Russ Roberts

Elizabeth Pape on Manufacturing and Selling Women's Clothing and Elizabeth Suzann

EconTalk Episode with Elizabeth Pape
Hosted by Russ Roberts
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Something's Rotten... Georgia on my Mind...

Liz Elizabeth Pape, founder of the women's clothing company Elizabeth Suzann, talks with EconTalk host Russ Roberts about starting and running her company--a manufacturer and seller of high-end women's clothing in Nashville, Tennessee. The conversation chronicles the ups and downs of her entrepreneurial story, the recent evolution of the women's clothing market, and the challenge of competition from lower quality, lower-priced products.

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Readings and Links related to this podcast episode

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This week's guest: This week's focus:
  • Money Talk. Elizabeth Pape's blog post, Jan. 2, 2017.
Additional ideas and people mentioned in this podcast episode: A few more readings and background resources: A few more EconTalk podcast episodes:

Highlights

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0:33

Intro. [Recording date: March 21, 2017.]

Russ Roberts: [Highlights to come.] My guest is Elizabeth Pape, founder of the clothing company Elizabeth Suzann. Our topic for today is the world of clothing, the challenge of a startup, and the role that pricing plays in the industry today.... Now, you wrote a very provocative and extremely interesting blog post on your company's website that we're going to talk about in some detail in the later part of this conversation. We'll link to that blog post. But I want to start with some background on you and your company. How did you get started with Elizabeth Suzann? And, describe what the company produces and sells?

Elizabeth Pape: So Elizabeth Suzann is the clothing company that I own. We essentially produce women's wear. We aren't necessarily a fashion brand: we don't release seasonal collections. We produce basics that are made from all-natural fibers and we do everything made-to-order from our national studio. So, we're pretty unconventional in terms of how we make clothes and the kinds of things that we make. But in terms of the aesthetics of the brand we're pretty simple, pretty minimal. We really focus on the craftsmanship of the product and the story of the pieces that we sell. So--I didn't set out to start up a clothing company, by any means. I was a liberal arts major in college, didn't study design; just knew how to sew kind of as a hobby. And, we lived in Nashville for my husband to attend school, and I was working on clothing kind of as a way to make some extra money on the side. Ended up with a product that seemed to be pretty popular with customers and just kind of followed that to where we are today.

Russ Roberts: What was that first product?

Elizabeth Pape: The first product that was really popular was the Georgia Tee. It's just a very, very, probably the simplest thing we sell: a very simple t-shirt made in linen. We now offer it in a few other fabrics but it's just a basic kind of universal top.

Russ Roberts: And when you started, you just made one and tried to sell it? Or you made a bunch? How did you--you say you like to sew and you found yourself in Nashville. How did that go from that to like taking in money?

Elizabeth Pape: I was selling on Etsy--I'm not sure if you're familiar with it. It's like an online marketplace for people making things by hand. Started there. Got pretty popular just kind of in that little community. But really started gaining traction when I would do in-person vendor events. So, there would be like a--you might have in your city a local kind of pop-up fair where people come and set up booths and sell their products. I did a few of those just really on a whim. So, my friends were doing them, and I just figured I'd try it out. The first one I did, I made maybe a couple thousand dollars--maybe like three grand. And to me at the time, I was like, 'Holy cow! I could, like, pay rent, you know, with this.' In a weekend.

Russ Roberts: What were you selling it for at the time?

Elizabeth Pape: Prices were pretty similar to what they are today--it was maybe $120 bucks for a shirt. So, at the time, being able to sell that much product in a weekend was inspiring to me. So I just kind of kept doing it--went to New York and Chicago to do some vendor events like that, and sort of grew a customer base that way--so, many of those people that I met in person would continue to shop on the site and the customer base just kind of grew in a grassroots way.

Russ Roberts: So, in those early days when you were showing up at that craft event with a stack of shirts, right, you had no idea how many you were going to sell . You probably sold out sometimes, I assume. Or did you just take 40 shirts and just sit there in advance and make 40 shirts? And how long did it take you to make one in those days?

Elizabeth Pape: I was definitely slower back then. I would make maybe 5 or 6 garments in a full day of work. But I would essentially just make as much as I could right up until the event. So, if I signed up for a show a month out, I'd make as many things--and I'd also be limited by how much I could afford to buy. So, if I had $500 to spend on fabric, that's sort of what would limit me there. But, I make just as much as I could afford to, given my money and time at the time. And usually would sell out. Most shows would sell out of the most popular products.

Russ Roberts: That's cool. So, when was that? That was at the very end of 2013, is when I started selling things. After I did a few events I picked a name--picked Elizabeth Suzann--and then actually started to treat it a little more like a real thing rather than just a side, kind of cash product. So that was the very end of 2013?

Russ Roberts: And when did you hire your first employee?

Elizabeth Pape: About--a few months right after that. Very early 2014 I had an intern, unpaid intern; and she helped cutting, packing orders, that kind of stuff. And then she became my first paid employee and was with us--she actually just left, moved to Seattle--so has been with us for about 3 years.

5:51

Russ Roberts: So, over the last 3 years, tell us what's happened--so, you started off, you had one employee--yourself, really. You were self-employed. And you were making your own t-shirts. It's a $120-dollar t-shirt: I'm going to confess, I'm wearing, I think about a $5-dollar tee shirt right now. Which is an incredible contrast to your clothing line, and it's a perfect counterpoint to your concerns that we're going to be raising later: It's a synthetic shirt; I bought it at Costco; I have no idea who made it and how it was made. But when you started, you were one person, making t-shirts--a high-end tee shirt, obviously. But then, tell us what happened over the last 3 years? And anybody of course can go to ElizabethSuzann.com--we'll put a link up to it--and check out the clothing line. But give us a rough description of the range of stuff that you're selling now, and what's happened to your growth--your employees and so on.

Elizabeth Pape: Yeah. So, we started out, just like I was saying, in small shows and an Etsy shop. Once traffic started to pick up and we were getting steady orders each week, my husband helped me make a very simple website. He is not developer; he's just handy with the Internet. So, he helped me set up a site outside of Etsy. And I just kind of brought people on one at a time. So, I brought on a part-time seamstress. In the beginning I was selling every piece myself--doing all the photography, all of the copyrighting, running social media, doing all of that on my own. So the first thing that I hired out was the actual production of the garments. I'd bring in part-time sewers into the studio with me; they'd be sewing orders while I was kind of working on developing new products and running the rest of the business. So, pretty quickly I added additional items, very simple, most of which we still sell today. And essentially it was kind of a snowball effect: added on 2 part-time sewers in that first studio space, was there for about 6 months and then had to move to a larger warehouse. So, in 2014 we moved to about a 2000-square foot warehouse in Nashville. While we were there the team grew from myself, our intern, and two part-time sewers to a team of 10, most of which were full time. And then, pretty quickly after moving into that building we realized we needed to move again. So, very early 2015 we moved to our current facility, which is a 10,000 square foot warehouse in Nashville. And now we are at a team, I believe, of 21--just had a new hire last week. So, we've grown pretty quickly--really just added employees one person at a time, as the job needed to be filled. The first thing we started outsourcing was, like I said, the manufacturing and production. Now we've got customer support staff, some media staff. My husband handles the finance end, kind of administrative stuff. So we've finally started hiring out more than just the production side of things. [?]

Russ Roberts: But everything you sell is made in that Nashville studio, correct?

Elizabeth Pape: Correct. Yes.

Russ Roberts: And made by the people, the 21 people--not all 21 touch a needle obviously or touch fabric. But you are using 21 folks in one location to create. Talk about some of the things that you sell now.

Elizabeth Pape: Yes. Absolutely. Every single thing that we sell is made in that building. So we still do just women's wear. It's a range that now developed into three different collections. We've got a year-round collection called our Signature Collection. That essentially is comprised of pieces that we release and customers sort of deem their favorites or they are our best sellers, our most popular pieces. We keep those indefinitely. So we've still got the Georgia Tee there from 3 years ago. And if a piece comes out this year that's popular, it will move into the Signature Collection so customers will know, 'I'll always be able to get that pair of pants or that classic shirt' from that collection. And then we have two kind of weather-center collections--a Warm Weather Collection and a Cold Weather Collection--that we update each year with new pieces intended for those climates. So we do a little bit of outer-wear--some coats, a few wool products, but predominantly linen, cotton, and silk tops and bottoms and dresses. Very basic but suitable to be dressed up or down. Everything is washable, so we've got a lot of professional customers, a lot of moms, a lot of travelers--people who need clothes that are really, really hard-working and easy to wear but are super-versatile for different uses.

