Expensive Shoes, Good News

August 4, 2011
Posted by Jay Livingston

The Times this morning has a reassuring front-page story – the rich are spending, and prices don’t seem to matter all that much.
“If a designer shoe goes up from $800 to $860, who notices?” said Arnold Aronson, managing director of retail strategies at the consulting firm Kurt Salmon, and the former chairman and chief executive of Saks.
For the record, the negligible increase from $800 to $860 (a 7% increase) is actually larger than the 5% income tax increase Obama proposed on incomes over $250,000 (from 37% to 39%). This 5% increase would have wrought such disaster that Republicans, in the words of one of their leaders,* held the economy hostage to ensure that it would not happen.
Nordstrom has a waiting list for a Chanel sequined tweed coat with a $9,010 price. Neiman Marcus has sold out in almost every size of Christian Louboutin “Bianca” platform pumps, at $775 a pair. Mercedes-Benz said it sold more cars last month in the United States than it had in any July in five years.
Here’s why we should all be cheered up by the good fortune of those with large fortunes.
“This group is key because the top 5 percent of income earners accounts for about one-third of spending, and the top 20 percent accounts for close to 60 percent of spending,” said Mark Zandi, chief economist of Moody's Analytics. “That was key to why we suffered such a bad recession - their spending fell very sharply.”
You might think that the rich account for more spending because they have the bucks. The top 5% that accounts for one-third of spending also accounts for about one-third of income. Now Mark Zandi is a very smart economist, so I’m sure there’s some reason that it’s better for the economy when rich people buy luxury German cars than when the other 95% of us buy the things we buy.

So it’s good that the money is flowing to the top. It’s certainly not flowing to the rest of us.
The success luxury retailers are having in selling $250 Ermenegildo Zegna ties and $2,800 David Yurman pavé rings - the kind encircled with small precious stones - stands in stark contrast to the retailers who cater to more average Americans. [emphasis added]
How about shoes? One of these shoes is the Nieman Marcus $750 Louboutin Bianca mentioned above. The other is a Viviana by Mossimo, available at Target for $29.99

(Click on the image for a view large enough that you can read the writing inside the shoe
and see which one costs 30 times more than the other -- as if you really had to look.)


Apparently, it’s better for one rich woman to buy the Bianca than for twenty-five women of average income to buy the Viviana. But I’m not sure why.

*GOP Senate leader quoted in WaPo: “I think some of our members may have thought the default issue was a hostage you might take a chance at shooting,” [McConnell] said. “Most of us didn’t think that. What we did learn is this — it’s a hostage that’s worth ransoming.”

10 comments:

Bob S. said...

Jay,

I've thought you were clueless before but now you are proving it.

Now Mark Zandi is a very smart economist, so I’m sure there’s some reason that it’s better for the economy when rich people buy luxury German cars than when the other 95% of us buy the things we buy.


Because in addition to the rich buying those things that the 95% of already buy (food, houses, etc) they buy the luxury goods and services.

There is a simple fact; there is more profit in luxury goods then in commodity items.

The more often that money can be circulated the better.

Let's use your shoes as an example.

How about shoes? One of these shoes is the Nieman Marcus $750 Louboutin Bianca mentioned above. The other is a Viviana by Mossimo, available at Target for $29.99....
Apparently, it’s better for one rich woman to buy the Bianca than for twenty-five women of average income to buy the Viviana. But I’m not sure why.


If both shoes have a 50% profit margin (absolutely ridiculous but go with it), then the 1 pair of luxury shoes still has a higher profit then the commodity shoes.
Do the math if you don't believe me.

Now it is more likely that the luxury shoes do have closer to a 50% profit margin but the commodity shoes are closer to 10%.

Which drops the profit from $374 for 25 pairs down to approximately $75.

Which is a better return for share holders, eh?
Now consider that the rich probably also buy commodity shoes -- putting profit into not one company but two.

Did you stop to consider the salaries of the people working for the luxury brands?

Who do you think gets paid more, eh?

It’s certainly not flowing to the rest of us.

BUNK.

You work for a University, right?

