An increasing amount of new brands are introduced which all market themselves as offering shoes comparable to much higher-priced shoes, since they “cut out the middlemen”. This, is more or less just false advertising. These brands themselves are the middleman, and the difference in actual margins compared to the traditional quality shoe brands are small – if any. Here’s why.

 

The problem
I’ve been touching upon this topic in previous articles here on Shoegazing, for example in this run-down of different business models, and when I recently updated my article about low-priced brands and also was interviewed by Simon Crompton of Permanent Style for an article on the topic, and we discussed this a bit, I once again was reminded how big of a thing this marketing strategy is by numerous brands around the world, especially in the more and more swamped lower price segments.

You’ve probably seen it a number of times, shoe brands who state that “they saw that there was high mark-ups due to many middlemen, so they decided to sell directly to the consumers”, not seldom presented as something “unique” where they are “disrupting the industry”, even if it’s the new normal these days for new quality shoe brands. “Kickstarter language” has become standard. These brands usually have a graph showing the costs for “traditional luxury brands” compared to themselves, where the production costs are the same and then the “operation costs”, “retail costs” “marketing costs” or whatever things are being called, result in a more than twice as high Recommended Retail Price, RRP, for the “traditional brands”. It’s also increasingly common that these brands list prices in strikethrough text that are supposed to be “what the shoes would cost from traditional brands”, which then are around twice the amount they charge as a standard.

This marketing approach is taken as truth and trusted by customers, and regular media happily applaud it and pass the view on to the public. For some segments in the world of shoes, and other areas, this can be more or less correct, at least in general, but for the area of what we call “traditionally constructed quality shoes”, which is mainly welted footwear, it’s just more or less false advertising, it’s only valid for a very small percentage of this branch. We can see this in how these brands normally presents things without any actual, concrete info that can actually prove that what is marketed has anything to do with the truth, and in the rare cases that comparisons are done they have selected those few exceptions in the quality shoe world who is part of luxury fashion houses, since comparisons to actual competitors and the vast majority of the quality shoe market would prove their statements wrong.

 

Background info
Cause it is just that which is the main problem. The models that are used by these brands are taken from the luxury fashion segment, where we in general have many stakeholders who all have very high margins. Here, in the quality shoe industry, it’s basically the other way around, we in general have relatively few stakeholders who all have quite low margins (more on this below). There’s two main reasons for why this is the case. First, it’s a labour intensive production to make welted shoes, which means that all shoes always have to be charged quite high from the factory, especially if made in Western Europe or the US where the labour costs are high this directly coincides (now when the leather prices has been increasing as well, where it’s both more expensive and more difficult to get a hold of good leather, we have another factor adding increased costs as well).

Second thing is that we don’t have the same type of strong brands as in the fashion industry (apart from a few exceptions), for various reasons. Main is that it’s a relatively small niche product, and since the shoes will always cost quite much from the factory due to what I describe above, this means that if you would have those high luxury fashion brand mark-ups, the shoes would cost so much that very few people would buy them. Hence, the fashion brands focus on other less labour intensive types of shoes (some have welted footwear as well and sell them either at low margins and see them as something of a service, not the thing they make money on, or have a heavy upcharge on them and sell quite few pairs, which means it’s still not the moneymaker).

Ok, so, where there’s money there’s many who want to have a cake of that money. Like luxury fashion. But where there’s less money, like the quality shoe industry, there’s less people who care. That’s why, in general, distributors/wholesalers are very rare in this industry nowadays, it’s only on a few special markets we see them normally. Distributors have their own large stock from where the retailers purchase their products from, this is the type of middleman apart from retailers who have the highest rate, still quite low in this business though, usually somewhere between 15-25% of the RRP (could be higher on some special markets, like in Japan). If there’s a middleman in this industry, they are usually agents. The agent is an intermediary who might have smaller stock themselves but who otherwise mainly handles the contact between the dealer and factory and takes a certain percentage on each pair of shoes. This percentage is not that high in this industry, usually somewhere between 5-15% of the RRP. For quality shoes, the most common thing is that retailers buy directly from the factories. Even many of the big players in this industry are, in the grand scheme of things, rather small, which means that it works to work directly with the retailers. It’s also quite common to have for example agents in some larger or more special markets, like for European brands to have agents in Russia, Japan, South Korea and the US, for example, while in most European countries and other countries around the world they work directly with the retailers.