Russ Roberts: Were you scared along the way? You've expanded in a thoughtful, non-crazy way it seems. You didn't go out and hire 20 people the first week and think, 'I'm going to be a big success.' I think you said on the website you financed it all yourself. You didn't borrow money; you have no outside investors. So you've been pretty thoughtful about it, it seems to me. Have you been--were there scary times?

Elizabeth Pape: Absolutely. Absolutely. I think our growth has been pretty organic, and that has certainly helped; but [?] I didn't decide to launch a clothing line and have to pitch a big idea and hope it worked. We've predominantly made decisions or made moves or added people when there was an obvious need. So we usually kind of knew, 'Okay, we're about to hire a person full time and pay their salary, but we're hiring him because we need--we've got orders to sustain it.' But there have absolutely been quite a few scary moments. I think our first move to our current facility was probably one of the bigger ones. We moved into this building because we knew we needed the space, but a shift from 2,000 square feet to 10,000 is a pretty big one--and committing to pay that bill. You have the orders in September, but are you going to have the orders next January? So, we've definitely felt some fear there. I'm pretty prone to taking risks. I would say my husband is more the kind of sensible one in terms of talking me off the ledge sometimes. But I really like to take risks; I do find myself second-guessing them right after I've pulled the trigger. When it's a little too late. But, so far nothing awful has happened. I think we're getting to the point now where our staff is growing and has some pretty legitimate HR (Human Resources) needs that are pretty difficult to handle--as someone who has zero experience with that. So, I would say, yes, I'm certainly scared pretty often, but it hasn't caused any serious damage yet.

Russ Roberts: Well, I know you have yoga during the day, so I'm assuming that's helping calm you down.

Elizabeth Pape: Yes.

Russ Roberts: Because I read that on your website.

12:50

Russ Roberts: Is there a mistake you can share? You don't have to, but is there something you regret, that just blew up, that you didn't realize, that surprised you?

Elizabeth Pape: Oh, my gosh. Yes. The one that's kind of top of mind right now is our rule[?] provider. So, last year--which we're working through our supply chain, ethics are at the top of every decision that I make. So, the first thing that we addressed was obviously producing the clothing in-house--the people that are making the clothing in our building, we know how they're treated. It's an environment we're really proud of. We working backwards through the supply chain now. So, we know how the garments are made: let's figure out how this fabric is made. So, the first fabric we really prioritized in that kind of supply-chain process was wool. It's the one I feel was most strongly about because there are actual living animals involved and providing the raw material for that fabric. And, lots of wool production is really inhumane and unethical. So, we--I really wanted to find a domestic provider for the raw material of the wool, that I could go visit, see how the operation is run, make sure that I'm kind of on board with the process; and then find a domestic facility to manufacture the fabric. So, a ranch will provide the raw material and then that material will be spun into yarn and dyed; and then that yarn will be woven into fabric. So, it's a pretty ambitious project. Companies like Patagonia and Eileen Fisher have been trying to do this for years. And in hindsight, I don't really know why we thought we'd be able to do it so quickly. But essentially, we gave ourselves about 6 months to completely build up an entirely new supply chain. So, we did find a ranch--out in Oregon, we found a stock ranch that had excellent standards. We went out and visited, loved the owners, really loved the product, were very happy with the source of them material; and then worked with a weaver here in Nashville to actually create the finished fabric for us. And ultimately they were unable to deliver. They were a pretty small operation. She obtained investment based on our purchase order, based on us saying 'We're going to transition all of our wool to you.' And essentially the operation kind of crumbled under the demand. We needed about 1000 yards of wool, and it never got delivered. But, the real mistake on our part was that we took orders for the product before we had the fabric in the building.

Russ Roberts: Reasonable. Sort of, kind of.

Elizabeth Pape: Yeah. So, our big lesson there was to really be careful and make sure that we are working with operations that are at least as big as we are. And then, of course, never taking a customer's dollar until we are sure--

Russ Roberts: that you've got the product. Yeah.

Elizabeth Pape: And other products. So we've been recovering from that. It was a really huge story that we promoted and published, and we're really, really proud of and passionate about; and then it kind of just fell right out from under us.

Russ Roberts: Interesting.

15:56

Russ Roberts: Now, how do you market your retail line other than appearing on EconTalk--which is going to be huge.

Elizabeth Pape: That would be great.

Russ Roberts: You know, it's going to have a huge spike--people are going to--when they write the history of your company and do the documentary, or the Netflix series, they're going to say, 'What happened in April of 2017?' 'Oh, that was the EconTalk episode.' Okay. But other than that, how do you reach people?

Elizabeth Pape: That's a great question. I don't have a super-clear answer, because we are still kind of trying to [?] this ourselves how people find us. In the beginning it was pretty exclusively grass roots: I would meet people in person and then they would literally tell a friend. And I'm still blown away by how well that worked and how many people actually talked about, you know, this tiny, nonexistent company. Today, our primary efforts are focused on our current customer base. So, we still kind of take that angle. So, we try really hard to keep our current customers really happy and really well-taken care of, and give them a reason to talk about us to other people. We do not do a lot of re-targeting; we do not do Google ads; we don't--we are not trying to capture new customers. We're trying to keep our current customers really, really pleased and let them tell new customers about us. So, the way we do that is primarily by focusing on education. We do not put out kind of empty content. If we're going to send a newsletter, we have something that is going to add value to our customers' lives.

Russ Roberts: You're not just like knocking on the door, 'Hey, I'm here. Don't forget about me.'

Elizabeth Pape: Exactly. Yes.

Russ Roberts: Which, I understand is a useful advertising technique.

Elizabeth Pape: Yeah. It does work. But we think that the long term investment of really creating loyal--really, friends--in our customers is going to give us the biggest payoff in the long run. And it's also, you know, what I feel good about doing: I don't want to add crap to people's lives, so we just really want to try to make sure that we're always adding value, always providing education or information. Essentially creating marketing that is going to have a life cycle of its own. So, if we can publish a post like this "Money" post that is going to give people a reason to share it and a reason to talk about it on their own, that marketing will usually be significantly more effective because it just can exponentially grow. Not many people are inclined to just share a pretty photo of a dress.

Russ Roberts: So, one more question before we start to get to the pricing issues that you wrote about. Can you give us a feel for how many pieces of clothing you might--I don't want to go into your proprietary business--but some idea of what the scope of your operation is? Those of us who don't do a lot of sewing--and of course not all of your 21 employees are making product. Are we talking about hundreds of tee shirts? Thousands? Of course, you have tops, you have bottoms, you have outer wear, sweaters, some coats, boots, shoes. Is it thousands of pieces a month? A hundred? Can you give me just a vague idea of how big you are?

Elizabeth Pape: Yeah. Yeah, of course. I'm happy to share whatever information you think would be valuable. I think we are producing right now about 1500 units a month. We produce kind of using weekly plans; and usually our weekly production plan is 250-300 units. But then we've got big spikes every time we release a new product, so it may have[?] a 700-unit week or a 500-unit week. So, I would say between 1000 and 1500 a month in terms of units. We have a pretty small customer base: we've got about 4500--I think 4500--active customers. Those people just come back and keep buying. So, most of our business, I think 65% of our business, is repeat customers who are just continuing to support the brand. So, I think our first year in business, not counting 2013 and 2014, we did about $320,000 in sales. And then in 2015 did a million; and then 2016 landed a little bit over $2 million; and then this year we're projecting for $3 million.

Russ Roberts: So, personal question--again, you don't have to give me the details; but you seem to be good at providing details--so, you are welcome to. How much--do you have a dream to be 10 times bigger? Three times bigger? Just this size? Are you happy with the profit that you're making from this experience as a lifestyle serving 4500 people? I mean, that's an amazing thing, when I think about it. In 1950, or 1980, or 1990, it would be really hard to make a living selling to 4500--you couldn't have found those 4500 people before the Internet. Right?

Elizabeth Pape: Yeah.

Russ Roberts: This is such a 2017-, 21st-century story. And especially, given your price point and your production model, it's really quite extraordinary that you seem to be thriving. And, are you happy like this? Do you want to be bigger? much bigger? a little bigger? smaller?

