Preface:
The read below is an extremely rough-cut analysis of all the various inputs that are required for a manufacturer of a product to develop a ROI for transitioning from a build-sell-dispose business model to that of a circular-economy based business model. The transition is often not an easy journey, but to start the process a model with many what-if simulation capabilities is required to be employed to derive an attractive ROI that can be sold to enterprise leadership to authorize their approval to launch a pilot project.
The US consumer is currently the largest buyer of footwear in the world. They purchase 6 pairs of footwear per year, from sneakers, to casual, to specialized, to home interior and for a host of other purposes. The average price of footwear is US$40/pair or a spend of US$240/year. It is estimated that Americans employ the footwear for 2 years before they become marginally used or disposed. So, if a consumer has invested US$480 for 12 pairs of pairs of footwear over a rolling 2-year period, the usage price per unit/year is an estimated US$20.
Why is this usage price/year important? It becomes the foundation of a circular-economy business model; it is the perceived value proposition that must be met by an alternative offering for the footwear buyer.
Let us review a few facts of the US footwear industry:
Today only 1.25% of footwear purchased in the US is manufactured in the US.
60 years ago, the US was the largest and most efficient producer of footwear in the world with 90%+ of footwear purchased by American being produced in America.
As a result of a 1950s antitrust case against the United Shoe Machinery Company [USMC], this dominant footwear OEM was broken-up due to their too successful as-a-service business model of bundling the lease of their machines, providing maintenance services and consumables employed for the manufacturing of footwear.Â
This anti-trust ruling against the USMC by the US Supreme Court began a slow decline of the US footwear industry in the 1960s through 1980s and then a steep decline beginning in the 1990s as China entered the business of manufacturing footwear at price points materially lower than that of US domestic manufacturers. Note that the Chinese footwear manufacturers were heavily subsidized by their local banks, who were in turn subsidized by the central government.
Today only 1.25% of footwear purchased in the US is manufactured in the US.
60 years ago, 25-30% of footwear sold in the US was designed to be rebuilt, enabling the extension of their useful life; today less than 0.5% of the footwear currently purchased is designed to be rebuilt. The remainder are designed for the efficiency of manufacturing with no consideration for environmental issues. As a result, it is estimated that 3,000,000,000 pounds of footwear are annually inducted into the US waste stream.Â
The manufacturing Cost Of Goods [COG] of footwear produced in China is an estimated US$20, with logistics costs for delivery to the US of another US$4 or a total of US$24 per pair. The remaining US$16 of the price comprises Marketing, G&A and a 10% profit or US$4/unit.
The current US-based B2B-OEMs providing machines to the manufacturers of footwear is basically non-existent due to the shift of manufacturing to China. This fact would be an initial constraint on the conversion to a circular-economy business model, but in the US, when there is a demand, supply will eventually be provided.
With 2,000,000,000 pairs of footwear sold per year in the US, the annual profit by the sellers is an estimated US$8,000,000,000. This becomes the number that a circular-economy business model must beat.
So, how can we meet that profit threshold with a circular-economy business model? Below is a business model construct that provides an example of how our profit threshold could be achieved.
The first step is to redesign the footwear for it to be able to be periodically rebuilt to a like-new condition and be inducted into a like-kind exchange pool supporting as-a-service offering.
The footwear would be built and rebuilt in the US creating 100,000s of new jobs.Â
The cost of the redesigned footwear would average US$60 versus the current US$24 inclusive of logistics costs, or a loss of US$36/pair given the same price point of US$40 for the buyer of the footwear. The exchange pool will need to support 2-years of demand or resulting loss of 4,000,000,000 units @ US$36/pair or US$144,000,000,000.
The redesigned footwear would be offered as-a-service at US$20/year, with a like-kind exchange every 2-years for a like-new product that had been rebuilt. This would align with the current spend of the footwear buyers.
The estimated life of footwear that is designed to be rebuilt is 10 years, with 4 rebuilds; rebuilt-year-2, rebuilt-year-4, rebuilt-year-6, rebuilt-year-8 and disposed year-10. Note that most footwear will not endure heavy usage enabling the series of 4 rebuilds.
Due to more physically robust built footwear, as well as a like-kind exchange program, the requirement to produce new condition footwear during a 10-year period will drop by an estimated 80%, as the demand is fulfilled by the supply of rebuilt units. Or over a 10-year period 24,000,000,000 pound of footwear waste would be eliminated.
The cost to rebuild plus reverse logistics costs is estimated at 20% of the US$60 cost of production of the redesigned unit, or US$12, or $6/year for a 2-year use. The as-a-service fee/year of US$20 generates a US$14 profit replacing that of the sale of the footwear.
Over a 10-year life of a unit, the net profit of as-a-service model is US$14/transaction @ 2,000,000,000 transaction/year = US$28,000,000,000 or a gross profit of US$280,000,000,000.
The loss of (US$36 production increase @2,000,000,000 units produced for 2-years) = US$144,000,000,000 for the redesign of the footwear.Â
The current profits per year is US$8,000,000,000 @ 10-year time span or US$80,000,000,000; again, this is the net number to beat.
As displayed above, the circular-economy model financial performance, over a 10-year period ($280,000,000,000-$144,000,000,000)-($80,000,000,000), retains an approximate US$56,000,000,000 profit advantage compared to that of the legacy build-sell-dispose business model.
Obviously, there is much refinement required to the above analysis; from what percent of the consumer would embrace such a model, to the balance sheet issues of the sellers, to the reset of the forward and reverse supply chain and much more….but industrial ecosystem must begin their journey sooner than later.
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