Business reporter
AlamyThe Nike Air Jordan 1 is, in some ways, the iconic US shoe. It’s a popular sneaker line by a large American brand, created four decades ago for homegrown basketball legend Michael Jordan.
But although Nike sells most of its products in the US, almost all of its shoes are made in Asia – a region targeted by President Donald Trump’s tariffs salvo against foreign countries he accuses of “ripping off” Americans.
Nike’s shares fell 14% the day after the tariffs announcement, on fears over the impact they could have on the company’s supply chain.
So what will all this mean for the price of Nike’s shoe?
It depends on how much of the cost increase Nike decides to pass on to customers, if any, and how long they think the tariffs will actually be in place for.
‘Competitive industry’
Goods from Vietnam, Indonesia and China face some of the heaviest US import taxes – between 32% to 54%.
Hopes remain that Trump might be willing to negotiate those rates lower. On Friday, he said he had had a “very productive” call with the leader of Vietnam, helping Nike shares to recover some ground after their steep Thursday falls.
But most analysts think the firm’s prices will have to go up.
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 shoe production.
“Our view is that, given how extensive the list of tariffs is, the industry will realize there are few ways to mitigate the impact in the medium term other than by raising prices,” UBS analyst Jay Sole said in a note.
David Swartz, senior equity analyst at Morningstar, agrees that price rises are likely but says any large price increase would reduce demand.
“This is a very competitive industry. 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,” he says.
Many other western brands such as H&M, Adidas, Gap and Lululemon will be facing the same predicament.
Nike is already facing a tight bottom line.
It had around $51bn (ÂŁ39.6bn) 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%.
But that profit gets whittled away once you add in the cost of other business operations. A third of its revenue, for example, is consumed by selling and administrative expense.
By the time you factor in interest and taxes, Nike’s profit margin has shrunk to roughly 11%.
That’s across all its products, as they don’t break down costs separately for its different items.
Rahul Cee, who set up the running shoe review website Sole Review, says there are other ways Nike could keep retail prices low.
Mr Cee, who trained as a footwear designer and worked for Nike and Vans in India, says one way could be to downgrade the level of tech in the shoe.
“So instead of using high-performance midsole foams and construction, stick to injection moulded EVA (ethylene-vinyl acetate),” he says.
Another option would be instead of bringing out a new design every one to two years, to refresh the design cycle every three to four years.
ReutersThings could change fast
Simeon Siegel, managing director at BMO Capital Markets, says most companies were looking at Wednesday’s announcement as “still far from the final conclusion”.
“I don’t think that many people believe that those numbers are etched in stone just yet,” he says.
Theoretically, Nike is such a big brand that it should be able to put up prices without it hitting their sales, he says, but adds: “Do they have it right now is the question and do they have it across their product offering is another?”
Even before the announcement, Nike was facing a slump in sales that had curbed its ability to command full price for its shoes.
Finance chief Matthew Friend has also cited tariffs as an example of developments that were affecting consumer confidence.
And Nike relies heavily on US consumers, with the market contributing to roughly $21.5bn of its sales – almost everything it sells in its largest market of North America.
Sentiment in the US is a “significant concern” for Nike as it directly affects demand for its footwear, says Sheng Lu, a professor of fashion and apparel studies at the University of Delaware.
But ultimately he says firms may be forced to pass the cost of the levies on to consumers.
“Nike is very likely to raise prices if the tariff war persists. There is no way for brands to absorb a 30% to 50% increase in sourcing costs.”
He adds: “How US trading partners react against the reciprocal tariff policy will also have a major impact.”
China has already hit back with a 34% tariff of its own.
Part of the rationale behind Trump’s tariff policy is because he wants more companies to manufacture their goods in the US.
However, Prof Lu does not see Nike, or other companies, significantly reshaping its supply chain any time soon “due to the complexity involved in footwear manufacturing”.
That includes the time needed to “consider a long list of factors when deciding where to source their products – quality, costs, speed to market and various social and environmental compliance risks”.
Matt Powers from the Powers Advisory Group says the lack of American textile mills will make it “difficult and expensive [for Nike] to pivot production back to the US”.
Mr Powers added: “This transition, if pursued, would take years and require significant investment.”
Nike did not respond to BBC requests for comment for this article.
We also contacted 30 suppliers in Asia but none responded.
Additional reporting by Natalie Sherman in New York
