How supply chain issues caused the hottest sneakers to become scarce

Even today, many brands’ bestsellers are still out of stock in most or all sizes. A woman looking for a size 6 in Reebok’s best-selling Club C 85 Vintage style, for example, might not find it at Reebok.com, Nordstrom, Urban Outfitters, Madwell, Dick’s or Pacsun. Half of the sizes of Nike’s best-selling Air Force Ones in black and white, meanwhile, are also currently sold out on the brand’s website.

Major sneaker brands manufacture their components in multiple countries and continents, which has led to wild fluctuations in stock availability over the past couple of years. It’s a problem they’re still trying to get a handle on – executives from Nike, Deckers and Adidas suggested in recent earnings reports that limited inventory receipt dampened holiday sales growth. Today, these sneaker brands are beginning to adapt their supply chains to new needs, raising prices to match new costs or investing in automation. But if brands are too optimistic about their investments, analysts warn that these companies could end up with too much inventory in the second half of 2022.

Supply and demand

Global brands like Nike, Brooks and Adidas accounted for the majority of revenue from top-selling sneakers and styles in 2021, according to the NPD Group.

However, these sneaker brands have been hit hard by inventory issues over the past two years due to their sprawling and globalized supply chains. Some of the supply chain challenges that major sneaker companies have faced are ones that all retail companies have faced over the past couple of years. Last year, for example. Shipping container shortages in the United States delayed products at Nike.

But other issues have been particularly difficult for sneaker brands because of where they’re made. Nike in particular was hit hard by coronavirus outbreaks last year in Vietnam, where about half of its sneakers are made. In December, executives announced that temporary factory closures in Vietnam had reduced inventory production by 130 million units.

Sneaker brand Deckers, meanwhile, has been hit by national issues. In September, Deckers executives reported that 45% of inventory was in transit, down from 20% in an average year, in part due to labor and personnel issues. In February, Deckers executives said growth for the Hoka brand was limited by port congestion.

“The issues really seemed to be random,” said NDP senior adviser Matt Powell. “It’s not all basketball shoes or all shoes from one brand that have been blocked, rather it’s various products from different brands over time.”

Inventory delays have resulted in all sorts of domino effects, beyond more sneaker styles going out of stock. Out-of-stocks increased customer demand in a somewhat cyclical fashion, and markdowns declined. According to Powell, the proportion of athletic shoe customers purchased at a discount was down from 2020, as well as the two years before the pandemic.

In some ways, these issues have been good for shoe companies that have long embraced a model of deliberately limited sneaker run scarcity. Almost every major sneaker company – from Nike to Adidas to Reebok – uses some form of drop model to generate buzz, releasing a limited amount of a certain style, color or collaboration. . Adidas’ Yeezy sneaker drops regularly cause site crashes due to the massive influx of new customers (and bots) hoping to get their hands on a pair. Jordan drops from Nike often sell out within minutes or even seconds of being listed.

But these supply chain issues have made it harder for brands to manage scarcity on their own terms. On several occasions throughout the pandemic, sneaker brands have had to delay drops due to inventory delays or Covid-19 outbreaks – most recently two Jordan drops that were reportedly slated for December were postponed until early this year.

The scarcity of sneakers also led some consumers to spend more time and money on resale apps that already stocked the styles consumers wanted over the past year.

“Rapidly rising demand and limited availability of its most sought-after styles has prompted Nike to double the resale value gain of any other brand this year,” Mayank Hajela, senior men’s director at The RealReal, told Footwear. News in January.

RealReal reported that Nike’s “great value sneakers” rose 32% in value last year, even surpassing ever more popular brands like Rolex and Hermes. Meanwhile, over at StockX, Nike’s “Travis Scott Jordan 1” is currently selling for around $1,500, which is nine times its original retail value.

The struggle to sustain supply

Today, rising costs make obtaining and producing enough products an ongoing problem, explained brian Ehrig, a partner at the Kearney consulting firm. Ehrig points to rising oil costs affecting synthetic production, the continued decline in capacity due to Vietnam’s fall shutdowns and rising labor costs as lingering pain points.

“If you take the cost of materials plus labor costs, it’s usually around 80% or more of the product cost in normal times, so you’re stacking shipping containers more than they were one year ago and all of this is creating enormous cost pressure,” said Ehrig.

The key for many of these companies to continue to adapt to continued pressures will be to adjust supply chains to be more efficient.

In the past, Ehrig explained, the production processes of sports companies were centered in China. Over time, they globalized into other regions, but expanded production too much. An upper part of the shoe may be made in Indonesia, while the lower half may be produced in India. Then the two parts could be assembled somewhere completely different.

“It’s basically a super inefficient structure in the supply chain,” Ehrig said. “You have timelines, which for a shoe company are typically 15 to 18 months, and they’re trying to make all these predictions about what’s going to sell for a very, very long time.”

In turn, in earnings commentary throughout the year, sneaker executives regularly spoke about how they were working to fix their supply chains.

Nike’s chief financial officer, Matthew Friend, said increasing digital execution capacity through new automation techniques propelled the brand to a 20% increase in Black Friday sales, in the call to Nike’s results for the period ending November 30.

During Deckers’ fiscal third quarter earnings call in February, Chief Financial Officer Steve Fasching said, “It has become increasingly difficult to match sufficient inventory levels with high demand. [at Hoka]. To help offset this, we have increased our use of airfreight to offset shipping and port delays, but airfreight causes gross margin compression.

Adidas chief financial officer Harm Ohlmeyer, meanwhile, announced in March that the brand was “implementing significant price increases as we speak” to deal with the rising costs needed to manufacture and sell. shipment of products. In the first half of 2022, the brand will increase prices for direct-to-consumer exclusives, then expand to other products in the second half.

However, NPD Group’s Powell warns sneaker makers not to get ahead of themselves when it comes to production.

“Everybody made pots of money during the pandemic because they didn’t have to promote,” Powell said. “Did they miss any sales? Sure. But their profit percentage has increased…. I fear as we return to a more normal world that there will be too much inventory, which will drive prices down. »