It's both the cushion foam and the fabric that is shot, really. I unzipped one the other day and the foam was sort of stuck to the fabric, for reasons I couldn't fathom. They are kind of disgusting although I'm used to them.
Surprised people mentioned upholstery -- when we looked into getting a chair and ottoman re-upholstered it was super expensive, something like 600 or 800, so we ended up just stabling fabric around the chair. (It's the dogs chair now, so glad we didn't spend the money!!)
Speaking as a former salesman and sofa builder, I'm not surprised you were surprised. :)
There are quite a few reasons reupholstering furniture is quite expensive, often more than brand new furniture.
It all comes down to the cost of labor. There are generally at least three different people who have to work on any given project, sometimes 4 if the frame is damaged enough to warrant carpentry. You have the stripper who removes the fabric. This is actually the hardest, most time consuming part of the whole job as it requires him to carefully pull out every single staple one at a time with a sort of pry bar. Why one staple at a time? One must preserve the patterns. With an unfamiliar piece, the only way a shop can put it back together again is to basically reverse engineer the whole piece. Then you have the stitcher who gets to design all the bits and pieces for it to be all back together again All by hand, one at a time. Depending on fabric pattern there might be lots of time and waste fabric going into making sure each side looks the same or is symmetrical. Then you have the upholster who has the most straightforward job of everyone, who gets to tack on all the foam and fabric. These guys all have to work in concert, or the piece will not go together well. If it's a one man shop, this entire process takes FOREVER. It's actually better to have one guy do it all though since he knows how it got pulled apart.
Also, materials. Upholstery fabric isn't cheap. If it is, count on coming back! Just because it's only a "chair" doesn't mean it will take very little fabric or time. Every "extra" like welting, fringe, nail heads, buttons, etc-all cost bucks. Adding these things also costs in labor, not to mention things like deep diamond tufting, or french stitching, etc... Add in the cost of foam, dacron, thread, it all adds up.
Maybe a bit more than you want to read, but it's truly an interesting prospect to take apart an entire piece of furniture and rebuild it from the ground up. Fun to watch in stages.