Elizabeth Pape: That's such a good question. I think, my husband and I personally are very happy with the lifestyle that the business has been able to provide us with. We're certainly not getting rich. But we're able to do something that we love and live pretty comfortably. I think in terms of long-term dreams, I don't see us growing to become a huge brand because our product is so niche. I also think that growth, beyond a certain point, could start to hurt our image. I think people really like our brand because it feels like a discovery. It feels like 'I found this really special company.' I think the bigger we get, we'll lose a little bit of that magic. I think--my primary goal is to provide a really, really, like transformative environment for our staff. So, I'd like to grow to the point where we build a new facility--we're kind of in-town right now. I'd like to get out of Nashville a little bit and build a really excellent facility where we can really optimize our manufacturing process, have everything set up really truly perfectly for our business model. Have some greenery, lots of natural light, be able to have childcare on the premises; perhaps provide food that's kind of grown on site. I'd love to kind of create this ecosystem for the people who run the brand. I don't know if there's like a cap on that growth. But I don't see us growing to be like 10 times our current size. I don't think that would be the same company; and I don't know if I am cut out to run an operation quite that large.

Russ Roberts: I'm just curious how you're cut out to run this one. And I don't mean that in a disrespectful way. You confess you were a liberal arts major, had to figure out a ton of stuff. Right? Do you sit up at night reading books on supply chain and manufacturing and price points, marketing? Or are you just kind of winging it? You're doing a great job.

Elizabeth Pape: No, I completely understand. I feel that way myself--feel like an imposter, quite a bit. The thing that I sit up reading the most about is managing people. I think the supply chain and the manufacturing part--that--I am not going to say it's easy. It's not easy. But those things are easier for me to figure out. I think researching is a really great skill of mine--finding the best product, the best machine, the best table--all of those things are puzzles that I really enjoy solving. And then, marketing is just kind of an instinct. I just try to do things that I want to hear about or see. That's really my kind of litmus test, is: Do I like this? And so far that seems to be working pretty well. Managing people is definitely not natural to me. And I definitely struggle with how to kind of lead a team and how to transition from the kind of startup phase where everybody really needs to have a lot of grit and tenacity to get through those extremely long days; and then finding out how to transition those people into places where they're going to be happy as more structure needs to be put into place: Now that we've grown and we don't need to be working overnight, we really just need someone to lead the Fulfillment Team. How do we transition those really all-star players from the beginning of the company into roles where they are successful and happy long-term as we become a little more structured?

25:18

Russ Roberts: And I was going to ask who your competitors are, but it's a strange question, right? And I always think about the fact that, in microeconomics or price theory when we teach it to undergraduates, and pretty much also to graduates as well, we often talk about a firm that takes price as given. And it's for a particular quality. But of course a firm has to decide--and then in that world, which is a bizarrely sterile world in my view; and I think we spend way too much time in microeconomics teaching people about it--it's bizarre. But in that world, your decision is how much to make--how many units to make. You choose q. But of course, the real decision a firm has to make, and the one you had to make, was: What's the quality? What's the market I want to be in? In a way, you chose your competitors. You chose which firms to be in competition with. And you're not in competition, very closely in competition, with the Costco tee shirt I'm wearing or the woman's version of it. You're in competition with other high-end, high-quality--and with a narrative to tell about the production process that makes customers feel good. Do you see people in that space that you view as your competitors? Do your customers let you know? Do you find out--how do you do that?

Elizabeth Pape: That is something we think about quite a bit. I think we are a pretty unique brand, and this kind of concept is still pretty new--the idea of shopping ethically, or thinking about where your clothes come from. It's not an old industry.

Russ Roberts: Right.

Elizabeth Pape: So, our competitors are certainly not the kind of large chains. I think there are a few brands--we know kind of like where our customers like to shop, other than us. They like to shop at places like Everlane, Eileen Fisher, some smaller brands like Jesse Kamm, Apiece Apart. We have, we know we've got some brands that our customers like to support. None of them are doing things quite the way we're doing them. Everlane really focuses on transparency, but their things are still produced all overseas. Same thing for Eileen Fisher: some of them are domestically produced. But nobody's doing this made-to-order, lean, in-house method. There are much smaller brands kind of cropping up now that do this. And there are a few denim brands that have taken over factories in the South and are trying to bring back this kind of heritage concept. But we're really in kind of a unique space, and I don't know that we have any direct, really direct competitors who are doing what we are doing and who are selling to our market. I think that's both good and bad. I think it would be nice to have some other kind of players in the field, in terms of like networking and collaborating and kind of looking and seeing other people's playbooks, there isn't really much to go on here. We're just kind of inventing this model as we go.

Russ Roberts: Yeah. That's--I just want to say, H&M is not of your direct competitors. And I've never heard of them, but I suspect Polyvore is also not one. But in searching for a silk tunic to compare to your silk tunic, I now, foolishly did that; and now have Google ads popping up in my Google searches for those products. But we'll talk about that.

28:54

Russ Roberts: So, let's talk about this post you wrote, which is really so, both provocative, introspective, and just really interesting as an economist to read it. You start off by talking about how pricing in the clothing industry has really changed dramatically--customers' view, prices changed dramatically over the last 20 years. So, what has happened there?

Elizabeth Pape: Pricing for apparel has really just plummeted. I don't go into much of the reasoning behind why that's happened. I think I don't quite have the knowledge to speculate on precisely why this shift has occurred. But essentially from the 1990s to today, clothing has not only failed to increase in price with other consumer products, but it has actually dropped. So, individual garment prices have dropped while other consumer prices have steadily inclined, or increased. And, in addition to that, the percentage of disposable income that consumers are willing to spend on clothing is dropping as well. So, the clothing sales are getting cheaper; and the amount of money we're willing to spend on clothing is dropping. So, what that has led to is, the kind of response from department stores and brands, they're saying that if we're going to be able to continue to sell your products we need to make them extremely affordable, so that you can take that limited budget you've got for clothing and make it go a long way. So, it's a big kind of a race to the bottom. Forever21 was I think one of the big first players to come into this scene and make kind of obscenely low priced clothing. And then everybody struggled to catch up. Forever21 came out with, in the beginning, things were between $20 and $40 a pop--so, jeans, $20, a coat, $40. And then everybody just kind of jumped on the bandwagon. The H&Ms developed and then department stores started to kind of join that trend. And now, of course, you can go into Walmart or Costco and buy a $5 shirt. Other brands that used to be moderate--not high end, but you know, moderately priced but kind of Americana brands like Gap and JCrew--those aren't expensive brands, but for an average shopper, those are pretty kind of standard. But their prices have now started to drop as well. They are kind of becoming depressed with the rest of the market. So, you used to spend $100 on jeans at Gap; now they're $40, dropping down into the $30s. And I think we're just kind of seeing this real race to the bottom, as customers are saying, 'We're not willing to spend more than $x on a garment.'

Russ Roberts: I would include--I assume Old Navy is in that group?

Elizabeth Pape: Oh, yeah--

Russ Roberts: which is a store I've been in. Which makes it distinctive from most of the others that you mentioned. I think I've been in the Gap--yes--and I've even purchased something there. But my kids have shopped in Old Navy, I know, and purchased clothing there. I think what has happened--to give an economists' perspective--and it's fascinating to hear it from your side: First, it reminds me of a comment I may have mentioned here before from an egg producer I once talked to who is in his 70s or 80s, and I was looking back on the history of his industry which had incredible productivity increases in the productivity of the chickens and the reduction of the number of people involved in the process, the adding of capital so that egg production now was incredibly efficient. And he sort of interrupted me at one point and said, 'You know what the problem with our industry is?' And I said, 'No.' And he said, 'Too many eggs.' What he meant by that was that the incredible productive improvements in the process led producers to dissipate any profits they'd have made from those gains in the form of higher production. And all the gains, virtually all the gains, went to the consumers, in the form of lower prices. And some of that's happening in the clothing business. And I'm going to let you add some footnotes and caveats, which you do in your piece. But, basically opening up the world to clothing production rather than just the United States, letting clothing that's made in China come in without tariff, letting it come in in a container, which is much more efficient than in a box or in a pile or something else--the ability, literally, to containerize output from around the world and move it fairly cheaply now, without barriers, and move production anywhere in the world without barriers, as economic systems outside the United States such as Southeast Asia and China became available as places to produce stuff, lowered the price dramatically. And gave consumers a lot more choice. And meant they didn't have to spend as much. So, from the consumer perspective, there's a lot of good things about it. Now, it's not as cheap as it looks--as you point out. And I'll let you talk about that in a sec. But I think what's extraordinary about the last 25 years--and this is true, of course, in many, many areas--is that I have lots of choice now. I can buy a $10 shirt, and I can buy a $50 shirt, and I can buy a $250 shirt. And I can choose the quality I want, in terms of how long it lasts. And of course the $10 shirt--it'll last remarkably long for a $10 shirt, but it doesn't last as long as the $250 shirt. So, talk about some of the issues that you see as relevant and why a person might want to pay a premium. Talk about that.

