Sneakernomics
Joel Moniz via Unsplash
The sneaker resell market: once a niche hobby is now a global industry worth billions of dollars. However, it is nothing particularly new, and in fact many of our readers might have done it themselves the early 80s and 90s without realising the grails they were sitting on had they held on to them.
As we’ve discussed in previous company updates, the trend of collecting trainers and other hyped clothing, and later reselling has been exploding in the last couple of years. One could argue that since the explosion of Supreme’s streetwear into mainstream youth culture from around 2014, the trend has really accelerated. This has been further fuelled by several high-profile collaborations often with extremely limited supply, leading to the hyped pieces fetching a hefty premium on the secondary market. Examples of this include the Dior x Jordan 1s, or Travis Scott x Nike Jordan collection which go for thousands beyond their initial retail price. As such, amongst GenZ, sneakers are likely the most sought-after commodity.
As more sophisticated investors begin to enter the scene looking to generate returns, the street is starting to pick up on it. Recently, Cowen’s Equity Research team published a piece estimating the resell market is growing by 20%+ y/y and has potential to reach $30 billion globally by FY30E.
Given its growing popularity as an asset, they estimate that there is potential for it to be a fantastic alternative asset class in its return profile in the following three ways:
earn illiquidity premiums
provide diversification – non-correlated with traditional asset classes
earn favourable risk-reward characteristics
What’s more impressive though is that as the market scales, there have been attempts to add greater colour and depth to the market; through more widely available authenticity checking, as well as companies such as StockX that provide exchange like characteristics for real-time price visibility.
StockX, a $2.8bn unicorn running the largest global exchange for sneakers and more
Launched in 2016, the platform has rapidly grown to become the de facto place to go for the market price on every pair of trainers in almost every colourway ever possible. In 2020 alone, the firm reported $1.8bn of GMV, still a long way from the likes of Amazon’s $396bn but given it represents just a small segment of the market, it is quite incredible for such a young company. Reports suggest an IPO could be on the table as early as late 2021 or 2022. Prior to StockX, there had been no clear pricing consensus creating asymmetry where successful shop goers would struggle to accurately price their product and creating inefficiency.
Move aside e-commerce, Re-commerce is in vogue
Coming off the back of a growing awareness of our consumption patterns, the last couple of years have seen a boom in the re-commerce market, led in the UK by players such as Depop. And whilst StockX has steered clear of non-deadstock sneakers, only allowing brand new, the likes of Facebook Marketplace, and eBay have seen huge growth in this market segment. Online communities specialising in this trend have exploded, notably with groups such as ‘The Basement’ and ‘Streetwear UK/EU’ now boasting hundreds of thousands of members, meeting to discuss latest trends and buy/sell their finds.
Beyond the laughable image of teenagers sitting at home with shoe boxes stacked up to the ceiling, making a quick buck from someone wealthy enough to drop thousands on a pair of trainers; there is also a more sinister side to this market. As any keen economist will recall, supernormal returns only exist in the short term, and sneakers are no different. A growing number of replicas or “reps” are popping up, fuelled by organised crime hoping to cash in on the lucrative market. Once again, this is nothing particularly new, but as technology has improved since the 80s when this craze begun, the reps are increasingly more sophisticated making it impossible to differentiate between them and the originals.
As we reach total mainstream hype where people with absolutely no interest in the sub-culture are queuing up to resell, it is almost as if we are seeing a cyclical nature within subsegments of the sneaker market suggesting a real depth to the asset class. As opposed to geographical or industry split markets like we see with equities, instead you can see differentiation within brands.
For example, a couple of years ago, we saw Kanye West’s Yeezy brand absolutely explode. As a result of the extremely limited supply the price skyrocketed, in some cases reaching more than £1,500 for a pair of trainers that cost £150 at retail. As Kanye has released more via the Adidas partnership, prices have fallen, and the hype no longer remains. Whilst we can track these price trends on a particular shoe over time, there hasn’t yet emerged a benchmark index from which we can compare.
