How is that even possible?
Say you make shoes out of cheap plastic. And they’re popular. I honestly can’t see them costing more than $10 to make (probably less with cheap Chinese labor). And they sell for $40. How do you lose $148M in one quarter?
Note: I love my Crocs Mammoth, and the kids like them too.
November 13th, 2008 at 10:21 am
I used to work for Nike. I was working there when the Nike Shox were first introduced; the first model released was selling for $210. I repeatedly was told that the cost for a pair of Shox…
-materials
-labor
-packaging
-shipping from overseas
-labor for handling in our distribution center
-shipping to retail outlet
…cost around $13. We would sell them to retailers at around $120 a pair.
So, I concur. How can you lose money doing this?
November 13th, 2008 at 11:15 am
Dude, Crocs?
SRSLY?
Whoa…
November 13th, 2008 at 11:28 am
That link was worth it for the MASSIVE SHORT SQUEEZE comment. Comedy gold. At the moment, CROX is getting murdered in the market, down over 50%.
November 13th, 2008 at 11:30 am
It depends on the layering. My (albeit limited) experience with retail manufacturing brought home the relationship between manufacturing and retail costs – a $40 croc was bought by (say) Dick’s Sporting Goods for $20, which was bought by Crocs Inc. for (as you said) $10.00.
Crocs only earned no more $10 per pair, as indirect costs come out of that half of the sale. Likewise, Dick’s earned much less than $20 per pair as *all* of their budget, except purchase costs, (related to Crocs) come out of their $20.
Mfgr – Makes for $5 – Sells for $10
Dist – Buys for $10 – Sells for $20
Rtlr – Buys for $20 – Sells for $40
If the MFGR charges $15 suddenly, and the Distributor can’t raise prices, they’ve “lost” $5 on the differential.
For Nike, if they’re the Manufacturer and Distributor all in one, they still determine the MARKET price, halve it, and sell at the half price to the retailer.
When Nike sells at a Nike-owned store (NOT COUNTING THE STORE’S COSTS), Nike may make for $13 and sell for $210. But, from the differential, all the indirect costs (salaries, storage, utilities, taxes, rents, etc) of every level need to get paid.
It’s good to be vertically integrated, and I can’t believe I’m having Business School flashbacks. Oy.
November 13th, 2008 at 12:10 pm
So Lysander, essentially what you’re saying is that the production en route is counted as a full asset, and if production costs go up then the difference, even though there’s still a profit, is counted as a loss?
November 13th, 2008 at 12:45 pm
So Lysander, essentially what you’re saying is that the production en route is counted as a full asset, and if production costs go up then the difference, even though there’s still a profit, is counted as a loss?
No.
The “profit” from each stage to the next is ONLY that income that is not directly associated with one unit of product.
If, by unit, it costs $10 to purchase a shoe, 0.50 to pay for the warehousing and inventory, 0.50 for management, 1.00 for advertising, promotional material, etc, and 0.25 for “executive” level expenses, then the single unit of shoes cost 12.25 to hold. Selling the shoe for $20 then gains a profit – before taxes – of $7.75.
Now, if the shoe suddenly costs $15 to buy, the other, indirect costs are not directly affected (being indirect – the warehouse crew still wants their pay, etc) the single unit of shoes costs 17.25, or a profit of $2.75. There’s still a profit there, just not as much. I’m guessing at costs; I don’t know that the indirect cost of a unit of shoes comes to $2.25. If it’s higher than that (say, $4.50 all told) then there might be no profit, or only $0.50 per shoe, at the newer purchase cost.
What I’m driving at is, just because the retail cost is $40, and the estimated cost to Crocs is $10, that Crocs itself has $30 in the bank. At most, Crocs would have $10 and the retailer have $20, but the retailer’s costs are going to be higher than only what they bought the shoes from Crocs.
Likewise, this is why any retailer – whether or not they are a corporation – effectively “pays no taxes.”
Retailer can buy merchandise for $10, they want to make $5 in profit, after all expenses including taxes. Thus, they’re going to sell the merchandise for 10+5+EIT. If that comes to $20, that’s good for them. If that comes to less than $20, they’ll probably still charge $20 (boosting profit) because that’s the doubling point. But, if it comes to $24, they’re not going to slash their profits to $1, they’re going to raise their retail price to 24 or 25 – based on what the market can bear. If the market can only bear $20, and it costs them (less profit) $19 to have the merchandise for sale, and they need $5 per item (for their shareholders, kid’s college expenses, a new AR15, medical expenses, or whatever) then they might not carry that particular item but a lower-costing (to them) one. It takes, generically, as much effort to sell a $19-costing item ($1 profit) as it does a $12- or $14-costing item ($8 profit and $6 profit, respectively).
November 13th, 2008 at 5:43 pm
My wife worked at a sweatshop before coming here (legally). A lot of Chinese firms will ship jobs to countries with even lower pay standards. She made $50 a month, on a 10 hour day, 6 days a week. slaving under evil Chinese masters. Might bump up to 80 bucks a month if you are willing to work all days overtime. Missing a day, however, will land you a cut in your wages. And these are clothes you will find in macys, jcpennys, etc.