Elizabeth Pape: Yeah. I think that's kind of a great perspective on it. I think the sheer existence of a $10 shirt now makes a decision to buy the $250 shirt a much harder decision to make. Even if you really have interest in the $250 product, the simple existence of something that's so much more affordable, you really have to give that a lot of thought and understand your justifications for spending more money on that. I think something that's really kind of been lost with this shift in prices, the kind of concept of brand-building, I think people are simply looking for product at that price point, at the $10 price point--I think you are looking for a physical product. I don't think you are looking to buy into a brand or buy into an experience. I think, even in the 1990s, I think people were still feeling a little bit of connection to the kind of business they were participating in. I think now when you go into an H&M you are absolutely not thinking about the store you are in. You are thinking about the thing that you are putting in the bag. And I think that, just like you said, those companies have been able to offer the prices that they can offer because they've essentially passed every dollar of savings on to the consumer rather than investing in marketing or in the building up of a community or kind of a culture, lifestyle around the brand. They are literally just producing product and selling it at the minimum price.

Russ Roberts: Oh, yeah. It's shirts.

Elizabeth Pape: So I think we've lost a little bit of that kind of buy-in to a lifestyle or culture, community, there, because all of the savings have been passed on. I think that's something that we really try to do, is build that culture and build that community, not just for our staff but for our customers as well.

37:12

Russ Roberts: Yeah. I think the other thing to remember, which is hard to remember, is that the workers who work in the factory that made that $10 shirt have a much less pleasant life and experience doing that than your workers. We're going to talk about your production process in a little more detail, which is extremely interesting to me. But of course their opportunities and alternatives are vastly inferior to your seamstresses' and sewers', cutters' alternatives. And incredibly--it's not obvious that this would happen and I think most people have trouble believing it--but a lot of the people who work in the garment factories in China, Indonesia, Vietnam, etc. have much better lives than they had 20 years ago, even though they are making a $10 shirt. Now, their lives are not very great--certainly aren't great by our Western, American standards. But they are better. Which is surprising. So, the companies that are always looking for a competitive edge and are producing a commodity, without the stuff surrounding it that you produce, they've still been forced to give some of those gains to their workers because they have to compete for them: there aren't enough to go around. When you make $10 shirts, you sell a lot of them. And so, the expansion of output has increased the demand for workers in those countries. The other thing we have to remember, for a lot of poor people, a $10 shirt is a blessing that's unimaginable. We're lucky to live in a really wealthy country that can afford a $180 shirt, or a $90 shirt; and it's a great thing. It's just not the way of human history.

Elizabeth Pape: Yeah, absolutely. I think that is a conversation that we engage in quite often, internally and with our customers as well. It's a really, really sticky subject. And this is kind of true--really any Western involvement or Western production in developing countries, this vicious cycle of: are we adding value there, or are we adding enough value there? Would it be worse to simply not be involved at all and not provide any jobs? Is a bad job better than no job? I think those are all questions that are really, really important. I absolutely do not have the answer. I think our primary purpose here is to advocate for intentionality and consciousness in consumption. So, accessibility and affordability are huge. I know we are very, very much in a niche market here, where most shoppers cannot afford to purchase clothing from us. If you are looking at the average, even--the U.S. average. But even if you can't afford to shop from a brand like ours, I think our primary objective is to encourage people to be consuming a little bit more mindfully. You may very well need to buy the $10 tee shirt. It may not be an option to shop anywhere else. But maybe you don't need 10 of them. Maybe you need 1--you know, every two or three months you need a new one. I think we're really here to just advocate for mindfulness, and just kind of re-evaluating our needs as consumers. I think the drop in price has created a kind of like subset--it's created this kind of subculture of, particularly in younger generations, of people who shop like they eat. It's literally, it's like an activity, to go purchase things, wear them once or never wear them, and then either literally throw them in the garbage or donate them. And that, I think, has a potential to be really, really damaging. Not even if you--even if you forget about the kind of sad production conditions of those garments, but that's just not a healthy way to exist, you know, as a person. It's not fulfilling. It's not an introspective way to exist. So, I certainly don't have a great answer to the question of, 'Well, if we don't make $10 shirts, where will the people in those factories work? Where will they provide an income for their families?'

Russ Roberts: That's not your job. I mean, what I respect about you, and tremendously, is that you are creating a product that's got a different set of attributes. It's higher quality; it's made in a certain way; and for a lot of people that's tremendously valuable. And, as long as you don't want to stop somebody from buying the $10 shirt, I don't have any--I think it's great. And moreover , even though I'm as hardcore capitalist as there is, probably, or in the top 50--I agree with you about the shopping experience. I think our challenge as human beings is to be given those choices of the cornucopia of clothing and food and gadgets, and not be totally consumed by them. And not buy them and then throw them away. Not buy them for that quick thrill of getting a bargain or a new thing. I think that's very hard for most--I think that's our 21st century Western first-world problem. It beats starving to death. But it's still an issue for your soul. And I'm going to make a couple of confessions here: I probably have way too many of these $5 Costco thermal undershirts made by Cool 32, which I really love. I have probably 12 of them. I probably could have gotten by with 4, and I could have given the rest of the money to charity, or done something more thoughtful with it. I pass by it on my Costco run every two or three weeks, and I think, 'Oh, I could use another one.' And there I go. And I should be more, probably a little more thoughtful about it. Right before you called, I was waiting for a UPS (United Parcel Service) delivery of a new camera, and I was way too excited about that camera. It does give me legitimate pleasure and I really love taking photographs. But I think any thoughtful person should be, as you say, mindful of how it affects our day-to-day life or our opportunity to have access to all this stuff. And I love stuff; it's great. It beats not having any. But I think we should be thoughtful about it.

Elizabeth Pape: Absolutely. I think objects--objects are incredible. And we're certainly not anti-consumerism at all. We do make money by selling products. And I think that objects really do have the power to transform lives, silly as it sounds. The Bose headphones I'm wearing, I was talking to my husband about them the other day, and they have quite literally provided me with hours of focus and peace. And I think that we can sometimes take for granted the real value that objects can add to our lives. I think that, for me, the objects that tend to add the most value are the ones that are highly, highly functional; and I can see and feel their application in my daily life. And the ones that I can connect with the story of where they came from. So, yeah--I think that the power of objects is really real; and it certainly is one that is not to be discounted. I think when we are thinking about the kind of lower-priced, and perhaps--not always, but perhaps lower quality kind of range of products in our lives, we just seem to be evaluating: What is their purpose, what is their function, for me, and am I kind of making a conscious decision here rather than just any kind of unconscious, you know, eating the potato chips decision?

Russ Roberts: Oooh. Don't talk about the potato chips. But yeah, that's kind of the compulsive, convulsive, grabbing. So I've moved to a high level. My high level now is that I know that I'm doing this; it's a compulsive thing sometimes. Which is a step forward. Before, I would just be compulsively eating the chips. Now I'm going, 'Hmmm. I'm compulsively eating the chips.' That's a step. Who knows what could be next? I'm working on it.

45:34

Russ Roberts: And I also will say that I love your website, and I love your line of clothing. I don't wear women's clothing. My wife does, though. So, it's interesting. There is something very appealing in what you've created, and I want to turn to the really interesting breakdown you did of the pricing of one item, which is your--it's a silk tunic, you called it an Artist Smock. And you sell it for $185. And, for a non-clothing aficionado like me, I might be tempted to say it's just a big, baggy shirt. Which it is. But it is beautiful. And the silk is very high quality, at least you tell me; and I bet that's true. So, talk us through why that has to cost $185 bucks when--I did go on H&M's site, or I did do a Google search for 'silk tunic' and I found that H&M has one for $70 that I can get on sale now for $40. And it is 100% silk. But yours is $185. So, talk about why it's $185.

Elizabeth Pape: Yeah. So, this is one of our oldest pieces, one of our most popular garments. We use a silk that we just recently we had a new fabrication developed just for us. Silk is measured in a weight: It's called momme--it's called the weight, it's m-o-m-m-e. It looks like millimeter when it's abbreviated, but it's not millimeter. So, we were using a 12-momme silk and we just upgraded to 18. So, it's quite a bit thicker and heavier than what you'll find. And it's produced in South Korea. A lot of silks are produced in India and China; and the milling in those countries is--just not as high quality as the silks from Japan and Korea. So, the fabric itself is one that we're really proud of. But, essentially, our cost is derived from the cost of the good sold, and then our profit. So, material cost ends up at about $31. That's comprised of the fabric itself--so we use about 1 and a half yards, or 1.7 yards of silk crepe to make this top. We also wash all of our garments. This is a kind of small thing but pretty significant for our brand. If you've ever had the experience of buying a cotton shirt from the store, and take it home, wash it and dry it--it's a full size smaller than when you bought it. That's because that fabric has not been laundered yet. We account for all shrinkage ahead of time, so that when our customers receive a garment, it is going to fit the way it's going to fit forever. They can wash it and dry it. So, that shrinkage uses up a lot of fabric. Most fabrics shrink 10-20% in length. So, we're using probably about 15% more fabric than the H&M tunic, because we've accounted for shrinkage. If you throw that tunic in the wash, I can almost guarantee you that it's going to shrink to an unwearable size. So, shrinkage ends up being a pretty big factor in our bottom line. So, we've got fabric. And then we've got trim, which is pretty minimal--thread. We've got the garment tag, the care tag, the hang tag. So, all those go into the material cost. And we end up at about $30--I think $31 dollars--

Russ Roberts: and 74 cents. Yeah.