As mentioned above, a contributing factor to this diminishing popularity was due to the widespread fakes that arrived on the market. But when resellers demand such a hefty premium, it reaches a point where people begin to question, are reps an acceptable alternative?
Whilst indeed controversial within the space, the now cult-like hatred of ‘resellers’ within the sneaker community has given rise to more online forums dedicated to promoting reps and the discussion around where to source the highest quality lookalikes such as Reddit’s r/repsneakers. However, the sneaker community seems to be split, and it raises the existential question of who you hate more, the resellers or those who wear reps. Whilst in the past, those sporting reps have been on the receiving end of the hatred, it now seems as though the balance is tipping as the prices on the resell market grow. If you go to a drop, there is immediately a sense of tension as prospective sneakerheads look to see who’s a reseller is as if it’s a witch-hunt.
In terms of selection of new releases and understanding what is likely to generate sufficient returns, the criteria is arguably less empirical than building an equities portfolio. It seems that a few key factors play a significant role. Firstly, the brand and whether it is based on a previously released shoe or is completely novel. To give an example, in recent weeks, we have seen the release of the Nike Dunks in both low and high-top silhouettes. Whilst not partially special, they have a long history given that they were first released in 1985 and are now being re-released in several new colourways. The second consideration is the market supply of the shoe, and whilst difficult to gauge, by observing sentiment in the communities, the information is quickly made available even if more anecdotally. Finally, the people who are behind it, for example Kanye, Travis Scott, etc. Of course, it isn’t just Nike and Adidas that are championing this trend; other brands witnessing the hype that has come about are picking up on the trend. For example, New Balance for example have experimented with handmade in the USA Limited-Edition of their 990 v5, a take on the original shoe that made them famous in 1982. The combination of limited quantity and retake of an original icon is what gave this shoe it’s allude. Although not anything ground-breaking, the ability to make c. 20% on any ‘IPO’ like event as was the case with this release is worthwhile, especially considering that with sneakers you also have a risk-free return given that under consumer protections, you are often granted a 28-day return policy. Whilst the return profile on other pairs is much more attractive, the likelihood of “copping” (being able to purchase a pair) is much lower. As such, it is arguable easier to make consistent gains from such hyped, but not overly hyped releases.
Unfortunately, as is the case with many things it’s not what you know, but in fact who you know. Some of the largest resellers will have what’s known as a “plug” (connections to someone often working inside a brand or shop stocking upcoming releases). Through these means, they can secure huge numbers of hyped trainers and make incredible profits. As the market has grown, this has become increasingly evident, and stores have adapted their policy to ensure fairness to avoid reputational damage and being cut off from suppliers. Many stores operate a one pair per customer policy and now increasingly it is becoming commonplace to see stores only offer a customer a pair in their approximate size (although understandably more difficult to enforce).
However, from the view of a fund manager, the key question remains, how do the returns of this scale. Whilst it is clearly possible to make a strong ROI on a small investment, it is much more difficult to do it on a larger scale. The sneaker market can draw a lot of parallels to the art investment market, but given its much smaller ticket size per investment, it is much more difficult to do at size. As the NFT and crypto space develops, it is likely that we will see further developments in this space. Companies like Rares.io have made headlines in recent months when they purchased Kanye West’s original pre-launch Nike Air Yeezy 1 sneakers for $1.8 million. Instead of keeping the item for themselves, they have planned to digitally fractionalise the ownership so that smaller investors could invest in the growth over time.
All in all, it is an exciting market to learn about and as you delve deeper, it is clear to see the parallels that exist between traditional investment markets and sneakers. As the market grows, and more market data becomes widely available, we may see a boom in institutional sneaker reselling. Although for now, I wouldn’t bank on selling your old Jordans to your broker just yet, as it will likely be the high-end one-of-a-kind pieces that are the first to move in this way. Without proper access to analytical data and information, the space remains too immature to sustainably make gains at scale, however, times are changing, and a new era will soon be upon us: Welcome to Sneakernomics!