Wendy’s thread of men’s fashion made me think of fashion writer Derek Guy, who had an interesting thread on Bluesky the other day about the effect of tariffs on sneakers.
He breaks it all down, but basically it costs Nike $27 to manufacture and import an imaginary sneaker, which it wholesales to Footlocker for $50, who sells it at retail for $100. Out of that, Nike gets $5 profit and Footlocker gets $6 profit. If you’ve worked retail, you’ll know those markups and margins are pretty typical.
Now you add a 145%, or $38.25 to Nike’s cost. In order to maintain margins, the wholesale price needs to be $120 and the retail price needs to be $240. They might be able to eat a little bit of it, but if you can’t maintain margins, there’s no point in being in business in the first place.
So the reality the cost of shoes will go up a lot, that means Nike and Footlocker will have lower sales, which means lower headcount.
Tariffs are a tax. If the profitable wholesale price was $50, then paying a $38.25 tariff should result in a profitable wholesale price of $88.25, not $120. That means a profitable Footlocker price at $138, not $240. The author appears to have applied the 145% to each stage but the only stage paying the tariff is the first stage, and that cost is a fixed $38.25.
My few pairs of good shoes are all from Allen Edmonds, and I’m pretty sure they are all made in the USA. I’m also pretty sure that my sneakers and my sandals are all made overseas, likely somewhere in Asia. My wife and I had really good ($$$) hiking boots that I bought in Switzerland, and were made in Switzerland, but their soles literally disintegrated into dust after a few years while sitting in the closet next to all our other shoes. We got very few uses out of them and they were quite expensive, so we were very disappointed.
Because Nike is getting 10% margins the $50 price. If it cost $88.25 their margins would go down to 5.6%. At that point, you are almost (and might actually be) better off simply putting your money in the bank.
Of course everyone would like to maintain their margins…and in the long term the tariffed products will go in that direction if they last a long time.
As an example, lets just look at a retail store. They have a number of relatively fixed costs like rent per square foot. Doubling (or 2.45x shoe prices) does not increase the rent, utilities, shipping costs and employee costs (assuming static shoe sales ).
Bottom line is that they can absorb a lot of the price increase without harming profitability with margins decreasing.
That doesn’t make sense. They still received their 10% margin on the $50 dollars and are just adding a tax on that. So then footlocker get’s it for $88.25 with the tax. Nike get’s their margin, the government gets their tax. The only way their margins could be squeezed is if Footlocker told them we are only going to pay less than $88.25
Follow the cash flow to understand the math. Sales tax and VAT are applied at the point of sale. No change in the cash flow except at the end. With tariffs the cash flow is increased at the start of the process and gets inflated at each step of the process.
That is a good point so you are saying that Nike will pay the tariff and The Footlocker will not buy them sticking Nike with huge inventory thereby forcing them to lower the price and pay the Tariff themselves?
No, I’m not saying that. I’m saying that tariffs are an expense. By definition, expenses lower your margins. Therefore in order to maintain margins, prices must be raised by the importer.
I think we are saying the same thing but in different ways. In order for their margins to shrink they would have to absorb some or all of the tariffs. If they pass it along then their margins stay the same. I am assuming that Nike will pass them along but maybe I am wrong, they might have to pay some of it. But I agree with you, although I didn’t think of it that way because I always assumed they would be passed on.
That isn’t the same thing. If you stated that they wanted to maintain their margins, then I agree but you stated that they are getting $5 profit - and that does not need to scale up by 145%.
On the last Nike earnings call, they were very proud to tell everyone that the DTC (Direct To Consumer) part of the business is growing much more rapidly than any other part. So it doesn’t only depend on Footlocker [anymore].
I’m not sure how tariffs work on retail products such as these. Nike produces 100,000 shoes overseas for $15 each, and then ships them all to the USA. They sell 70,000 of them to “Footlocker” (retail stores around the country) for $60 with MSRP at $89.99. They sell 20,000 DTC for $80 each on average (because they offer coupons and deals and free shipping and loyalty programs and etc). And then as the year passes, they have 10,000 leftover, out of that 2,000 are given away for various promos and sponsorships. The remaining 8,000 are shipped to discounters (“TJ Maxx” and the like) for $20 each.
What is the tariff on those 100,000 shoes? Is it 100,000 x $15 x tariff% or something else?
If Nike is importing all 100,000 shoes, then selling them, they’ll pay the tariff. That means paying $3.675 million for the shoes, instead of $1.5 million.
Given your scenario, they’d make $5.96 million from selling. Will Nike feel good about making $2.285 million, as opposed to $4.46 million? Or will they pass their cost on to distributors / consumers?
