Nike’s iconic trainers, such as the Air Jordan 1, may face a price hike due to US tariffs on imported goods from Asia.
The Impact of Tariffs on Nike’s Iconic Trainers
Nike’s iconic trainers, such as the Air Jordan 1, are a popular line created four decades ago for homegrown basketball legend Michael Jordan. However, most of its products are made in Asia, a region targeted by President Donald Trump‘s tariffs salvo against foreign countries he accuses of ‘ripping off’ Americans.
The Cost of Tariffs: A Potential Price Hike
Goods from Vietnam, Indonesia, and China face some of the heaviest US import taxes, ranging from 32% to 54%. Swiss bank UBS estimates that there will be a 10% to 12% increase in the prices of goods that come from Vietnam, where Nike produces half of its shoes. Meanwhile, Indonesia and China account for almost all of the balance of its trainer production.
Tariffs are taxes imposed on imported goods by a country's government.
They can be used as a trade policy tool to protect domestic industries, generate revenue, or retaliate against other countries' tariffs.
The World Trade Organization (WTO) regulates international trade and sets rules for tariff implementation.
Tariff rates vary widely depending on the product, country of origin, and trade agreement.
For instance, the United States has imposed tariffs on Chinese goods worth billions of dollars, while the European Union has implemented tariffs on US steel imports.
Industry analysts believe that price rises are likely but say any large price increase would reduce demand. ‘This is a very competitive industry,’ says David Swartz, senior equity analyst at Morningstar. ‘My guess is that it would be difficult for Nike to raise prices by much more than 10-15%. I don’t think it could offset most of the tariff.‘
How Tariffs Affect Nike’s Bottom Line
Nike is already facing a tight bottom line, with around $51bn in sales in its most recent fiscal year. The cost of making products, including shipping, third-party profits, and warehouse fees, consumed only about 55% of revenue, giving it a healthy gross profit margin of more than 40%. However, that profit gets whittled away once you add in the cost of other business operations.
Alternatives to Price Hikes
Some experts suggest that Nike could keep retail prices low by downgrading the level of tech in its trainers or refreshing the design cycle every three to four years. Rahul Cee, who set up the trainer review website Sole Review, says one way could be to use injection moulded EVA (ethylene-vinyl acetate) instead of high-performance midsole foams and construction.
The Impact on US Consumers
Nike relies heavily on US consumers, with the market contributing to roughly $21.5bn of its sales. Sentiment in the US is a ‘significant concern‘ for Nike as it directly affects demand for its footwear. Sheng Lu, a professor of fashion and apparel studies at the University of Delaware, says that firms may be forced to pass the cost of the levies on to consumers.
As of 2022, there are approximately 331 million people living in the United States.
The majority (around 230 million) are aged between 18 and 64 years old, representing the primary consumer market.
Women make up around 51% of the population, while men comprise about 49%.
In terms of racial diversity, the US is a melting pot with no single ethnic group forming a majority.
Around 62% of Americans have a household income above $50,000 per year.
The Complexity of Supply Chain Management
The transition of production back to the US would be complex and expensive, according to Matt Powers from the Powers Advisory Group. ‘This transition, if pursued, would take years and require significant investment.‘
Supply chain management involves coordinating and managing activities across the supply chain to maximize efficiency, reduce costs, and improve customer satisfaction.
It encompasses procurement, production, logistics, and distribution of goods and services.
Effective supply chain management requires real-time visibility, accurate forecasting, and seamless communication among stakeholders.
According to a report by McKinsey, companies that excel in supply chain management can achieve up to 30% reduction in costs and 25% increase in revenue.