Finally, we have the marketing part, which in these graphs shown often is claimed to stand for quite a lot of the “more than twice” upcharge for the “traditional luxury brands”. Well, that might be the case for just that, “traditional luxury brands”, thing is that “traditional quality shoe brands” in almost all cases are something completely different, as already been explained (also worth noting, is that a lot of clothing and accessory companies who offer similar products to the luxury companies yet don’t have the brand and spend as much on marketing can offer those products at much lower prices. When people buy luxury goods, people also think it’s worth it because that heavy marketing and high overhead costs has made the products filled with another type of value that people consider worth spending on). Most of the big brands within the quality shoe industry, brands like Loake, Crockett & Jones, Allen Edmonds, Alden, Regal, Carmina, and so on, have extremely small marketing budgets, relatively speaking. We have some, usually French and/or owned by actual luxury fashion companies, that can have higher marketing costs – brands like Berluti, John Lobb Paris, RM Williams and Church’s – but fact is that these are a small minority of this market.

 

Actual comparisons
So, now when we’ve learned what the middlemen and marketing costs actually are, let’s do some concrete comparisons. Note, these are generalisations (everything in this article are generalisations, there are always exceptions in both ways, so to speak, but it’s difficult to go more in detail than this and still make it understandable. And in this case, it’s the general market that these brands don’t want you to look at, they want you to look at the rare exceptions, since otherwise their claims are incorrect).

As I’ve mentioned, we are talking about a low-margin industry, and this is especially the case for the lower-end and midrange segments of quality shoes (since, as described above, it’s labour intensive products, you can never come away under a certain amount of work which is relatively high), and/or when made in countries with high labour costs (like the UK for example). And with the competition getting tougher, margins are being lowered even further.

There’s different ways of calculating margins, but to use a popular and easy to understand way, we can talk about what margin the retailers need to have to make money on the shoes. Here, you multiply the price the retailer pay for the product, to reach the final Recommended Retail Price, RRP. For most consumer durables in general, and the fashion industry in particular, margins are in general between 2,5-3,5, and for more luxury fashion it can be even more. This means, for a regular retailer, you multiply the price you pay for the product with 2,5-3,5 to reach the RRP. And then of course you as a consumer can do the opposite, divide the RRP with 2,5-3,5 to find the price that the regular retailer has paid for the product (or then higher for luxury fashion items).

Now, this don’t apply for quality shoes, for welted footwear, a low-margin industry. Here, in general, the margins for the retailer is down at between 2,0-2,5, especially for welted shoes in the entry level segment. And as mentioned previously, what goes, in general, for low-margin branches is that there’s low margins for all parts, so the factories make relatively little on each pair and the percentage taken by a potential middleman like an agent or a distributor/wholesaler are also relatively small. Also notable is that normally, if there’s middlemen, the retailer margins usually comes a bit lower, which is quite logical since part of the retailers work to otherwise deal with the factory etc. is taken care of by someone else, and if a distributor also stock is at least in part taken care of by another party.

It all boils down to something like this, if we look at a generalised summary with sort of industry average figures for a welted shoe in the lower price segment, in a European country with the average EU VAT rate of 21% (this can be different for example in the US, where one don’t have VAT but a lower sales tax in most states). Note that this can be more or less translated into higher sums as well (although margins usually go up a bit but across the segments as well) when it comes to quality footwear, the shares would be quite equal.

 

Conclusions
The three most important things to gather here is that 1) the “direct to consumer with no middlemen”-brands have the same amount of middlemen as the most common “traditional quality shoe brand”, since they themselves are the same type of middleman that a retailer buying a brand directly from the factory is. 2) is that the margins are the same for the most common traditional quality shoe brand business version, and the supposedly “disruptive”, “new” “direct to consumer” brands. And 3) in no business models when it comes to quality shoes are the upcharges anywhere near the “twice the price or more” compared to the “direct to consumer” models, even with the rare model with distributor/wholesaler the upcharge ends at 43%. This is, again, generalisations, but hopefully gives a good idea of what the actual, real figures are in the industry in question. Of course one could see some brands also in this industry who can charge a bit more only for brand name, but then again, it’s relatively small adds in general here, the “luxury fashion markups” are such a small exception that they shouldn’t really be part of the discussion, to be frank.

There are, of course, a few “actual no middleman brands” around, for those who wish to work with those. They are the ones that can actually claim to have lost middlemen, and in some cases they then also keep margins lower (since here they actually can do that). Some examples are Vass (although available at some retailers as well, but then at higher prices than if bought direct), Meermin, CNES, Sagara, Bridle, Txture, etc. Many small or even one-man operations offer MTO direct to customers as well. And of course, almost all brands who work with retailers also sell direct to customers in their own online shops as well, something that often is quite an important income for them since here they get better margins when they have both the factory margin and the retailer margin, so to speak.

