There’s this unpleasant feeling I often get just after buying something expensive.  Usually it’s right as I’m walking out of the store, some big box tucked under my arm and this thought suddenly crosses my mind; How much of the money I just spent actually went into making this thing?” I’ve just decided to spend more money on some well-known brand because I thought I was going to get better quality, but is that actually the case? Or did I just spend half a weeks pay financing executive bonuses and fancy advertising campaigns?
The thing is it's a question that is actually relatively easy to answer. Most of the brands we consume are owned by publicly listed companies, which means all their financials can simply be downloaded from their website.
So that's what I've been doing for the past week or so; downloading financial reports and breaking down where the revenue goes. I have chosen five different brands that consumers pay a premium for.

1. Coca Cola
What better place to start than Coca Cola? One of the best symbols of American consumerism, inspiration for my favorite Andy Warhol quote and Warren Buffet’s stock of choice. Coca Cola make four of the five most consumed non alcoholic drinks in the world, coke, diet coke, Fanta and sprite.
Interestingly, in most countries if you buy a can of coke it probably wasn’t made by Coca Cola. Instead, Coca Cola will have sold their “syrup or concentrate” to another company who has mixed it with sparkling water, put it in a can, and sold it to the supermarket where you brought it. In Australia’s case that company is Coca Cola Amatil, which is part owned by Coca Cola, but in other countries some of these bottling companies are completely independently owned.

By combining the graphs of Coca Cola Amatil and Coca Cola I came up with the below graph. I have based this off 90 cents as this is my best estimate of what coke get when you buy one of their cans.

As you can see, only roughly 26 cents of the money coca cola get goes into making the actual can and contents, whatever those secret ingredients are they definitely aren’t expensive.
a 28% profit margin is pretty impressive, especially when you consider that what they are making is basically fizzy sweet water. I guess Warren Buffet knows what he is talking about after all.

2. Prada
Prada has been listed on the Hong Kong stock exchange since 2011 and the majority of their goods are sold directly to customers through Prada owned stores. Like Coca Cola, the vast majority of Prada's products aren’t actually made by Prada themselves, instead the prototype will be made by Prada who then ship it to one of their suppliers who mass produce it.

Let’s take this Prada handbag for an example which retails for an eye watering $2,450 AUD.

Once you take the GST out, you're left with the below graph.

That’s right, less than a quarter of the money spent on a Prada handbag actually goes into making the bag, not really great value for money when you think about it. The biggest cost by far is for their retail stores, which Prada invests considerably in. 4% on design seems a little excessive, especially considering as far as I can tell all their bags look the same, but then again I'm not really known for having much fashion taste so what would I know?

3. Apple
Just like every other company listed before, Apple don’t actually make their iPhone’s, they are manufactured for them by various companies. The new Iphone went on sale in Australia for $929. Once you take out GST, you are left with the below graph.

It’s pretty hard not to be impressed with this breakdown. Apple spend the highest portion so far out of any company on producing the product, yet still are left with the equal highest profit margins. Furthermore, despite being one of the most recognized and respected brands in the world, their advertising spend is only 1% of total revenue.
I should point out that Apple only sell a small portion of their phones through their retail channel so you could argue that the selling and admin costs (which is where the cost of the stores is recorded) are artificially low.

4. BMW.
At last, a company that actually makes the product it sells! BMW take complete control of the entire production process, then (like all other car manufacturers) outsource the actual selling of their vehicles to independent dealers.
The below graph breaks down the costs of BMW 3 series in Australia. I have used the manufacturer’s list price as a starting point, which excludes GST, on road costs and dealer delivery (which is where most of the dealers margin is.)

A lot has been said about how unprofitable the car industry is but it still seems strange that BMW, manufacturer of some of the most innovative and market leading products in the world takes in an average profit margin that is lower than Coca Cola.
Interestingly, the research and development expense is more than twice as high as Apples, though I think that says more about Apples transition from an innovative start up to a corporate machine than anything else. All in all, based on this data the value for money you get from buying a BMW seems pretty good. 73% of the money that BMW gets from a vehicle goes towards either making the product, developing it, or providing warranties.

5. Nike.
Once again, we are back to a design a prototype, get it mass manufactured in the third world, then ship it to the stores model.

Nike is one of the most iconic brands around and famous for its massive advertising and endorsements spending. According to some website, there was a year in which Michael Jordan was paid more than the entire Indonesian workforce that actually made the shoes, though I haven’t been able to find a reliable source for that.

The below graph breaks down the EX GST cost of a pair of Le Bron XII’s.

Unsurprisingly, Nike have the highest spend on advertising of the lot, at 11% of their total revenue. All research and development costs are included in their cost of sales which means I have been unable to give a separate breakdown for this.


I hope you have found this interesting. For me, the biggest surprise I got from this was discovering how standard it is for companies to outsource the actual manufacturing of their products. It's hard not to conclude that companies mainly do this so they don't have to take responsibility for the working conditions of third world factories, which makes the whole practice seem pretty grubby. Lastly, as consumers we don't often take into account profit margin or advertising spend when deciding what brands to buy, but maybe that is something we should start thinking about more.

For the finance nerds out there, I have used EBIT as a measure of profit as I think the company structure and tax rate should be irrelevant in this sort of analysis. For all graphs I have used the unadjusted figures from the financial reports except for Coca Cola's, where I have had to combine the reports from Coca Cola Amatil and Coca Cola.