When buying timeless and durable clothing you expect them to serve you and to bring you joy for many years. In my opinion, two of the most important purchasing criteria are the materials and workmanship. They dictate the feel of the garment, as well as the general appearance, fit, and most importantly, how durable this particular clothing will be. It is very important to recognize how the price is comprised, especially when you are in the search of the best value for your money.

Example: a hundred euro shirt

First we break down the price of generic shirt, manufactured in Far East. This example is not about any particular brand and you should be aware of that cost structures vary heavily depending on company size and business model. Small boutiques and large chains have competely different distribution and profit margin structures. However, the example is universally applicable and should give you an idea how your money is spent in production chain.

  1. Shirts price: 100 €

  2. Of this total, VAT is 19.20 € (we have a very harsh tax system in Finland), ie pre-tax price is 80.65€. (= 100 / 1.24)

  3. Retailers profit margin is around 50%, ie in the purchase price is 40.32€. (= 80.65 / 2)

  4. Wholesale margin is at least 25%, or about 10€. (25% x 40.32€ ~10€)

  5. Clothes imported from outside the European Union first pay duty (around 12%) followed by value added tax (again Finnish 24% which is later reductable when the product is sold ahead). Price prior freight charges to EU territory is thus 27.09 € (= 30.34 / 1.12).

  6. Freight and forwarding depends on the size of the batch. We can safely assume 1.79€ per shirt leaving 25.30 € for the shirt factory

  7. The cost of materials is significantly larger than the cost for workforce. For example, in the 25.30 € shirt the proportion of materials can be as high as 14 €, ie 55 % of the production cost.

  8. The remaining 11.30 € is divided for the actual sewing and assembly work, factory management and profit.

    QualityShirt1

The following comments illustrate the situation better.

Some comments related to the example.

  • The share of the retailer might be seemingly large, but he also bears the greatest costs. How many shirts shop must sell in order to cover their expenses, even mandatory? Rent is between 1000 € to 50 000 € depending on shop size  and location (crucial), add 3000 euros for every shop assistant (2000 € / month + taxes 1000 € / month) as well as all required regulatory fees, accounting, insurance, bank fees, etc.

  • Trade margins depend on the brand and volumes. The popular brands have higher margins which leaves only 12-15 euros for materials. Similarly, another brand might spend as much as 25-30 euros for material. This means that even if the retail price is same, you can expect a vast variation in materials used. (To keep this example simple we can assume that the cost of labour is the same for every product)

  • The share of taxes is actually much higher than you could see in receipt when the indirect taxes, such as employer’s costs, import duties and taxes etc. are included. In reality, at least one third of the selling price of clothes in Finland is directed, one way or another, to the tax authorities. We also enjoy the highest income taxes in Europe, which means that we work really hard for our clothing – please greet every well-dressed Finn with a great respect!

How to exploit this information?

How can you take advantage of all this information when buying clothes? The cost of the retailer and manufacturer are about the same, so one should seek brands with a minimal wholesale margin. Any vendor buying directly from factory should have an edge. Let’s see some examples:

  • First of all, in the largest chains (H & M, Zara, Dressmann etc.) it is occasionally possible to find clothes made from excellent materials at an affordable price. The chains often take advantage of special prices for excess high quality material (which cloth factories generally want to get rid of) and they still charge the price of low quality products. In general, low cost chains tend to prefer the cheaper synthetic fibers and, cutting the garments in a most cost-effective way possible, often resulting in compromises regarding the fit. Hence, discoveries require knowledge and accuracy.

  • Second, you should prefer smaller brands instead of the big name brands to improve the price-performance ratio for the simple reason that for the high-margin brands the marketing costs can be sky-high. The better known the brand, the higher the margins.

  • Minimize the number of intermediaries in the supply chain in order to improve the proportion of material and work in the price of clothing. There are several online clothing stores that do not have any physical stores at all, with their our own production. These stores are able to sell clothes made of very good materials at a reasonable price. The disadvantage is often the possible difficulties in fit and the required knowledge of the correct size and the fit when ordering.

  • In my opinion, investing in personal service just to make sure your clothes fit perfectly is always money well spent. I prefer local stores where I can find professional help and get perfect fit and style instead of latest fads.

 

Text: Joose Luukkanen
Photos: Jussi Häkkinen

LEAVE A REPLY

Please enter your comment!
Please enter your name here