Too Hot to Touch: Why branded products are so costly?

It was an lazy afternoon in the weekend when the SMS came. A newly setup mall is giving huge 30-40% discounts on clothes. As freshers who just entered in the list of officegoers, we badly needed clothes. In student life we used a single Tshirt for a whole week. Used the same cloth for attending classes and while sleeping. But in office you do need to look decent.

Me and my friend Ajit got ready and we took an auto to reach the mall. The new mall was big. Really big with all leading brands present there. We came near the men section. We browsed through Lee, Levis, Wrangler, Spyker and even higher priced brands like Adidas, Reebok, Nike etc. Most of the jeans were priced around Rs. 2500 and none of the sandals were below Rs. 1500.

Picking up a random sandal my friend Ajit said to me, "See these sandals? Back at home I used to buy sandals from Sreeleathers or Khadims. They were priced around Rs. 300. And see these, none of these shoes are below 1500. I see no reasonable difference in quality."

I replied, "Brand boss, brand. If you want brands like Reebok, Adidas and Nike, you have to pay the price."

- "But why?" said Ajit. "If the price of the raw material is same, if the quality is same, the price should also match."

- "But the local brands are made by hand. Like I know a couple of families in my native place who sew clothes for some local brands at their homes. They are not permanent employees... they just work on a contract basis and also paid poorly. Whereas the big brands have their own factories across the globe. The people who make the products are full time permanent employees who are treated well, paid well."

- "No sir. Not always true. Just google a bit with 'Nike Adidas factory poor condition' and you will get it. There have been reports that many of the big brands like Nike and Adidas treat their workers poorly. Most of these brands have their factories in south east Asia; in countries like Indonesia and Vietnam. The reports say, the workers live in extreme poverty and face prosecution and physical assault. Both Nike and Reebok have been accused of using sweatshops for production." 

- "What is a sweatshop?" I didn't have a clue. In response Ajit opened Wikipedia in his old Nokia and read aloud:

"The U.S. Government Accountability Office defines a sweatshop as an employer that violates more than one federal or state labor law governing minimum wage and overtime, child labor, industrial homework, occupational safety and health, worker’s compensation or industry regulation."

- "And yes," he continued, "the sweatshop controversy is long sticked with brands like Nike and Reebok. Often they spend a few bucks on the factories to stop the shouting media. But soon the fish comes out of the closet. Just google the word sweatshop along with your favourite brand and you will see it."

- "This is gross. I have to think twice before I buy my any Nike or Reebok products in future." I said.

- "Well, NO. Not at all." Ajit clarified. "I have nothing against Nike and Reebok in particular. I am just using the names just to explain easily. Infact, recently both the companies have taken affirmative actions to improve labor conditions. Which is good. Even my favourite jacket carries the Reebok logo. I am not saying anyting against any brand in perticular. Many other companies also try to save money by setting up factories in south-east Asia and with poor labor condition. I am just curious about why these branded sandals and jeans costs so much compared to the local ones. See, having big factories and full time employees is not the answer."

I still tried to justify, "Compared to the local ones, the brands need to support bigger supply chains. Their procedure is way too much complex than the local ones. This requires money. See, they have so many managers and executives."

Ajit snapped, "No company employs executives and managers to increase production cost. That's rediculus. They have the whole big system to decrease production cost. Not to increase it."

Giving up on the shoes, we came near the Jeans section. I picked up a Levis and noted the price tag area. Apart from the 2500 INR price, it listed the original manufacturer. Some Greatway Pvt. Ltd. at Ludhiana.

- "See? This trouser is manufactured by this local company. What Levis does is just marketing. In fact, this is true for most of the brands. They just contract with different local manufacturing facilities spread across the globe. Mostly they prefer countries like Vietnam, Indonesia and China, where it is illegal for workers to organize, and where wage rates are very low. All these companies are besically marketing companies who spends millions of dollars to make the brand. They make sure everybody recognizes the brand logo."

I nodded. What Ajit was saying does make sense. In all the price tags I could see the name of the company only under 'marketed by'.

Ajit continued, "And this explains the illogically high price of the branded merchandise as well. Persons like Sachin Tendulkar or Shahrukh Khan do not come cheap"

- "You mean all the money spent on TV ads are included in the MRP?"

- "Yes sir. And not only TV ads. Apart from the regular advertisement methods like TV, Radio and News Paper ads there are other ways like buying an IPL team, sponsoring F1 race or organizing musical festivals. You might be very amazed to see your favourite brand is bringing Shakira in town but be careful, this event might create an equally amazing hole in you pocket."

