The economics of Nike's Air Jordan product line, explained

The Air Jordan line started in 1984 when basketball player Michael Jordan signed a deal with Nike to launch a lineup of shoes, offering him $250,000 to be associated with the brand. Though Adidas offered him double that amount of money, he stuck with Nike — they had offered him a percentage of the revenue of the shoes and promised that if he didn’t earn $3 million in the first 3 years of the partnership, he could exit the deal.

This series of shoes is a main driver in Nike’s massive profits, and it’s clear that the deal is still paying off for both parties more than three decades later. Nike reporting sales of the Jordan brand separately for the first time in 2016, growing by 18 percent to $2.8 billion during that year.

Nike's total revenue in billions

There’s a lot of logistics going into producing a pair of kicks, but Nike is mostly so profitable because of the incredible lengths it goes through to keep its costs as low as possible. During the World Cup, Reuters reported that the amount of money both Nike and Adidas spent on producing a pair of shoes fell from 4 percent in 1995 to 2.5 percent in 2017.

A decrease in spending on labour can be attributed to several factors, including the company applying for exceptions to the minimum wage in countries such as Jakarta (RP 3.6M/308.81 CAD per month) and an increase in automation in its factories. Minimum wage exemptions are legally granted to countries, but even the minimum monthly pay is too little for an Indonesian family to live on — something that more than 171,000 workers, 79 percent of whom are women, are forced to do.

However, Nike workers in Sukabumi were forced to sign a petition in 2013 supporting the factory’s attempt to be exempt from the new wage. In response, Nike said they require “contract factory workers to be paid at least the minimum wage required by country law”. It’s not clear whether this matter has since been cleared up, but the company is still facing publicity issues — more than 500 women working in factories for Nike and Puma have been hospitalised, which has been attributed to them working 10-hour days, six days per week. They reported feeling exhausted and hungry, and temperatures in the factory rang in at an astounding 37° celsius. There’s other claims against the company too, including a rumour that the company hired Indonesian military officers to face workers into working for less than minimum wage, which the Huffington Post reported on.

The truth is that Nike shoes and the Jordan lineup in particular are so popular and profitable because of the branding power behind them. They’re marketed as luxury goods, but they’re not targeted at only wealthy people and the name behind it is the driving force of the luxurious quality to them.

Take the Jordan et al v. Dominick's Finer Foods lawsuit for example. Lawyers for Safeway, owner of Chicago-based and now-defunct Dominick's, argued that Jordan should have been paid $126,900 for the use of his name in a 2009 ad place in a Sports Illustrated magazine. However, Jordan and his lawyers testified that his prior endorsement history suggested he wouldn’t have taken the deal, and ended up winning $10 million as the fair market value for an endorsement.

In 2017, Nike released a series of “retro” Air Jordan shoes to celebrate the 20th anniversary of earlier models, topping nearly $35 million in one single day. These shoes cost the company an estimated $16 to produce in China, according to the Citizen Times, but would sell for hundreds of dollars on Amazon and eBay, due to the demand for them.

Psychologists reason that the main reasons we purchase luxury goods is to “signal” that we measure up to our peers and to “mark” specific accomplishments and achievements in our lives, which can be worth celebrating.

There’s a smartness and cult-like following behind the Nike and Michael Jordan powerhouse team, representing a must-have status symbol of the younger generation. The math behind the shoes, like many other highly demanded products, is simple: if a company releases a product in a small quantity but many people want it, it can charge a premium just for being on the market.

📸: Pixabay 📈: eMarketer Research