Elizabeth Pape: for the material cost going into that shirt. Then we've got the labor cost. So, all of our garments are, as we said, cut and sewn in the building. So, we've got a gal over there who, she creates a marker, which is essentially a template that's laid out over various plies of fabric. Those have been cut through with a kind of electric knife--she cuts through the big stacks and then she pairs together the garment pieces that go together to make one [?]. So, she'll end up with--she'll make a marker, lay out the fabric, do the cutting; she'll end up with 20 little individual bundles of tops to go into sewing. So, the cutting time takes about half an hour to spread, cut, and bundle it. She's got that together. Then it moves over to sewing. This shirt takes between half an hour to an hour, depending on who is sewing it. A seasoned sewer takes about 35 to sew. We use an average wage of $16.50/hour. That's an average of entry-level wage and then team members who have been with us for a while. Our compensation is based on the national average and what we think is just fair, realistic, for our demographic of employees. Minimum wage in Tennessee is $7.25. Average wage for garment manufacturing workers is about $11.09. So, we're well above that, for our entry level; and of course we give annual raises. So, most people end up well above the $16.50 that we use to calculate costs. So, labor costs for about an hour in labor. Then we've got to press--wash the garment, dry it, press it, trim all the loose threads off, check it for quality; pack it and label it. That's about 10 minutes in additional labor. So, our total labor cost, calculated at an average of $16.50 an hour is $20.89.

Russ Roberts: And--can I ask you a question? How often do you have to throw one out?

Elizabeth Pape: Oh--I would say every week we have 2 or 3 damaged garments. And those go into our Sample Sale. So, we hold, in person, Sample Sales where we are able to offer things at a discounted price.

Russ Roberts: And what would disqualify a garment in your--from being sent out as a regular?

Elizabeth Pape: We're pretty strict. If there's any visible defect in the fabric itself--there's a loose thread, if there's a pin hole, if there's a small stain--anything that's visible to the eye we essentially say it's not going to a customer.

Russ Roberts: Is there something about the stitching itself? Is there an art to the stitching that some people don't do very well, or can't do well, or occasionally mess up?

Elizabeth Pape: Oh, absolutely. Yes. If it's repairable, we'll send it back into production and repair it. If it is ir-repairable in terms of, you know, there have been holes created by the needle that you can't undo, we'll put them into Sample Sales as well. But we do all of our training in-house. There aren't many industrial sewers in Nashville, you know, ready to hop on the line. So, we are typically taking home sewers or those with a little bit of industrial experience and are training them to sew our product. So, it takes quite a bit for them to be able to sew customer orders. They are usually sewing for a couple of weeks on test runs and samples before they are able to sew a customer's garment.

52:09

Russ Roberts: Now, you mentioned that you pay above the, well above the minimum wage--which is not surprising. But you also pay above the clothing person's wage of $11-something. Do you have a lot of people who want to work for you? Do you have a line? When you go to hire someone, do you have a big line?

Elizabeth Pape: Yeah. We do. We have a pretty large pool of applicants. Predominantly they are interested in working on the kind of media side, the creative side. We do--we don't have much trouble filling our production spots, but it's definitely a more difficult job to hire for than like our media job openings. But, so far, we've always had more applicants than individuals we've ended up hiring. So, we've done okay so far.

Russ Roberts: So we get--I'm going to round up--we have a running joke here on EconTalk that, macroeconomists have a sense of humor because we know that, because we use decimal points. But when you say $31.74, [?] you actually tried to measure with some real precision--which is necessary--what the tag costs; there's 2 cents I think for thread. And you've got all that in there. But I'm just going to round up to make it easier to hear the numbers and remember them. So, you've got about $32 in material; you have $21 in labor for this garment. That gets us up to $53 bucks. Then you've got another $10 or $11 of wastage. Talk about that.

Elizabeth Pape: Yeah. So, this one is the one that kind of sneaks up on you. In the beginning you never accounted for this. But essentially, when you are cutting pattern pieces, if you look at a garment, flat--the pieces aren't just rectangles. So, when you lay those out on a roll of fabric, you are going to have some odd shapes and some strange angles. You are going to have quite a bit of wastage. So, we try really hard to reduce that. And that's our--our cutting team leader's job is to really minimize wastage in terms of how she's laying out markers. But, no matter what, we've got a bit of fabric wastage there. And then we've got some wastage in labor. So, we're paying for 35 minutes to sew Artist Smock, but we do pay hourly rather than by the piece. So, we have to factor in for wastage during the day. Someone's 8-hour day doesn't mean that they sewed--

Russ Roberts: for 8 hours--

Elizabeth Pape: yeah--a 12.5 Artist Smocks a day. Did a few and had some break times in between. So, we've got wastage there. And then another big factor is wastage that accounts for inaccurate costing estimate. So, we might get a time from our sewing team leader of 35 minutes for an Artist Smock. But maybe they are not all quite sewing it that quickly. Maybe that was an overly optimistic estimate. Or, maybe our efficiency goal is 75% but really the Artist Smocks is coming in at about 62%. So, we want to make sure that we account for any mistakes that happen in the costing process. So that we feel pretty safe with about a $10 or $11 dollar estimate of waste. That's kind of our buffer, there.

55:13

Russ Roberts: So, one other thing about this process I want to share, which is just so interesting to me. I'm going to read your quote from your blog. You say,

We don't sew garments in assembly-line fashion, we instead use a lean, full-garment construction method. That means each seamstress sews a garment from start-to-finish. Despite it requiring more time, this improves craftsmanship, ensures everybody is learning and perfecting new skills, and is most importantly a more rewarding and fulfilling way to work.
And we've talked many times on this program about Adam Smith and the power of specialization. And, I've mentioned occasionally that that tends to lead to boredom. Potentially. Although if you're a specialist in pediatric oncology, it's not so boring. But in the production process, it can be. And you've gone the other way. It's obviously a little less efficient. You don't get the gains from specialization that Smith talks about. But, you get probably happier employees. And they get the pride in their work that they made the whole garment.

Elizabeth Pape: Yeah. We really, really have thought about this quite a bit. And there was a point, a crossroads, where we were trying to decide--you know, we're at a scale where we could probably go into bulk production style and gain some efficiency there. Ultimately, I made the decision based on my own personal experience, and kind of listening to our sewers talk about why they enjoy what they do here. So much of their sense of accomplishment and happiness is derived from knowing that they created something for a customer. And when you are able to do every step of the process and end up with a literal finished garment hanging next to a machine and you know that that's going to a customer with a name and a child and a story, that's just such a different feeling, such a different level of satisfaction that you get from those hours you spent working on it than if you sew 25 shorter seams and you never even really see the finished garment--you never really get to see the fruits of your labor. So, I certainly think we could gain some efficiency by assembly-lining; but I think that in terms of employee-turnover and dissatisfaction with the job, we may actually end up at a break-even point in terms of efficiency of training new hires, etc.

Russ Roberts: Well, to come back to a point that came up in a recent episode--which has nothing to do with clothing--about drugs and narcotics: we were talking about the role of raw materials in the final price. This is a $185 garment. The labor cost is $20-30, depending on whether you include the wastage; and that's got non-labor costs in it. So, it's true that it's cheaper to make the garment somewhere else. But that's not--the manufacturing process itself, that labor content is not that big a part of the overall price, unless you want to sell it for $10 bucks, in which case you can't. But, it is $21 bucks; and it's really interesting.

58:22

Russ Roberts: Now, so, we have labor, material, wastage--that gets us to $63 bucks. We're getting perilously close to the H&M non-sale price of $70. But you are going to sell it for $185. Where is that other $122 going to go toward? It's not all profit, contrary to what I think people often think: 'Well, you spent, you had $63 of costs, so the rest is profit.' Well, it's not. So, talk about the other factors.

