18.12.21Real Talk
ARTICLE BY Ross Dwyer

Shortages, Supply Chain Snarls and Startling Price Hikes

Sneaker Supply Chain Issues

If you stayed abreast of global business news over the last two years, you probably heard phrases like ‘skilled staff shortages’ and ‘trade headwinds’ as often as you’ve taken an L on the SNKRS app. One of the insanely counter-intuitive results of the pandemic has been a surge in demand for consumer goods, sneakers included, which has caused all sorts of supply chain snarls. Ross Dwyer spoke with a bunch of industry sources to help make sense of the challenges that may well recalibrate the game as we know it, especially in the short term. One brand told SF they’ve had to delay or cancel 60 per cent of their key releases over the next four months, which gives you some idea of the carnage ahead. It’s chaos out there!

Inflation

We’ve come a long way from cost-conscious parents freaking out at the $65 price tag on an Air Jordan 1 in 1985. Anyone remember the glory days of ‘Two pairs for $89.99’ at Foot Locker in the 2000s? How about when Air Jordan retros were $160 before the ‘Remastered’ initiative hiked them up to $190 in 2015? Over that time we have seen some natural inflationary price increases, but for the most part, brands use tactical changes to shoe specs and all sorts of tricks to keep shoe prices pretty much stable. Until now.

According to a report from the Footwear Distributors and Retailers of America, sneaker prices rose nearly 10 per cent across July and August 2021 alone, with more pain to come over the next six months. Take it to the bank, you WILL be paying a LOT MORE for your shoes in 2022. Ouch!,

Vietnamese Nike Factory

Vietnam is the new China

Breaking down the increases starts with raw materials. A global shortage of rubber and plastic, key components in athletic footwear production, has made it challenging for factories in Vietnam, Cambodia, China, Indonesia and Thailand to produce shoes at scale. Two of Nike’s biggest suppliers – Chang Shin Vietnam Co. LTD and Pou Chen Corp – have struggled to keep their operations humming at full capacity for much of this year.

In July, further calamity struck when the Vietnamese government reacted to a surge in COVID-19 cases by mandating factory closures, with many in the Ho Chi Minh area required to stay dormant for over 100 days. A decade ago this wouldn’t have been a huge issue as China was the number one source of footwear, but as wages on the mainland increased quickly, brands simply moved production to Vietnam where cheaper labour was readily available. To give you some perspective on the scale of that shift, around 30% of adidas footwear is currently made in Vietnam. ASICS, Reebok, New Balance and other brands are similarly impacted, but given that Vietnam accounts for roughly half of Nike’s footwear production, the pain will be felt more acutely in Beaverton.

What’s more, as workers started returning to work in October, many left the industry altogether or started new roles that required retraining, further impeding any immediate snap-back to efficiency. The bigger issue facing the footwear industry is that many skilled staff are chasing work in the electronics business, where increased pay and better working conditions offer substantial upgrades.

As a result, all major footwear brands will see a dent in their bottom line this year, but this is also diabolical news for retailers. We’ve heard from multiple industry sources that larger sneaker retailers will use their commercial clout to ensure their highly-prized product allocations are vigorously protected. That’s smart business for the big-box firms, but it’s guaranteed to leave slimmer pickings for mom-and-pop stores and independent boutiques. Supporting your local spot will be more important than ever.

Shoe Shipping Box

Ship and Rip

Even if brands overcome these production issues, getting the finished product to the final retail destination introduces another series of related obstacles. Shipping container shortages, increased transit costs and port delays are a triple whammy that has caused even Nike – a seemingly invincible entity with no lack of confidence and a huge PR department – to finally acknowledge it is facing an uphill battle. In September this year, Nike slashed their profit outlook pretty much in half. According to Bloomberg, ‘Full-year growth will be in the mid-single-digits rather than a low double-digit percentage rate Nike targeted earlier’. It’s not a catastrophic loss by any means, but it was enough for the share price to dip around 10 per cent when the news was announced. There may be more bad news to come.

