Posted: May 15 2014

So now that we established that this is in fact a real thing. Why are things the way they are?



Well, we neither have nor claim to have all of the answers, but we'll give you some of our thoughts and a chart to boot.

After yesterday's blog post, we were pretty shocked about the state of sneaker manufacturing in the U.S. I mean, seriously, 90+% of sneakers sold in America are made overseas and up until 2 years ago, not a single mainstream sneaker manufacturer even had the technology necessary to make a sneaker, in its entirety, domestically. That's pretty crazy given the size of the industry: sales of athletic shoes in the U.S. totaled ~$10 billion last year. It's even crazier given the size of these mainstream sneaker manufacturers: if Nike were a country and its market cap was its GDP, Nike would be the 66th biggest country in the entire world (ranked by GDP).So, we began asking ourselves, “what the hell is going on with mainstream sneaker manufacturers in the U.S.?”Well, we couldn't begin to answer what the hell is going on” without first looking into if anything is “going on” at all or if the trends in the footwear and apparel spaces are simply a reflection of general production and manufacturing trends. After all, we do hear about offshoring all the time. Perhaps we're making a big deal about nothing. Perhaps apparel and footwear production trends just mirror the overall economy?Nope, that's not the case.Below is a chart (labeled Exhibit 1) that illustrates what percentage of the goods that we purchase/consume are made in the U.S. In other words, it shows what % of what you buy or use, by industry, was made in the good 'ole U.S.A.Many industries function as expected. For instance, it should come as no great surprise that 90+% of Food and Beverages consumed in the U.S. were made in the U.S. There are all sorts of factors that lead to that being the case ranging from government regulation (the FDA and other associated bodies) to logistics, particularly the fact that some foods have a limited shelf life, others don't travel well, etc.Other industries are surprising (at least they were to me). For instance, I would have never imagined that 75+% of the furniture that we buy and/or use in the U.S. was made in the U.S.But let's focus in on our old friends in the apparel, footwear, and accessories spaces. Why? Because they are special. So...damn..special. But special in a bad way. How so?Well, of all the industries and sectors studied, apparel, footwear, and accessories ranks the lowest in terms of (bought and/or used in the U.S.) / (made in the U.S.) and it's the lowest by a wide margin. In fact, less than 10% of the shoes, clothes, and accessories that we buy and/or use in the U.S. each year are actually made here; computers and electronics, second to last, stands at 40+%.Above is a chart of industries and the primary manufacturing costs /share of retail cost attributable to logistics across each industry. Apparel, footwear, and accessories sits at the top left in the chart above. Why and what does it all mean?Well, it sits at the top left because both labor costs are a large portion of the total cost to make apparel, footwear, and accessories and because logistics costs are a very small portion of the retail price of these products. And that makes perfect sense. Why?Well, in an industry in which hardware is the bulk of the input cost, the competitive advantage that one country might have over another, with respect to cost of components, will slowly evaporate as manufacturing processes become more efficient and materials become essentially commoditized.Another way to say this is as follows:Sooner or later, everyone, everywhere will learn how to make the same parts and pieces just as cost effectively as everyone, everywhere else. So, where I get those parts and pieces no longer matters. I can get them for the same price any and everywhere AND because the majority of what it costs to make my product is the cost related to these parts and pieces (not for the people who assemble them, etc.), I can afford to manufacture wherever the hell I feel like it.Well, apparel, footwear, and accessories are the EXACT OPPOSITE of the type of industry I described above. Instead, in the apparel, footwear, and accessories industries, the vast majority of costs are labor cost. And while we can build machines to replace humans, for the time being, if we are comparing the wages of workers in the U.S. to wages of workers in “low-cost” countries...well, there is no comparison. There is no contest.1. Yes, the footwear, apparel, and accessories industries are outliers with respect to domestic versus foreign production and manufacturing trends2. True, there are many reasons why this is the case3. A potential reason can be found in the breakdown of costs to make footwear, apparel, and accessories vs. other industriesGiven all of this, it's clear that it's pretty damn irrational to commit to making everything in America. Fortunately for those that do, us included, we've never really valued rationality all that highly. We've always been more of the “passionate, bold, daring” types and though it's tough to constantly “swim against the tide,” we love it and we're not stopping anytime soon.X