The reason many new brands are started and focus on selling directly to customers is since it’s very easy nowadays. There’s a good amount of factories to choose from, you can find info on them and contact them from a computer or mobile anywhere in the world, and you don’t even have to visit the factory (most do this anyway of course) to start ordering your shoes, and you can then set up an online shop and go out selling to the whole world already from the start. To get a new, unknown brand into retailers is difficult, and in this competitive market when you would be adding an extra middleman between the factory and retailer it’s also challenging when you are no-one (brands who buy from a factory and then sell through retailers usually have similar margins as the distributor/wholesaler category above, when it comes to the quality shoe industry).

A note worth making that is quite interesting, is that within the menswear area we’ve for many many years have had the “private label” practice, where retailers have their own labeled products. These, are exactly the same as these new, “disruptive no-middlemen” brands, just labeled differently.

Some savings can be found due to the possibility to sell directly online. And since this modern world offer the possibility of showrooms or no street front shops, where main marketing is done online anyway, we see a different type of less costly physical stores for these brands. So this is true, these brands can have lower “overhead costs” than at least some of the “traditional brands”, but it doesn’t translate to those price differences they want you to think. And you always have to take into account that when sold online the retailer/brand have to add the cost for shipping (there’s no such thing as “free shipping”, somewhere the seller have to take this cost), and even if they don’t offer free returns usually the shipping out of the new pair is also covered by the seller. And, again, it’s still the middleman who is selling to you, in most cases.

Since this is labour-intensive products, the most cost-savings can be done by lowering the labour costs, and this can only be done by doing production in lower-wage countries. That’s why we see that many of the most competitively priced brands offered nowadays are from or make their shoes in China, Vietnam, Laos, Mexico etc., and why we have Indonesian manufacturers offering hand welted shoes at prices below Goodyear welted shoes made in Europe, with otherwise similar specs. When the work conditions and environmental conditions are improving in these countries (even if it means slightly increased prices), when online trade becomes increasingly globalised, and if free-trade across borders becomes easier, domestic brands in low-wage countries will likely become a more difficult competition for European and American-made quality shoe brands. I hope that this will not result in boundaries of how things are marketed being pushed further in directions that are incorrect.

We already have the problem with more or less every brand who make Blake stitched or Goodyear welted shoes falsely market their products as “handmade” or “handcrafted” (more about that problem in this article), now we have added another false advertising problem with the “no middlemen” thing. I feel sorry for all the people who fall for all this, who actually believe that they get “handmade shoes” that “rivals shoes at twice the price or more”. If they think that what they have received is all you get even if you pay double, why would they go spend that money? In the same way as when Blake stitched or Goodyear welted shoes are incorrectly marketed as “handmade” is damaging to those who actually do handmade, hand welted footwear, it’s damaging for “traditional brands” when lower-end shoes are being incorrectly marketed as on par with these, even if they cost half the sum or less. What’s a bit ironic is that these new brands often praise themselves for being the “open, honest and transparent” alternatives. We are in this vicious circle where players have to follow what other players do not to seem like an inferior player, so I can understand why brands feel pushed to go on with these incorrect marketing strategies, however it doesn’t make them more correct. And one can succeed without falling for this approach, we have brands like J FitzPatrick or Sons of Henrey as good examples, brands who say a lot of nice things about their stuff in their marketing, but where all is completely true.

Now, don’t get me wrong here, you can get great shoes from these new brands, real bang-for-the-buck stuff. But they won’t, in general, be comparable to other welted brands “twice the price or more” and things like that. And you’re still buying from a middleman. You almost always more or less get what you pay for when you buy quality shoes. Which is a wonderful thing really, it makes it so much easier for us customers. As long as we don’t get fooled by those who wants us to believe otherwise.

 

A final note, as most of you readers likely know by now, I work for the shoe, shoe care and accessories online retailer Skolyx, where we work with both our own brand buying directly from the factory (so comparable to the “direct to consumer” brands), and with the very old brand Yanko and the very new brand TLB Mallorca, both of which we buy directly from the factory as well. Previously I’ve worked with Italigente who was bought from a factory where we were the middleman selling to retailers. After being in this industry both as a blogger and at times within shoe companies for almost eight years now, meeting and talking with numerous of different stakeholders from literally all parts of the world, I’ve got a pretty good view into how the industry works. To make sure I keep things as correct as possible, this article has also been reviewed by a number of other persons in the shoe industry.

 

What’s your thoughts on this? And is it anything I have gotten wrong (I, like all, make mistakes)? Comment away below!