Eric Koston with Shoeboxes

Appetite For Reduction

When the pandemic struck in March 2020, brands, manufacturers and global shipping companies all anticipated steep declines in demand and scrambled to scale back production. Sensible as those decisions may have seemed at the time, the opposite occurred as demand for consumer goods exploded. Meals at fancy restaurants and lavish vacations may have been off the table, but consumers channelled that spare cash into designer furniture, collectibles, bikes, high-end TVs and even more sneakers, catching brands and shipping services unprepared.

This unexpected surge in demand directly led to a snap increase in the price of the giant steel shipping crates that move goods around the world. Per the New York Times, shipping a container from Los Angeles to Shanghai was roughly $2000 before the pandemic and now runs upwards of $25,000! There’s also a huge backlog of cargo ships anchored outside ports in the US and Europe, the result of a build-up that has been brewing for months. There are simply not enough workers in the ports to unload the extra cargo.

Airfreight is also nuts. One brand indicated to SF that the cost of sending shoes by plane (due to a tight colab release deadline) had ballooned from $5 to over $20 per unit. Some of this price gouging might be opportunistic, but jet fuel has risen 30-40 per cent in the last six months, which will place even more pressure on UPS, FedEx and DHL to pass the blowout on to their clients.

Sneaker Camp-Out Line

The Real World

Here’s how the situation looks in the real world when a brand orders X-number of shoes for a major release. With huge pressure on factories due to the COVID closures and skilled staff shortages, the brand might have to negotiate a premium in advance to have materials put aside and stored. Payment of a ‘rush’ fee helps bump production ahead of the factory queue, then once the shoes are made, another ransom is required to unlock room on a crammed container ship. When the shoes finally make it to a port in the US, they may well be stuck on the water for weeks due to stevedoring delays. The release date is then postponed, the marketing plans are in tatters and the brand is forced to eat the extra costs.

Putting aside the personal disappointments of unsatisfied customers, the sneaker stores won’t make their budget for the month, which might mean redundancies or even closures in the long term. These knots won’t be untangled anytime soon and will likely be cinched even tighter in early 2022, but let’s hope there is a pragmatic solution afoot.

Tangled Knots

From 2015 to 2020, the sneaker industry graduated from $12 to $15 billion in annual sales in the North American market alone. The current projected figure for 2025 is well over $18 billion, which is a helluva lot of extra triple-white Air Force 1s Nike needs to sell. Given the turbo-powered trajectory, the pandemic might just be a unicorn chance for all the major players to take a moment and reflect.

Using the sell-out time and quoting the aftermarket value as barometers of success is a ludicrous reality in an optics-obsessed industry, but surely there is a way to streamline helter-skelter release schedules and product matrixes crammed with pointless takedowns. More thought and less gluttonous abandon might be the antithesis of capitalism, but maybe this logistical crisis will force an entire rethink of the business model. Call us a bunch of romantics, but Sneaker Freaker would also love to see a return to domestic manufacturing in key markets. Imagine if Nike reopened their long-dormant factory set up in Exeter, New Hampshire, and went head-to-head with New Balance as a ‘Made in USA’ competitor? The marketing rush and sales potential for a premium, US-built line of Swooshes would be immense. Thousands of extra skilled jobs would be an added boon for the local economy.

3D-Printed Sneaker

The Future Starts Here

The sneaker game is always evolving and mutating, but in the short term, prepare yourself for stock shortages and price hikes to join the cacophony of raffle Ls in your list of footwear-related headaches. On the plus side, the pivotal challenges may also mean that a new era is almost here, one with fewer releases, greater attention to detail, enhanced quality and less repetitive hype designed to satisfy the whims of marketing execs.

Just as the great man Socrates once said…‘The secret of happiness, you see, is not found in seeking more, but in developing the capacity to enjoy less.’ We more or less agree!

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