September 19, 2015    7 minute read

The Economics Of Nike’s Air Jordan Brand

The Economics Of Nike’s Air Jordan Brand

You’ve probably heard of a man named Michael Jordan and a company called Nike before. What perhaps you might not have known is the dominance that the Brand has in the market place.

  • $11,267
  • $15,000
  • $5,000

These three figures are resale prices for three different Jordan branded shoes, the Air Jordan 11 (blackout), UNDFTD X Air Jordan 4 and the Air Jordan 10 and 12 OVO editions. In all three cases these were limited editions or one off shoe releases. However for the product to re-sell for so many times more than it’s retail price, gives us the first indication of the power of the Jordan brand.

In 1984, Jordan signed his deal with Nike, although Adidas offered $500,000, double Nike’s offer. Nike included something no one had ever done: a percentage of the revenues in the deal. Nike also had an out clause, if Air Jordan’s didn’t earn Nike $3 million in the first 3 years. Jordan signed with Nike and in 1985 the shoe made $130 million in revenue. The rest is history.

Rising prices

When Air Jordan debuted in 1985 they cost $65. An astronomical price for sports shoes then, an equivalent of about $136 today. However, in 2002 the XVIIs became the first sports shoes to retail for $200 and new Jordan’s sell for higher today. It’s this continued rise in retail pricing, that is perhaps most shocking of all. Eric Myers, director at engineering firm INTEGRIS Group said

“Rising sneaker prices can be attributed to a variety of factors: rising costs of labour in China, increased costs for raw material, inflation, and general price increases, yet it appears that the price increases have significantly outpaced these factors over the past decade.”

Steve Bence a 38-year Nike veteran and director broke down the general industry cost of a $100 pair of shoes. It’s worth noting that the Jordan Brand has shoe releases that regularly eclipse this $100 mark, yet would pay a similar price for production.

Screen Shot 2015-09-16 at 09.16.45

(Source: Steve Bence)

Not the cleanest image

In order to keep costs low Nike has gone to incredible lengths, pushing labour and human rights barriers. Despite labour costs only accounting for about 4% of the total cost of production for Nike it has fought rising wages. With 171,000 Nike-affiliated workers, Indonesia is the third-largest producer of goods for the company, according to The Independent. However according to the Guardian a Nike shoe factory in Serang, Indonesia, failed to pay its workers for 600,000 hours of overtime work over two years.

An Educating for Justice report claims, a shoe factory in Sukabumi, Indonesia, which produces Nike products, allegedly hired high-ranking Indonesian military officers to force workers to agree to work for less than the country’s minimum wage. Six Nike-contractor factories in Indonesia applied for an exemption from the minimum wage law, the Australian Broadcasting Corporation reports; they needed consent from some workers in order to be eligible. If the factories get the exemption, they will be able to pay their workers $3.70 per day instead of $4 per day.

The result is a big profit margin

Clearly profit margins that these branded trainers/sneakers (not just the Jordan brand) have are very wide. As a notorious reseller Corgishoe, with several thousands social media followers, explained, “For example, a shoe that should sell for $100 is now bumped up to $125”. A large amount would be sold at the sore price upon the shoe’s release and the remainder can be sold at a discount of 25 per cent, which happens to be around the $100 manufacturer suggested retail price (MSRP), based on the production costs.

“Even at a 40-50 per cent discount on the $125 MSRP the brands are still turning a great profit…. It’s genius. Pull the wool over the consumer’s eyes, and always remember: Capitalism has no moral compass. I absolutely applaud the brands for maximizing their profit margin.”

Power of branding

The truth is Jordans can keep margins so wide because of it’s branding power. Jordan’s are luxury goods, but one that isn’t exclusive to the wealthiest. The name Jordan it self is worth millions of dollars. At a civil trial focused on the market value of Michael Jordan’s identity, Jordan was awarded $8.9 million from Safeway for using his name in an advert without his permission. In 15 years, having earned the largest single season salary NBA history, Michael Jordan took in $94 million in cumulative playing salary, whilst hitting game winner after game winner. Yet in 2014 alone over the age of 50, Jordan made more than $100 million in sponsorships.

Jordan U.S. shoe sales rose 17% to $2.6 billion in 2014, according to data compiled by SportScanInfo. Jordan has eight times the sales of the signature shoes, which is current NBA star, LeBron James. Jordan apparel and the international business have revenues over an additional $1 billion. The Jordan Brand commanded 58% market share of the $4.2 billion U.S. basketball shoe market last year, up from 54% in 2013. The Nike share jumps to 95.5% if you include Nike Basketball. The competition: Adidas (2.6% share), Under (1%) and Reebok (0.8%).

The Air Jordan XI “Legend Blue” sold out on Nike’s website in three hours. At an average price of $180, according to SportScanInfo, Nike sold more than $80 million of the “Legend Blue” within its first week around $35 million within its first day. One style. In one week. The competition: Adidas, Under Armour, Reebok and every other non-Nike/Jordan brand sold a cumulative total of $190 million for all its styles over the entire 52 weeks of 2014. Like he did on the court, Jordan has dominated all competitors that have stood in his way.

Jordan himself rates higher than any athlete in consumer perception, according to market research firm Repucom. He ranks 12th globally. The only other athlete in the top 20 was David Beckham. Jordan’s 98% awareness level in the U.S. is on par with President Barack Obama in the States.

The followership

The following for Jordan’s have reached a cult like status. They’re a must have and a symbol of status within the younger generation, collectors own pairs that have never been removed from their box. Rapper Macklemore’s song “wing$” perfectly captures the attitudes within the culture when it comes to the effect the brand has had. Beyond sports within the hip hop culture, whether it’s Multi millionaire rapper Drake, who is “still at it scrubbing J’s (jordan’s) with a tooth brush”. Or it’s Nelly who “rocks a different year of J’s every day, a different style, different colour are a must” the Jordan Brand is engrained in the culture. Nike even had to change its Jordan release dates to Saturdays so as to stop children skipping school to go buy the shoes. One thing is certain the Jordan brand is as successful and example of brand power you’re likely to come across, with significant financial benefits Nike.

chart-stock-2015

(Source: Nike)

chart-eps-2015 chart-revenue-2015 chart-roi-2015

With a growing share of a market it already dominates and the continued financial success of Nike, the partnership between Nike and Jordan will likely continue to produce billions in revenue for the company and hundreds of millions for the man. Although with demand remaining as high as it’s ever been don’t look for the prices to come down. If you want to be like Mike, you have to pay the price.

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