- "You mean to say, quality wise there is no difference between the branded ones and the local ones?" This is obviously not true. The branded ones definitely has better colors better designs.

- "I don't exactly say that. The brands can employ expensive designers which the local ones can not. They also have stricter quality control to keep their brand image intact. All I am saying is, even if I admit these factors, the branded products are priced way higher than they should have been. And this is because the price also include the marketing costs. As I said, persons like Sachin Tendulkar or Shahrukh Khan do not come cheap."

- "Then why people buy branded products? Among my friends, nobody wears a pice of cloth which is not branded." said I.

- "You have a very rich set of friends then. Anyway, this is exactly the advertisement campaigns are meant for. The companies do repeated ads, sponsor events, put up hoardings and this way establish their brands. So that, when you wear a Reebok shirt, anyone who looks at the shirt knows that you are wearing a Reebok shirt. Then they portray anybody who does not have the brand as a loser. As if girls are really going to come running to smell your armpit if you apply AXE deodorant. But believe it or not, by repeated advertising they actually make your subconscious believe these stuffs."

I know these situations. Now Ajit will go on alone and deliver a reasonable sized speech. I did not interrupt him. Ajit continued.

"And slowly, these brands become status symbols. Consider you case only. As all your friends wear branded t-shirts you can not see anything beyond that. Because of the advertisements, you will feel like a loser if you wear a shirt of a local brand. I visited a friend once. Even the eggs they eat is branded and carry holograms. This way, the marketing does not remain only the merchant's need any more. It becomes the need of the consumer also. As the money spent in marketing directly translates into brand image, you will not buy a shirt if the company does not spend a part of the price in advertisements. It's like, the consumer is requesting the merchant to charge him extra for the advertisements. Silly. But true."

"Then how does a new brand enters the market? I mean why doesn't a new brand comes which presents equally good product with far less price?" I asked.

"It is not easy. You, the consumer will not let it. To enter the market, it has to put an equal amount of money and effort in advertisements and also make the price at par with the leading brands. If the new brand costs any less, the consumers will typecast it as the cheap brand meant for losers."

"DJ&C for example" I mumbled. The TShirt I was wearing was of DJ&C a brand owened by the Future Group. While the quality of the TShirt was pretty good at much less price, it did not fit well with the Lee Coopers. It did felt like a loser.

"Don't take names. But yes. May be true. By the way, have you noticed how the same quality TShirt/Kurta is priced differently in Fashion@BIG Bazaar, Pantaloons and CENTRAL?"

"Yes." I said. I went to Pantaloons a few days ago and did not find any piece of cloth with price less than Rs 400. But at Big Bazaar there were good quality TShirts at Rs 250. 

"This happens inspite of all three of the market chains is owened by Future Group. This is because different chain of super markets cater different market segments. The quality of the product does not determine the price; the pockets of the target consumers do."

I remembered an old joke on Mullah Nasruddin in which the king comes to buy an omlette from Mullah's shop. After eating when the king asks for the bill, Mullah charges Rs 1000 for one single omlette. Astonished, the king asks, "Why? Is the egg so rare in this place?". Mullah aptly replies, "No your majesty. Egg is not rare at all. Rare is a customer like the king". This is so true. Go buy a cup of coffee in any Cafe Coffee Day and you will know. But I didn't understand how buying overpriced coffee or t-shirts can be a status symbols.

Ajit sensed my amazement. "How marketing shapes and steers consumer need is worth another discussion. Have you ever bought a 1000 rupees stuff at 40% discount while the product actually costs 550? And the most interesting part is you didn't actually need that stuff. You just bought it because there were discounts. That's called anchoring. But we will continue talking later. Now I think we are hungry. Let's have some branded foods at KFC or McDonalds. I can only see these two restaurants around."

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Few references on working conditions in the factories of Nike, Adidas etc:

• http://www.oregonlive.com/business/oregonian/index.ssf?/base/news/121790850350380.xml&coll=7
• http://www.stanford.edu/class/e297c/trade_environment/wheeling/hNike.html
• http://www.commondreams.org/headlines02/0308-03.htm
• http://www.oxfam.org.au/explore/workers-rights/Nike
• http://en.wikipedia.org/wiki/Sweatshop
• http://en.wikipedia.org/wiki/Nike_sweatshops
• http://www.ehow.com/about_5485125_Nike-sweatshops.html