Elizabeth Pape: Yeah. That was a big motivation for writing this piece. I think I'd heard a few too many comments of, 'I can sew. I know what it would cost me to make that shirt.' And it's certainly frustrating, as someone running a business when you hear that and you know that is absolutely not true. So, most of that $120 leftover, our gross profit margin, is going towards our operating costs. We have a kind of interesting operation because we are essentially running two businesses. Most clothing companies are outsourcing all of the operations side of things: they are outsourcing all of their production. So, they have overhead as well; but their overhead is the overhead cost to run a sales business. They need to market, go to trade shows, find boutiques, etc., shoot[?] their product. So, we are running a sales business as well; but we are also running a factory. So, we have two different kinds of overhead: we have the overhead for our factory; we have a lot more square footage than we'd need than if we weren't producing in house; equipment and maintenance of that equipment and all that kind of stuff. And then we have the overhead for the kind of sales business. So we have to pay for website upkeep; we have to shoot[?] the product, pay for all of our office staff and our media staff, our customer support staff. Office supplies; just keeping the building running--I would never have imagined how much money we'd end up spending on paper and pens, just to run a business. And then, of course, design and research and R&D--all those things cost tons of money. So, the big chunk of our gross profit margin is going straight towards our operating cost--just keeping the business going, keeping the roof over our head, paying our utility bills, paying the non-production staff, and then kind of keeping the operation stocked: keeping equipment up and running and all of that.

Russ Roberts: And taxes is on that list--

Elizabeth Pape: Oh, yes--

Russ Roberts: as you've pointed out in the blog. And I want to come back to that in a second. But, just one thing about the equipment. In my primitive way, I think: 'Okay, you need scissors; and you need needles to sew. Maybe you have sewing machines.' What other equipment do you have? How much stuff do the people creating the garment use alongside their own hands?

Elizabeth Pape: That's a really interesting--I've never quite thought about it from that perspective. It requires quite a bit of equipment. So, each seamstress or sewer has--we call it a pod. So they have a kind of area where they've got all of the equipment they need to make the garment from start to finish. We would obviously have less of it, capital investment for equipment, if we were doing assembly line style: we didn't need each kind of equipment for every sewer. But since we doing it this way, everybody needs a straight stitch machine, industrial machine which sews a straight line; and then a serger, which is a machine that--it's called 'overlocking': It wraps the edges of fabric in thread so that they don't fray. So they have their straight stitch machine and their serger, which are both industrial pieces of equipment that are about $1500 or $2000 apiece. And then we have a boiler steam iron that can hold enough water to produce high levels of steam for an 8-hour day. And then they've got small pieces of equipment like scissors and pins, chalk, things like that. But the big equipment are the pieces of machinery, the straight-stitch, serger, and boiler iron. And then, that's just for the sewing side of things. Over in the cutting department we have two large industrial tables that are about 25 feet long, that are really, really pricey to get in the building; and those have spreaders on top of them where you put a bolt of fabric on the spreader and you are able to roll it down the table back and forth and it will lay out the plies of fabric on top of one another. And then we've got our marker software. So, the software itself is quite pricey. It's a digital CAD (computer-aided design and drafting) software; I think it's about $2500 just to get the software in the building. And then you've got training costs and all that kind of stuff. And then that software is used to print the templates that are laid over the fabric--so you've got a large-format printer that prints on paper about 60 inches wide. And then we've got the paper costs: Every day we're printing multiple markers to cut with. And then the cutting equipment--we use large machine knives. They're essentially like motorized pizza cutters. They're called rotary knives, that are mechanized; they plug in overhead to plugs that hang down from the ceiling. And that is used to cut through multiple plies of fabric. So, it's quite a bit of machinery used to bring a product to life, and in an industrial setting where it's being used all day, a lot of it needs to be replaced or repaired pretty frequently.

Russ Roberts: And you've got washing machines--

Elizabeth Pape: Oh, yes. At the end of the production cycle, everything gets washed and dried. We're actually right in the middle of replacing our--we have commercial washers and driers like you see at the laundromat. We're in the middle of replacing them because they both just gave out. So, two big industrial machine sets.

Russ Roberts: How did you find out about all that equipment? How did you figure out what you needed?

Elizabeth Pape: Um, yeah, hoogh. That was pretty difficult. In the beginning I just kind of invented solutions, before I knew there was a company that made industrial cutting tables. I would just build them. I would just go to Home Depot and buy some 4x4s and plywood and build what I thought I needed to do it sufficiently. Almost always I would then discover that this was already a thing that somebody made and sold--had already discovered was the best way to do things. There's a website called Fashion Incubator that a really brilliant woman writes. She's, I believe, in New Mexico; and she was a pattern maker--I think she still is a pattern maker in the industry. And she--I don't know what motivated her, but she essentially created a resource for people trying to start clothing manufacturing businesses, and talks a lot about the equipment required and where to find it. I learned quite a bit from her site. But really it's just a lot of googling, a lot of research, a lot of reinventing the wheel. And then someone would say, 'Oh, hey, I see you are using this rigged up cutting table. Why don't you get the real thing?' But, it turns out that there's quite a bit of infrastructure still in the United States. There are quite a bit of supply houses that still make this equipment and sell it domestically. So, once you find a source, then they typically--like, now we buy everything from a company called SouthStar Supply; and they've got almost everything we need. So, if I've got a question now, I just go straight to them. They can usually point me in the right direction. Once you get in to the industry then it's a lot easier to find what you need.

Russ Roberts: And if they improve something they are eager to tell you; and that's how you find out about it.

Elizabeth Pape: Absolutely. Yeah.

1:05:54

Russ Roberts: Let's talk about taxes for a minute. That $16.50--let's say that's your starting wage, I think you said it, for a new seamstress or a new person coming in. Is that their take-home? Or, in other words--

Elizabeth Pape: No, that, no, that is their take-home.

Russ Roberts: Is that the cost to you, or is that their takehome? Because you have all kinds of other costs--typically, companies do, of unemployment, and payroll taxes, etc., etc.

Elizabeth Pape: Yes. That is a great question. This is a pretty simplified kind of summary of cost. $16.50 is the average wage that we pay hourly to the employee. That's not necessarily their take-home. They're going to be paying taxes off of that. But it's also not the exact cost to us. The cost to us will be a bit higher because we've got, like you said, payroll taxes, unemployment; that kind of stuff.

Russ Roberts: Do you have other benefits you provide?

Elizabeth Pape: We currently--we're in the middle of working on our benefits package this year. We currently offer PTO (paid time off), Maternity/Paternity Leave, vacation time--paid vacation time. We're working on health care--that's going to probably be the next one we roll out; and ideally your retirement will come in 2018.

Russ Roberts: So, to go back to our $185 tunic: Now I just want to mention one other thing. Some of those overhead costs, of course, are what in economics we call fixed costs--electricity, your electricity is going to be pretty much the same, not all of it but some of it will be the same no matter how many garments you make, just to have lights on in the building; maybe not to run the machinery. But some of your marketing staff, your non-production staff, is going to be paid no matter how many garments you sell or make. And so, part of the cost of that tunic is reflecting the fact that you are small. And if you quadrupled or ten-fold increased your output, you'd have a higher cost, of course, but some of your per-garment costs would stay the same, and you could lower some of the per-garment costs of your overhead. So, part of what your $104, $103 of operating costs are the fact that you are relatively small.

Elizabeth Pape: Yes. Absolutely. That is absolutely true. This is a pretty kind of generic summary of what our gross profit margin is used to pay for; but it certainly is not indicative of--it doesn't mean that those costs will increase with every garment we sell. Or that necessarily $103--we don't take $103 every time a customer buys one of these and split it up to all of these--

Russ Roberts: Right. Well, you kind of do. But you kind of do. And I think what's amazing is, when you think about how an H&M can sell it for $70, or something similar--obviously, their design costs are lower. But the main thing that they're doing is they are selling a zillion.

Elizabeth Pape: Yes, absolutely.

Russ Roberts: And you can sell a zillion when it's $70, or $50, or whatever it is. And when it's $185, you can't. And that's your choice of where you are. And it could be the case--fortunately for you, it's not--but it could be the case that no one is willing to pay $185. The fact that enough people are means that you are a going concern. Which is fantastic. But the bottom line is, I think we get down to $18.50 out of that $185, conveniently about 10% to make the calculation simple, is left over--for new things, reinvestment in the business, maybe adding health care benefits is what you write, or maybe a new facility; some capital you could accumulate. So, it's not a lot of money. It's kind of thin.

