As Costs Go Down, Will Nike Continue To Charge More?

In March, Nike, for the first time in five years, missed analysts’ expectations and its stock plummeted more than nine percent on a single day. The company couldn’t achieve the margins it wanted because of the high costs of making and shipping its shoes and clothes.

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In a move that didn’t get much response from consumers at the time, Nike said that to solve this, they would pass on the costs at retail.

Nike said it would increase charges for most products by 5.2 percent because of the cost of cotton and rubber.

This was the easiest thing for Nike to do instead of make its supply chain leaner or change the materials it uses. It was also perhaps the best thing to do since Nike isn’t a value brand. It’s consumers, it is believed, won’t budge if a shoe that sells for $160 now sells for $170.

But since that day in March, some of the biggest costs Nike had have plummeted. Rubber in March cost $2.45 per pound. Today, it was down to $1.48 per pound. In March, cotton was at an all-time high of $2.29 a pound. Today? It’s at 87 cents a pound, its lowest price since March 2010.

Labor costs are generally higher, but Nike has managed to move from country to country to get the best bang for its buck. Over time, Nike has shifted its manufacturing from Japan to Taiwan to the Philippines to China. And in 2010, Vietnam replaced China as the top producer of its shoes for this very reason. Out-of-control inflation might one day push the company out of Vietnam as well.

The cost that hasn’t gotten any cheaper since March is shipping. The Baltic Dry Index, which tracks worldwide international shipping prices of various dry bulk cargo, was 1,533 on the day Nike’s earnings disappointed in March. Today, that number is 23 percent higher (1,885).

Nike felt like it had to raise prices because it gets commitment with retailers on timetables that are generally a year in advance. In reality, the cost of making a product isn’t what it is at the time the shoe or shirt is in the store, it’s when the company is making it.

So the question is this: If Nike finds that it can pass on the cost to the retailer and consumer now, in a tough economy, would the company keep the prices as high when the costs come down?

Questions? Comments?