Why don't footwear prices take a step down?

Prothom Alo file photo

A cowhide that generally sells at Tk 1,000 was sold for just Tk 350 this year. Rawhide prices fell during the Eid-ul-Azha the last two years, but a pair of quality shoes is being sold at Tk 3,000 at the shops.

A customer, Najmul Hossain, who works for a private company, expressed his anger. He asked why the prices are so high when rawhide is so cheap?

There is certain common information to be noted. This year the skin of a Tk 100,000 cow was around 25 to 30 sq ft. If the skin is sold for Tk 400, each sq ft costs around 15 taka. After changing hands, adding the salt price and transport costs, the price increases per sq ft from Tk 25 to Tk 30.

There are three stages of rawhide processing: wet blue, crust and finished. It costs Tk 35 to Tk 60 to process each sq ft of rawhide due to the chemicals used, said leather technologist Firoz Alam. Some 30 to 40 kinds of chemicals are used during the processing while the cost also depends on the quality of the leather a tannery wants to produce, he added.

At the current price, it costs Tk 65 to Tk 70 taka per sq ft to make leather for the uppers of a medium quality shoe. For the normal leather used inside the shoe, each sq ft costs Tk 35. Then the price is fixed including the tannery workers' wages, administrative costs, loan interest and other costs.

According to two brands, the manufacturing cost of a Tk 3,000 pair of shoes is Tk 1,200 which is 40 per cent of the price. The leather costs about Tk 250 when the rawhide costs Tk 60 to 70. This means rawhide price has little contribution to the price of finished products. One pair of shoes requires 2.25 sq ft leather.

The other accessories including the soles, fabric and glue are mostly imported.

“The major cost of footwear is mainly marketing and show-room related. The rent and advance payment is higher in the Bangladesh,” Ziaur Rahman, managing director of Bay Footwear said, adding that, though the price of rawhide fell, wages, fuel prices and other affiliated costs are on the rise.

Bangladesh earned over $1.23 billion exporting leather during 2016-17 fiscal, but the earning stood at only $800 million during 2019-20 fiscal.

While fixing the price of the products, the companies have to consider a number of issues. Only 30 per cent of the shoes sold by the big brands are made of leather, so prices of leather footwear are inflated a bit, he claimed.

Profit margin of low-cost products is kept low targeting low-income customers, he said adding that, there is hardly any impact on customers for leather shoes if there is a little hike in price.

In some cases, 40 to 50 per cent of a new model footwear remains unsold and are sold at reduced prices. At one point, the unsold ones are sold per weight, Ziaur said, adding that all fashion brands across the world consider these factors while fixing the price of footwear.

The traders can make excuses for extra price, but what about the profit footwear companies make?

Bata sold products of Tk 1.64 billion during January-March 2020. It had a gross profit of 43 per cent. Bata had a gross profit of 40 per cent in 2016 when rawhide prices were better. This means, profits did not increase with the price fall of rawhide for Bata.

In Bangladesh, footwear giants Bata Shoe and and Apex Footwear have the cost and revenue on their websites.

Apex Footwear sold Tk 7.58 billion products in first half of 2019-20 fiscal (July-December) with a gross profit of 24.76 per cent. The profit stood at 21 per cent before the plummet in skin price. This shows, Apex’s net profit has increased a bit. The company has to spend a section of the profit for marketing and administration. It has to pay taxes too. So overall, the picture is not so promising.

In 2017-18 fiscal, Apex EPS (earnings per share) stood at Tk 11.50 . This has reduced to Tk 5.18 during first half of 2019-20 fiscal. This means, though the price of rawhide decreased, Apex’s EPS did not increase.

Bata sold Tk 1.64 billion products during January to March in 2020. It had a gross profit of 43 per cent. Bata had a gross profit of 40 per cent in 2016 when rawhide prices were better. This means, profit did not increase with the price fall of rawhide for Bata. Rather, the EPS has fallen.

Before the coronavirus outbreak, Bata EPS stood at over Tk 2. It was over Tk 3 last year. The EPS were several times higher during the same period in the preceding years.

Leather exporters are not having a good time either. Exports have dropped over the last few years. Earlier, leather used to be the second top export, but has notched down to four.

Bangladesh earned over $1.23 billion exporting leather during 2016-17 fiscal, but the earning stood at only $800 million during 2019-20 fiscal.

If the profits were bigger, demands would be higher for rawhide, but no one showed much interest in purchase, said Md. Sakhawat Ullah, general secretary of Bangladesh Tanners Association (BTA). “The government is informed about the rate we sell leather. Above all, most of the tanneries would not become loan defaulter if leather be would be profitable.”

According to the latest estimates, Bata incurred losses during April to June, when coronavirus spread. Apex estimates have still not appeared while another top brand has closed 12 showrooms.

*This report, originally published in Prothom Alo print edition, has been rewritten in English by Nusrat Nowrin.