Well Sparky who do you think is donating enough money to provide those buildings, those endowed chairs, provide scholarships so you can teach eager students?

Certainly not the people paying $29.99 for a pair of shoe, wouldn't you think?

How do you think are buying and operating companies that pay salaries of dozens, hundreds or more people?

Certainly not the people paying $29.99 for a pair of shoe, wouldn't you think?

You act as if the money the rich have belongs to everyone and they are being selfish for not sharing more.

I just don't get it.

Anonymous said...

High profit does not equal more welfare. For example, say I am the only purveyor of drinkable water. I can charge people lots of money for water and make lots of profit. But that doesn't mean that the general welfare is better.

From an economic standpoint, one person buying a $750 pair of shoes and 750 people buying a $1 pair of shoes are the same, in terms of GDP. Either way, $750 worth of shoes have been produced. But in the 2nd scenario, 750 people now have new shoes, versus only one person in the other.

Jay Livingston said...

1. If both shoes have a 50% profit margin . . . then the 1 pair of luxury shoes still has a higher profit then the commodity shoes. Do the math if you don't believe me.

OK, here’s my math for the numbers I used in the post (1@ $750; 30@ $25)

Target buys shoes for $20 a pair, marks them up 50% and sells them for $30 – $10 profit each. They sell 25 units so they get $250 profit.

Nieman Marcus buys one pair for $500, marks it up 50% and sells it for $750. The one unit brings $250 profit.

Why is Nieman-Marcus’s $250 profit higher than Target’s $250 profit?

2. I agree that retailers who sell to the non-rich have to sell more units to make an equivalent profit. So as a seller you’re also better off, usually, if your customers are rich. (It’s like the old joke about the med student who says he plans to specialize in “diseases of the rich.” The same is true in education. I’d be making more money if I were teaching the children of the rich.) As the Times article says, things have been good for those who serve the rich.

But as Anonymous points out, $750 worth of shoes is $750 worth of shoes. No matter how you divide it up, there’s no difference in the contribution to GDP, our principle measure of “the economy.”.

3. I said that the money is not flowing to the rest of us. If it were, the stores that serve the rest of us would also be in fat city. But they’re not. Stores for the rich are doing well. The rich, many of them, have rebounded from the recession. So have corporations. Corporate profits are generally up. Profits in the financial sector are way up.

If that money had been trickling down or in some other way benefiting the non-rich, then middle-income people wouldn’t be finding their salaries reduced by 20%. Average people would be out there buying lots of stuff. But they’re not. There would be no problem of aggregate demand. But there is.

Bob S. said...

Jay,

Your cluelessness continues to show.

Why is Nieman-Marcus’s $250 profit higher than Target’s $250 profit?

Because you are looking at profit in isolation.

How many work hours did it take to sell that 1 pair of shoes versus the 25 pairs.

The profit you describe is gross profit, not net profit.

You have to take out overhead, labor, taxes etc.

The other issue is the mark up isn't just at the retail end.

Each step along the way marks up the price.

While the luxury shoes may cost a little more (exotic leathers, dyes, etc) the cost isn't that much greater at the manufacturer. In fact, the costs are usually very close at manufacture. And the same manufacture often does both shoes.

So the manufacture charges more for the luxury shoes -- higher profit means that (s)he can keep paying the workers.

The distributor charges more for the higher end items. The costs are usually the same here - distribution is distribution -- but the difference provides more profit. Keeping the doors open and paying the workers.

The Retailer also marks up the costs of the shoes. Same workers sell both shoes -- in some cases you will have boutique stores ONLY selling the luxury shoes, I'll get to that in a minute.
So the Retailer can pay for more salaries selling one pair of luxury shoes.

Part 1

Bob S. said...

part 2

The staff at the Retailer has to sell more shoes, work more, be open longer, pay more for utilities, etc to sell 25 pairs of shoes instead of 1 pair.

IF the retailer is a boutique store, then the city gets more in taxes (boutique stores usually have higher property values), more in sales taxes, more in income taxes.

All those taxes -- paid for by the purchase of a luxury shoe -- go to help the poor.

