Why Are Running Shoes So Expensive? An MBA Analysis

We live in a world where an "affordable" running shoe is $100. Everyday running shoes are nearing $200. Race day shoes are a stone's throw from $300. At this rate, it'll cost more than your monthly mortgage payment to build a semi-decent rotation for your next marathon training block. But why? In this analysis, we dust off our MBA financial accounting chops to dive into the income statements of three of the biggest running shoe producers in the world to explain the true costs of running shoes.

Why Are Running Shoes So Expensive?

There are four key components that influence a running shoe's price: 1) materials and labor, 2) marketing and distribution, 3) research and development and 4) margin. To get a sense of why we as consumers are forking over the big bucks to get laced up for marathon training, we went straight to the metrics behind the madness—the income statements of Adidas, ASICS and Nike. 

The income statement is a snapshot of a company's financial position in a specific year, and it tells us where the company spent their money through the year. For the purposes of our analysis, we zoned in on a few major line items on the income statement:

• how much they sold (reported as revenue/sales)
• how much it cost to make the products they sold (reported as COGS, or cost of goods sold) 
• how much they had left over (reported as EBITDA, or earnings before interest taxes depreciation and amortization)—this is how we calculate margin

By looking at a shoe company's income statement, we can calculate the company's margin and get a rough sense of how much they get to keep from selling a shoe. For example, in 2022, ASICS sold $3.3 billion worth of products (revenue) and, after all their operating costs and other expenses listed on the income statement, they had $347 left over (margin/EBITDA). This means that they retain roughly 10% of a shoe's purchase price as profit. (This is of course an oversimplification, but this is Supwell, not Professor Xi's accounting class.) So for every $200 Superblast you buy, the fat tigers at ASICS stuff their pockets with Andrew Jacksons.

ASICS and the other two companies we analyzed sell products other than shoes, but since all of these businesses are squarely in the apparel industry, we can use their overall numbers as a proxy for shoe costs. Below, we dive in to the five biggest factors in running shoe cost.

1. Material & Labor Costs: 60% to 70% of Running Shoe Price

Input costs are the biggest line item for apparel companies. Production expenses are massive for these shoe manufacturers, who operate factories across the globe with the latest tech, employ thousands of workers and spend millions to buy the commodity inputs  like cotton and rubber that are needed to make a running shoe. On the income statement, these expenses are all lumped together and show up as cost of goods sold, or COGS. This represents about 55% of the companies' annual revenue and 60% to 70% of their total expenses—the lions' share of what makes a running shoe so expensive.

Here are costs of goods sold for the three shoe manufacturers in 2022:

• Adidas: $14.3 billion (58% of revenue)
• Asics: $1.8 billion (53% of revenue)
• Nike: $25.2 billion (54% of revenue)

Real life example: for a $200 shoe, $120 to $140 goes to material and labor costs

2. Marketing, Distribution & Operational Expenses: 20% to 30% of Shoe Cost

There's no sale without spending to get the word out. Marketing costs aren't broken out independently on the income statement but are accounted for under sales, general and administrative expenses. This line item can also include distribution expenses and all other general costs of doing business, like salaries and rent. This represents 40% of the firms' revenue and 20% to 30% of the running shoe cost that's passed to the consumer.

Below we've broken out sales, general and administrative costs for the three manufacturers we analyzed:

• Adidas: $9.7 billion (40% of revenue)
• Asics: $1.3 billion (39% of revenue)
• Nike: $14.8 billion (32% of revenue)

Real life example: for a $200 shoe, $40 to $60 goes to marketing and operational expenses

3. Research and Development: 0.5% to 1.5% of Shoe Cost

Research and development, also known as R&D, is one of the most important expenses for these apparel companies. To continuously grab a share of the pie, the shoe makers put themselves on an annual treadmill of releasing products in a vicious cycle, committing themselves to deliver a new iteration each year. You don't get to the Nike Pegasus 40 without 39 years of research and development.

However, this is a fraction of the cost of running shoes compared to material, labor and other costs of good sold. In 2022, Adidas spent more than $150 million on R&D and Asics spent $34 million, about 1% of revenue compared to the 55% of revenue for COGS.

Below we've broken out R&D costs for the three shoe manufacturers:

• Adidas: $167 million (0.6% revenue)
• Asics: $34 million (1.2% of revenue)
• Nike: not reported on income statement (included in SG&A)

Real life example: for a $200 shoe, $1 to $3 goes toward R&D

4. Margin: 7% to 20% of shoe cost

We'd love for running shoe producers to be benevolent purveyors of the fastest footwear, servicing the running shoe nerds of the world from the goodness of their heart. In reality, they have businesses to run, so they apply a margin on top of operating costs, which can be invested in new projects or back into the growth of the business: more research and development for next year's triple–carbon plated supercritical beaded post-PEBA foam marathon racer with space station–grade titanium infused laces.

Across the three companies analyzed, the average margin was 12.2%, with Nike pocketing the healthiest chunk and Adidas the most meager. Because Nike's sales, general and administrative expenses were lower than the other two companies (32% of revenue vs 40% for Adidas and 39% for Asics), they can keep the biggest share of the shoe price vs the competitors. Remember that when you buy the Alphafly 3 for $305 next year.

• Adidas: 7.8% margin ($2.0 billion EBITDA, $24.6 billion revenue)
• Asics: 10.3% margin ($349 million EBITDA, $3.3 billion revenue)
• Nike: 18.4% ($7.4 billion EBITDA, $40.7 billion revenue)

Real life example: for a $200 shoe, $14 to $40 is the company's margin

Final Thoughts

While it can feel like we're getting ripped off every time we buy a $250 pair of race day shoes, there are huge costs that go into making a great running shoe (but how expensive is carbon fiber, really? Now that's an analysis for another day…). From the research that creates the next industry-shattering midsole compound to the marketing that suckers us into believing in the industry-shattering part, each step in the shoe-making and selling funnel adds to the cost that's passed along to the consumer. Nobody ever said shaving 30 seconds off your half-marathon PR would be cheap, but you can at least be thankful you didn't get into cycling (yet).

Sources

The Wall Street Journal. (June 27, 2023). Asics Corp. ASCCF (U.S.: OTC)  2022 Income Statement. The Wall Street Journal. https://www.wsj.com/market-data/quotes/ASCCF/financials/annual/income-statement 

The Wall Street Journal. (June 27, 2023). Nike Inc. Cl B NKE (U.S.: NYSE) Income Statement. The Wall Street Journal. https://www.wsj.com/market-data/quotes/NKE/financials/annual/income-statement

The Wall Street Journal. (June 27, 2023). adidas AG ADR ADDYY (U.S.: OTC) 2022 Income Statement. The Wall Street Journal. https://www.wsj.com/market-data/quotes/ADDYY/financials/annual/income-statement

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