Sneakernomics

From Tokyo, Japan and Abu Dhabi UAE, this is Down to Business English Business News to improve your business English, with your hosts Git Montreux and Des Morgan.

Hello there Des.

Hi Skip, a warm welcome to you. How are things?

Not too bad. Well, it's been a fairly busy time at the office as of late, but I'm managing to stay on top of things.

Well that's good to hear.

And I've been trying to find a little time to fit in a bit of exercise. Haven't been too successful though.

I know what you mean. I don't exercise near as much as I used to, and I have no excuses really. Well uh just a minute. Actually I do have one very poor excuse. Uh well I need some new trainers, or as you call them in North America, sneakers.

Hey, that's a pretty good example of one of the differences between UK and North American vocabulary. You say trainers and we say sneakers.

Another example would be you say the hood of a car and we say the bonnet.

Or the American sidewalk versus the British pavement.

Yes there are many, many examples, but regional language differences isn't our topic today is it?

No, I just thought our listeners might enjoy a few of those examples.

Well I'm sure they have. But let's get back to trainers.

Sure.

Should I get a pair of Adidas or Nike?

Well, that would depend on which sport you will be doing.

If I'm honest with myself, probably just a bit of walking.

Well in that case I guess it doesn't really matter that much. Still, sneakers, trainers, running shoes, whatever you want to call them, they are a big business. And on today's show, I would like to explain how that business works.

Sounds great, so let's do it, let's get D2B down to business with the economics of sneakers. Some recent changes in sneaker design and how and where sneakers are moving into in the future.

Let me ask you this des Do you think sneakers are overpriced and

In many cases absolutely.

Okay. Now of the final purchase price, how much do you think the manufacturer gets?

Why is their portion? Hm a third, maybe?

33%? Nope. Dead wrong. Out of the purchase price, the manufacturer only gets five percent.

Really? Only a poultry five per cent I am surprised.

If you break down where all of that money goes, you will see that manufacturing accounts for 22% of the purchase price. Staff, warehousing, office rents, and patents use up eleven percent. Marketing and advertising another five percent. Freight and insurance five percent, taxes two percent, and the manufacturer's profit is, as we said, five percent.

So that adds up to fifty percent.

That's right. And that remaining fifty percent all goes to the retailer.

So the bulk of the purchase price stays in the retailer's pocket. Yeah.

But keep in mind that the retailer has a lot of expenses of their own. They have to pay for staff and rental of their premises. They have to carry all of the sizes in their inventory, And any product that they can't sell has to be moved at a pretty big discount.

I guess the retailer does have a lot of risk on their end then.

On the other hand, online retailers are able to reduce some of those expenses, especially in the area of staff salaries and expensive rent. But even they have to hold enough stock of the mini sneakers they actually sell.

Just a minute, why don't the manufacturers sell the sneakers online directly to the consumer and cut out the retailer completely?

That is increasingly what's happening. In 2017, Nike announced that their five-year target was to generate 30% of their sales directly online.

With retailers taking such a big slice of the pie, that seems like a very prudent step on Nike's part.

Absolutely. Um

Getting back to the traditional business model of selling through a retailer, I'm wondering if the quality of the product is affected. If the maker is only getting a small five percent. I mean do they invest in quality materials or do they try to squeeze out a few more percentage points by using inferior materials?

That is a good question. There is a new startup company by the name of Allbirds. They claim that the big manufacturers do indeed cut the quality of materials to keep the cost of manufacturing down.

And I'm guessing that Allbirds use only the best materials and sells their products only online?

Well not only online, but for the most part, yes, online. And, according to their website, they only use the highest quality of material.

As in good quality leather?

No, they use wool, trees, and sugar. What?

Are you talking about a pair of shoes or a walk in the forest on a cold day while eating a candy bar?

I'm talking about shoes. The upper part of all bird shoes are made of woven wool, or the fiber from a eucalyptus tree. The same eucalyptus tree that koalas eat from.

Does the sugar come in?

Sugar is for the sole of the shoe, which is made from a resin that comes from sugarcane.

I'm going to guess again that all birds claim that the materials they use are the finest.

They do. Plus they make another very bold claim. They claim their shoes are the most comfortable in the world. So pretty bold. Well

Pretty good marketing if you ask me, because now I really want to try a pair to see just how comfortable they really are.

Making the upper part of the shoe from woven material has another key advantage.

Or it would keep your feet cool in hot weather. It really fits closely to the foot and could probably be produced in a wider range of colours.

All of those are more than likely true, but for the manufacturer, the main advantage is woven shoes are cheaper to make. Sneakers made from leather require many small pieces to be stitched together, which is very labor intensive.

Makes sense. The woven upper can be made by a machine and then just attached to the sole. Also by a machine I would guess. Easy to see how that would reduce labor costs.

And that is exactly the reason why all birds are cheaper to make.

And are all birds designed to play any particular sport, like tennis, for example?

No, they're not for any specific sport, but rather for the athleisure market.

Sor sorry, sorry, the what market?

The athleisure market. This is what the footwear industry have started to call the market for sneakers that are never really used for sport. I see.

The shoes are just for leisure activities like taking a walk.

Precisely. According to a Forbes survey conducted in twenty sixteen, only twenty-five percent of sneakers sold are actually used to play a sport.

Ah, I like it.

The term started to be used around twenty fifteen. Now, another question for you Des. Do you think the sneaker market is growing or shrinking?

Hm, in one sense I would think that it's shrinking because older people are less likely to spend as much on clothing. But in another sense, dress is more casual nowadays, so I would suppose athlesia is more common, even in the workplace.

Okay, so what is your final answer?

I'm gonna go with growing. The sneaker market is definitely growing.

Okay, and you would be right. The market has in fact grown at a rate of two point eight five percent a year over the last three years, which is a trend analysts expect to continue.

