations, based on the Elaborate Harmonised Tariff Code (HTSUS) system to determine how much duty to be paid.
The resulting landed cost will therefore include factory cost, insurance, freight cost, and custom duties. For instance, assuming a landed cost of $22 with a wholesale revenue of $50 per pair, the company’s gross margin would be $50 – $22 = $28.
From the gross margin, the brand accounts for the cost of running the company, which includes the marketing cost. This now leads to income (gross margin less expenses), which is then taxed by the government. The remaining amount is called net income. This is the profit the brand makes from a certain pair of shoes.
Nonetheless, other versions such as the Adidas Original model provide a higher margin compared to regular sneakers and running shoes. For example, the white Adidas Superstar sells for $80, yet it’s produced for $16. This makes the production cost a simple 20% of the wholesale revenue, thus creating a much higher gross margin.