Elizabeth Pape: Yes. Absolutely. We are certainly hopeful that exactly what you said is true: We are hopeful that, as we grow in the next year or so we will see those kind of fixed operating costs remain the same; we'll realize a little bit more net profit. Ideally, we would like to be able to pass some of that back down to the customers. I'm pretty happy [?] with where our pricing is at currently. I would like for it to be a bit lower--not much lower, but if possible I'd like to get our prices down 10-15%. So, if we were able to see our costs shrink as a percentage of our revenue with growth, we would ideally be able to pass some of this back down to the customers, take a little bit more net profit in terms of, you know, building up some capital for a new facility. But once we've kind of achieved those things that we're working toward, we would like to pass some of that savings back down to the customers; take a little bit more net profit in terms of building up some capital for a new facility, but once we've kind of achieved those things that we're really working towards, we would want to pass some of that savings back down.

1:10:43

Russ Roberts: Just to come back to this point about your lower-priced competitors: They are relentlessly pushing every margin they can. So, they've cut the labor costs dramatically because they are producing in a place where they don't pay $16.50--they pay, maybe, $3, $3-something an hour, I don't know, maybe $5 in some places. They are using a lower-quality material. They are not worrying about where it's made so much; they only care that it's silk[?] and that it's cheap. And they've got those overhead costs down as low as they can, because they're making a zillion. And you--I want to give you a chance to talk about what you call cost per wear. For a lot of people, the clothes they wear are a statement that they're paying attention--that they know what's in. For a man, there aren't as many choices: it's the width of their tie or the cut of their jacket in a suit, the tightness of the legs of their jeans, maybe. There's certain things--I just, fortunately, read that baggy jeans are coming back. Whew! Good for me. But that's one way to think about your clothing purchase: It's a statement that, 'I'm paying attention. And this goes out of style. So, I don't want to pay for quality; so I'm not going to wear it for very long.' The other strategy is to say, 'There are certain things that are timeless; certain looks that are timeless; and I'm going to invest. I'm going to pay a higher price per unit of clothing'--and this goes way beyond clothing, of course--but, 'I'm going to pay a higher price because I'm going to keep it for a long time.' So, talk about how you think about that in terms of your product.

Elizabeth Pape: Yeah. That is a huge, huge element of the design process that we work really hard to pay attention to. In terms of cost per wear, I think you can kind of calculate that by looking at two things. One is the actual physical durability of a piece of clothing. If you buy a $10 shirt and the strap breaks after two wears, you've got a pretty expensive cost per wear: you wear it twice, so it was $5 per wear. If you have a higher-priced garment but you are able to wear it, you know, hundreds of times over many years, you could get down to $1 per wear. You could even get into the pennies per wear. And then you could go the other direction: You could look at something really, really expensive on the high-end spectrum, something that you're going to only wear to a few really fancy occasions, and you could be looking at several hundred dollars per wear for something like a ballgown or a really expensive jacket. So the spectrum is pretty huge in terms of what the cost per wear could be on an item. We try to make sure that our garments are physically durable enough to give customers a good cost per wear value. Ideally, we'd like our garments to last between 3 and 7 years. We do not want them to last forever, because that means they're going to last forever in a landfill. We use natural fibers, which are going to biodegrade, which means they are going to abrade with friction. They are not going to be ever-lasting. Pieces that are close to ever-lasting are not pieces that we feel comfortable making--with polyesters and synthetics. But we also look at style durability: so, how likely is this piece to be out of fashion in a year? And for that reason, we have our kind of year-round, long-standing Signature Collection that's comprised of pieces that are essentially trendless and don't really have a kind of date attached or a strong color story; they are all very neutral in color, simple in silhouette. You could see an image of someone from the 1960s or 1970s and they might be wearing something similar to what we sell. And I imagine that you could see someone 10 or 15 years from now--a pair of slim black pants would not date them. So, we look at physical durability to really give customers a best shot at cost per wear, and then we look at style variability. If something feels like it is kind of of-the-moment or trendy, certainly as a creative eye, I'm not immune to wanting to participate in that. But we really try hard before putting a collection out there to eliminate anything that's got too strong ties to the present day.



COMMENTS (23 to date)
Ryan H. writes:

The wastage segment reminded me of the chapter in "The Millionaire Mind" where the underwear factory started selling its wastage as gun cleaning patches. After awhile he started to view his underwear factory as a way to supply his gun patch company materials at zero cost. All his profit came from gun patches.

Seems like there should be a market somewhere for even small pieces of really high end silk.

Anyways, great episode. Sent a link to my daughter who is getting into fashion.

Buzz writes:

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Cowboy Prof writes:

I enjoy these discussions with people who "do economics on the ground" as is it always enlightening as to how they think about economics. I also thought Russ did a very good job in questioning the guest about how ethical it really is to not outsource overseas. This addressed the ethics of sweatshops in a fairly non-confrontational way.

The guest early on discussed how ethics is one of her top priorities when managing her business, and later talks about how "intentionality (?) and conscientiousness" are important things that the company sells. I've seen these sentiments tossed about in other businesses (e.g., fair trade coffee), but I also think it exposes some blind spots for those making the arguments.

Again, Russ addressed this very well when the discussion turned to purchasing a $10 shirt versus a $185 tunic. If I heard correctly, the guest tended to link "cheaper" shirts to consumerism (which she is not opposed to) and a lack of the consumer thinking about the broader social implications of such a purchase. But what about subjective value? Buying a cheap shirt might be fine for some folks because shirts are not a "thing" for them. They might use their resources elsewhere in more "responsible" ways (e.g., buying fair trade coffee). Or perhaps I buy it out of concern for the developing nation "sweatshop" worker who might otherwise be scavenging on a garbage heap for daily sustenance. Or it may just be this is the one thing that folks can afford. I get a bit froggy with all this "ethical consumerism and production" stuff when it limits the ethical considerations to a very narrow range of what constitutes "ethical behavior."

Throughout the interview, I couldn't help but get the following quote out of my mind from Adam Smith in Wealth of Nations:

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest."

Joe writes:

Great episode. My favorite EconTalks are fast becoming the ones with CEO/owner guests.

I like the idea of intentional living, but it can get really exhausting. One reason I tend to buy the cheapest stuff is that it's simple; I just try to minimize my bill. Once you start talking about qualitative factors, then life gets complex.

That said, it's easier than ever to make choices in line with your values while keeping life simple. I recently started buying my jeans from a high quality, made-to-order site after I'd gotten frustrated with inconsistent quality of Levi's. They only make a couple fits and only require one measurement (waist). All I have to do is choose a color and fabric weight.

So I guess my takeaway from this podcast is that if you identify your values and find a company that shares them, intentional living doesn't require much more thought or effort than unintentional living.

Luke J writes:

Good stuff. Could make top 10 of 2017.

Generally, I use those $10 shirts for years before finally tossing them. Shirts are not my thing, as Cowboy Prof mentioned above. Even still, I'd fork out $100 for a nice pair of pants if I thought they'd fit me in three years. At my rate, that ain't likely.

JRo writes:

That was very informative, especially getting into some of the inside numbers. At one point I found myself wishing Russ could ask such questions of, say, Levi Strauss in his day.

The insights into the complexity of the garment industry reminded me of an editorial in China Daily about 10-15 years after the era of Mao suits. The Commies were marveling at how allowing hundreds of millions of citizens to wear whatever they wanted had marvelously stimulated their economy, creating jobs and producing wealth.

Kevin writes:

I really enjoyed this episode.

I am grateful we live in a world where people can make and buy $150 shirts while also being concerned about the treatment of sheep. That is not mockery, that is a sincere testament to the fantastic wealth we have achieved. As someone who grew up shopping at second hand stores and cannot break the habit, the world of the wealthy always amazes me.

I care nothing for the morals of distribution lines. That all sounds like nonsense to me, but it is a luxury good that the next generation seems more and more focused on. It is possible when I am old it will simply be the way business is done. Good/bad? Might not matter because generations have different preferences. But very interesting thing to watch happen.

AS other said, this way of thinking (beyond being able to put some random comments on marketing materials which the guest was clearly not trying to do) is exhausting. Maybe some people buy the cheapest shirt possible and then donate to the poor. Its all so complicated.

Great guest. Thanks.

GirlFriday writes:

Really enjoyed this guest and interview. Russ asked some excellent questions - I always appreciate his economist perspective, delivered in a cheerful manner. I've nothing to add but to echo a few comments above: buying ethically is important to me, but I also have been in situations where a $10 shirt was what I could afford, and I've yet to kick the secondhand shopping habit (although that's mostly due to the thrill of the hunt these days). I do think the secondhand clothing market has its place in a conscious consumer market. Definitely think this will be in the top 10 of 2017.