There is not as much profit in commodity items so less in taxes.

Isn't that obvious?


The rich, many of them, have rebounded from the recession

The rich were never as greatly affected by the recession -- why shouldn't they rebound faster?

The rich still had to buy food, clothing, cars, etc. Now they are just buying higher in items.

I said that the money is not flowing to the rest of us.

Again I have a simple question:

Why should the money flow to the 'rest of us'?

What are you doing that the money should come to you?

The other part of that lie is easily proved by your newest post.

Less people are paying taxes, right?

That means fewer people are paying their share and the 'rich' you are blathering about are paying more and more for the services YOU USE.

Jay Livingston said...

1. Your argument that Target’s $250 profit is less than N-M’s $250 profit brings in the factor of fixed costs. I didn’t realize that these could be calculated on a per item basis. I would think that fixed costs would enter into calculations of total profit. In any case, for your argument to be true, the ratio of fixed cost to sales would have to be lower for N-M than for Target. I have no idea whether that’s the case.

2. Data on sales
"Retail Sales Rise at Expensive Stores but Are Mixed Elsewhere" (full story here and in other news sources)

The high-end stores are doing well. The low-end stores are OK. The middle-range retailers are hurting. It would appear that the middle-range customers are now shopping at the discount stores.

Bob S. said...

Jay,

I didn’t realize that these could be calculated on a per item basis

Most costs are calculated on a per item basis. That way the cost for each item can be rationally compared.

In any case, for your argument to be true, the ratio of fixed cost to sales would have to be lower for N-M than for Target.

Use some common sense here. How much more expensive is it to manufacture a luxury shoe compared to a commodity shoe?
Not much. Definitely not tens of multiples of the cost, right?

So even if the cost to manufacture the luxury shoe was double, that is a small part of the total cost.

Following me?

As price goes up, the fixed costs (labor, utilities, mortgage, etc) stay the same. Variable costs may increase (material) but usually fixed costs are just that.

It would appear that the middle-range customers are now shopping at the discount stores.

Or it could be that the poor folks aren't over extending themselves by trying to keep up with the Jones, eh?

The Middle class is definitely learning the basic financial axiom - "It isn't how much you make, it is how much you keep".

They too aren't over extending themselves.

Consumer driven economies are good except when the people are putting themselves into debt purchasing things.

T

Jay Livingston said...

No, I don’t follow you. You’re saying that fixed costs are calculated on a per-item basis. That means that when Nieman-Marcus calculates the cost of that shoe, it includes not only the $500 it paid the supplier but also some proportion of rent, salaries, insurance, advertising, etc., and that it does this for each item in the store. And Target does the same. I never realized that.

Seems like it would be difficult. Different items have different costs and stay on the shelf for different lengths of time. I wonder how and when this accounting is done.

In any case, to know whose $250 profit is greater, you have to know whose fixed costs are higher. And of course, a big store will have higher fixed costs than will a small one. That’s why I figured that fixed costs would be calculated relative to total sales, not item sales.

Bob S. said...

Jay,

It really isn't that difficult to calculate.
Stores know how much shelf or display space an item takes up, how much storeroom space, how long it takes to move an item, etc.

They also know how much it costs, per pound or cubic foot to transport a product.

The stores overhead is pretty well established. They know how much other items like it sold for, how long it took etc. They base the fixed costs on that.

This is standard practice in most industries and retail.

I wonder how and when this accounting is done.

Not an accountant so you get what you pay for.

The costs can vary depending on time, etc but usually are established at purchase. Net profit is determined after sale based on how long it was on the shelf, how much difference between suggested retail price and actual sale price, etc

You don't really think those stores selling things at "50% off" are losing money usually do you?

That mark down affects the profitability of a product. Guess which shoe is more likely to be marked down?

And of course, a big store will have higher fixed costs than will a small one.

Not necessarily. A boutique store on the Magic Mile in Chicago is probably going to have higher fixed costs then a Big Box Store in Lubeck Texas.

Rental prices and purchase prices for retail spaces are express "per square foot".

That’s why I figured that fixed costs would be calculated relative to total sales, not item sales.

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