Does that surprise you?

No, it makes sense for the reasons you pointed out. If anything, I would have thought that the growth rate would have been larger.

Me too. So if the athleisure market is growing, then endorsements from famous sports stars should be less and less important. Is that true?

The last mega deal was the deal between Nike and the basketball player LeBron James. Get this. It was a lifetime endorsement deal that was rumored to be worth one billion dollars. However, those kind of deals, although still important in promoting a brand, are becoming less important. The internet has really changed how sneakers are marketed.

In what way?

Internet marketing allows the big sneaker makers to market products just to the niche that they are targeting. This is a much more efficient way to spend the marketing budget, given the fact that most shoes will never see a soccer pitch or basketball court.

You know, Skip, I'm looking at the All Birds website right now. I think I might get myself some of those knitted shoes. They do look pretty comfortable.

Well do shop around. It's not just all birds who make them. All of the big sneaker companies are now making a knitted shoe. Nike, Adidas, Puma, ASICs, the list goes on. I personally like the Adidas Yeezy Boost, and if I choose one of the limited edition colors, they only cost around five hundred and ninety-nine dollars.

Hundred and ninety nine dollars just a minute. Aren't they supposed to be cheaper to make than leather sneakers?

Yeah.

But they're more expensive to buy.

Yes.

I don't understand.

Limited edition color. However, the regular ones are only around$240.

Right. But even that is more expensive than a leather pair.

Welcome to the wonderful world of

On that note, I think it's time for us to get D two V. Down to vocabulary.

Down to business English audio scripts are a great learning tool. Be sure to visit the D2B website and download your free audio script of today's podcast. Down to businessenglish dot com that's WWW dot down to businessenglish dot com.

We start off today with the adjective poultry, which means very small. In the story I used poultry to show that I was surprised. That the profit margin for sports shoe manufacturers was so small.

You could use this word at work to show that you are disappointed with how small something is. For example, I was so busy in the office last Thursday that I only had a paltry 20 minutes for lunch. Nah, it was just an example. I usually go out for a good hour and get something really tasty to eat. There are some great lunch restaurants near my office.

Food is one thing that I really miss about Japan. Where I work, we only have Subway sandwiches and Starbucks. Not a great selection.

You must eat a lot of sandwiches then.

I certainly do.

Okay. Next up is the noun sole. A sole, as it was used in today's report, refers to the bottom part of the shoe. In the story, I said that the sole of an all-bird sneaker was made from sugarcane resin.

But when you use soul as an adjective, it has a different meaning. It means the only one.

That's right. It has the same pronunciation and same spelling as the noun, but a completely different meaning. I'd say it is used a lot in business English.

An example would be if a company was the sole distributor of a certain product.

You know, there is a Canadian-made chocolate bar that I really like, available here in Tokyo. But the sole distributor is a small shop very very far from where I live. So I don't get to eat one very often.

Good example. Moving on, I'd like to talk about the business expression to be labour intensive. Something that is labour intensive is a process that takes a lot of input from a worker to complete. In the story, Skip describes the stitching of leather sneakers. being labour intensive. In other words, it takes a worker a lot of time to stitch together a leather sneaker.

Although most factories today are highly automated, the service industry is still labor-intensive. Think about hotels and medical care. They all need people to look after customers or patients.

Even though you could automate checking in and checking out of a hotel, people seem to prefer the personal touch.

I know that I do. Next up is the noun endorsement. An endorsement happens when a person approves of a certain product or item. In the story, I reported that LeBron James, the famous basketball player, had a lifetime endorsement deal with Nike.

In other words, he agreed to wear Nike clothing and shoes for the rest of his career.

And he was paid a lot of money to do so.

Endorsement is the noun form of the word, but we can also use the verb form to endorse. It's often used in politics to show that a candidate has been endorsed by a famous figure, often a former leader or official.

We hope that our listeners endorse Down to Business England.

I feel certain that they do.

And although we talked a lot about the shoemaker All Birds today, I want our listeners to clearly understand that we are not endorsing that company. Neither Des or I have actually worn a pairs of all birds, so are only reporting what we have seen on their website. We have another word on the list.

Yes, our final word today is the adjective niche, which is used to describe a market that is aimed at a very small number of customers. In the story, Skip said that the sports shoe companies now advertise their products. to an exact target or niche market.

And usually the customers in a niche market are willing to pay a higher price for something that is designed specifically to their liking. There's a coffee shop near my house where a cup of coffee sells for 1500 yen. About$16 a cup.

Are they at least putting whiskey into the coffee?

No, it is an owl cafe. When you were sitting at your table sipping your cup of steaming hot coffee, you are surrounded by live owls sitting on perches around the shop. This cafe, it's for owl lovers.

Um an owl cafe. Yes, that certainly sounds like a niche.

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Thanks for that report on Sneakonomic Skip.

My pleasure, Dev.

Something you don't usually think about.

I had a lot of fun researching the topic and you know what?

No what?

Even though I don't really need a new pair of shoes, I suddenly have the urge to go out and buy something.

Resist that urge skip. Spend your money on something you need.

Good advice. And speaking of advice, I have a sole piece of advice for our listeners. My advice is to support Down to Business English by becoming To be member.

Yeah, and I endorse that piece of advice.

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Yes. Tends to be quite labor intensive after all. Absolutely. Thanks for listening everyone. See you next time.

Bye bye.

Have a comment or question about today's show? Don't be shy. Visit the D2B website or the Facebook page and post any comments or questions there. Skip, Dez or Samantha will be sure to leave a reply. Want to get even more down to business English? Sign up for the D2B newsletter and receive updates on some of the stories covered on Down to Business English. That's www.down to businessenglish.com. Down to Business English. Business news to improve your business English.