S Spiller writes:

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Dylan Wiliam writes:

I enjoyed this podcast but I was surprised that there was not more discussion of the division of labor. By insisting that each worker makes a garment from start to finish, the owner is in effect denying workers the opportunity to be more productive. I have no problem with workers avoiding the drudgery of repetitive tasks by specializing less, but I do think it's important that they are aware of how much they are paying (in foregone income) for this variety in their working day.

Dylan Wiliam writes:

There is a nice connection between this podcast the one featuring James Bessen on "Learning by doing" a while back, and that is the issue of wastage. In clothing factories, the supervisors typically decided how much cloth was needed for each garment and this amount would be provided to the cutters. However, by clever arrangement of the templates, the cutters were often able to get more garments out of a bolt of cloth. So, while the supervisor might estimate that a bolt would produce 40 dresses, the cutter might be able to cut the material in a way that yielded 43 dresses. The extra material was called "cobbage" in Ireland or "cabbage" in the UK (from the French "coupage"). The cutters would take the material home to make into dresses, which could then be sold to friends or at a local street market.

Bogwood writes:

I would second most previous comments. Was there a mention of debt? There seems to be a concern with start ups carrying debt and having no reserves, lack resilience in down turns.

You do not see the open accounting very often in medicine. You can get a very nice cataract operation covered by insurance but adding laser, specialty lenses can quintuple the charge with very high markups. She should move into medicine. (We worked with a Pakistan eye surgeon who wanted to do assembly line surgery following a Russian model but agreed with the complete procedure model in the end.)

Elizabeth Pape writes:

Great discussion here. Dylan, just to clarify, our production staff is paid hourly (not by the piece) to encourage the prioritization of quality over speed. However, if your point is that their lower quantities will, in turn, affect our overall profit margin, therefore ultimately limiting their potential wages, that's valid. That's a conversation we've had before and want to keep our production teams involved in as we grow. Definitely an important consideration!

Luke J writes:

@ Bogwood,
Yes, briefly the conversation touched on debt and startup money. Elizabeth Suzann is the kind of company that is built on savings i.s.o. debt. That is what I thought I heard anyway. No bank loans, no venture capital investment.

Jim White writes:

Russ,
Great interview. Just curious how you found Elizabeth. Normally, you read books and then offer up a program. Her experience seems to parallel to Yvon Chouinard founder of Patagonia clothing. I listened to a podcast NPR podcast: How I Built This (December 12, 2016). Thanks for doing these podcasts.

Tom Murin writes:

Excellent interview. Elizabeth is impressive. Very thoughtful and articulate.

It seems like their production is a standard 8 hours a day. If they added a 2nd shift they could use the machines more and not having them sitting idle 16 hours a day.

Trent writes:

Enjoyable podcast, though I think Russ was too tough on his criticism of microeconomics classes.

While it's true that a lot of time is spent on models where firms are price takers/only have to determine their quantity, I think Mrs. Pape's story illustrates how to differentiate a product effectively. While a lot of us may view her t-shirt to be essentially the same as the one at Costco you described, it isn't. For the reasons she described, her t-shirt is of higher quality - it's not a homogeneous product, if you will, so she's not a traditional price taker and is able to drive a higher price and earn a higher rate of return.

I also thought the discussion of 'cost per wear' was interesting. However, does it really apply here? Isn't the idea of women's fashion for the "It" woman to appear chic at all times, while never being seen wearing the same outfit twice? Maybe that's changed, but I still read articles where female TV anchors receive bad feedback if they wear the same outfit twice in a short time span. So if that's the case, the women who would be most willing to pay for upscale fashion are also the ones who would most least likely care about 'cost per wear' because they're not going to wear it that often, right? Or am I missing something in my logic (I certainly don't consider myself anything close to an expert in fashion)?

Brian Scott writes:

I was particularly interested in the recent conversation with Elizabeth Pape, and her views on the flood of much cheaper garments from the Far East changing people's buying habits. The trend also occurred here in Europe about fifteen years ago, and had a particular effect in one area, charity shops.

For ten years I was chief executive of Oxfam Ireland, where a significant proportion of the money we spent on relieving poverty in Africa etc came from the profits of our chain of about 40 charity shops in cities and towns throughout Ireland. These depended predominantly on donations of saleable used clothing from the public (other important categories were secondhand books, music, and bric a brac). The onset of much cheaper lower quality clothing had two effects on our business. Firstly, it dramatically reduced the price points at which we could sell used garments - if you could buy a new tee shirt for £5, it was impossible to sell a used one for £3.50. Secondly, the greatly reduced sales of new traditional middle quality clothes (eg from Marks & Spencer) resulted in lower volumes of saleable good-ish quality garments being donated. Our whole business model was undermined.

Our response was to increase significantly the number of clothes sold at the enforced lower prices so as to maintain sales revenues. Overall donated volumes, of course, rose because the cheaper garments were discarded more quickly. But we had to gear up our back rooms to process much larger volumes, something that some of our older lady volunteers took time to adjust to! Another thing we did was to select older fashion garments from the flow of donations as these 'retro' items could fetch higher prices from younger customers. In these and other ways we were able to maintain our net profit margins of 28-30%. These are highly unusual in retailing, but if your cost of goods is zero and your labour is largely free (apart from the shop managers), it is, of course, possible to do much better than conventional retailing.

The charity shop phenomenon is, I think, more developed in the UK and Ireland than many other places including the US. It's a fascinating business niche patronised here by middle class people (especially the young) as well as those less well off!

A further angle on charity shops and donated clothing is that unsaleable garments are sold on at very low prices indeed (eg £1.50 per bag) to commercial companies who sort and sell them in eastern Europe (the heavy stuff), Africa (the light clothes for the tropics), and completely unsaleable 'rag' to re-processing factories. This has occurred on such a scale that it has largely destroyed indigenous textile manufacture in several African countries - not, on the face of it, something a charity like Oxfam would be too happy about. On the other hand, the imports of used clothes has created very large numbers of indigenous artisanal jobs in distribution, retailing, and above all in tailoring and altering. On balance, Oxfam felt that if you are targeting the poorest, and spreading economic benefits throughout the country far into the remote rural villages rather than concentrating everything in city factory jobs, then maybe the net benefit is more poverty alleviation. But there has been a lot of heart-searching!

Thanks for the always interesting programmes.

GirlFriday writes:

@Brian Scott
I too could not help thinking about fast fashion and unintended consequences for second-hand stores. @Russ, if it's not too out of scope, I'd love to hear a podcast about that! Want to interview the head of Goodwill? Or maybe Brian?

Carr Hagerman writes:

This was a thought provoking episode. Shortly after I heard the episode I went shopping for some clothing, and really thought about where these products were produced and whether they'd been created with humane standards.

I don't think my shopping will return to its former dimensions.

Thank You

Adam writes:

Is it ethical to buy a $145 Georgia Tee. I get my polyester Tees for $5-10. My Tees employ people in faraway places. My Tees last a long time. They look good since I don't overeat and waste valuable food resources. They're wonderful in warm weather and great under a jacket in cold weather. I can afford a few for casual wear and a few for dirty work in my garden. I have money left over for books, education and charities.

From an opportunity cost view, isn't a $145 Tee a terrible waste of valuable resources? Are these resources misdirected by putting them into expensive fashion clothing? How is it ethical to use $145 worth of resources to make a shirt that's available for $5-10?

A better ethical choice?: buy a $5 or $10 Tee and donate the savings to a good cause or charity? That way, people get employed in faraway places and those in real need get help?

D writes:

High praise for those who pursue high quality. I would gladly spend money on small productions that aren't squeezing every player in the market to get a shirt on the shelf. Who would you want to buy from...sweatshop with quantity over quality or the quality shop with attention to detail. I could buy 20 bottles of cheap wine vs 1 bottle of wine that came from small production made with care and attention...same price. You can keep your clothes from WMT TGT and the likes but they aren't making their employees or the world any happier or better. Nothing beats the care in which a human brings to a task. WMT motto is Save Money Live Better, nonsense. Live better by paying attention to the quality in all things and learn to recognize it. Better to do with less items made with quality than a truckload of cookie cutter rags.

Dr. Duru writes:

I absolutely LOVED this episode! So good to hear from business people who are making a difference at a local level starting from the grassroots.

As someone who thought in grad school I would be a part of a movement to reinvigorate manufacturing in America, it is encouraging to hear the stories of the people who are actually doing it.

Professor Roberts - you didn't discuss models of economic growth in this episode, but I found myself wondering how scalable this model could be? That is. a business that purposely caps its own growth to focus on a market niche. What was your specific purpose or goal in bringing us this great story? For a second, I thought you were going to have Pape talk about how regulations and taxes constrain her ability to deliver wealth to her employees, etc...

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