Investigation: Nike’s Involvement in Secondary Sneaker Market

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***This report will focus solely on Nike (which consists 96% of secondary market sneaker resells) and its competitors in the North American market. It is important to note that sneaker markets also exist in other regions, although less so than in North America. This, perhaps, may be attributed to a stronger cultural predilection towards celebrity figures behind shoe releases and the popularity of basketball in the USA when compared to other areas. Furthermore I find it important to note I personally have no involvement in sneaker collecting and referred to other editors for feedback.

Here’s the question at hand: Are Nike and its competitors better off leaving their limited edition secondary sneaker market the way it is, or should they look to interfere with the market in hopes of turning a larger profit?

 

Via IndieWire

We must identify how sneaker companies could interfere with their markets. Nike (we will examine Nike as the clear leader in the industry) would interfere to address one or more of the problems with the sneaker industry. There are several issues with the sneaker market from Nike’s perspective, some of which may dissuade potential ‘sneakerheads’ from jumping on board with the craze:

  1. 1) Nike sells its limited edition sneakers for between $170-$300 retail price, while these shoes go for at least 2 times this price once resold.
  2. 2) The sneaker market has no official marketplace and/or transaction liaison, meaning many transactions are done face-to-face without any insurance in case of scamming or theft.
  3. 3) High prices may leave those without the means to pay for high-demand sneakers completely unable to participate.
  4. 4) Specialized sneakers are mostly sold for basketball, which excludes several other sports.

Issue 1: Nike sells its limited edition sneakers for between $200-$300 retail price, while these shoes go for at least 2 times this price once resold.

For Nike, the most immediately clear method of milking more money from the sneaker industry is to raise the price of sneakers on their initial sale (company to consumer). After all, Nike has a near monopoly on the market, so they are free to adjust the price and quantity as they see fit. If they were to raise the price of sneakers by $50, most sneaker fanatics would not reconsider their decision to purchase. A price increase of $100 is unlikely to deter many dedicated buyers. After all, if their intent is to resell the sneakers, their only expenditure is time waiting for the product (or shipping costs), so the profit margin is likely to remain high for, realistically, a low effort profession.

Of course, an argument against raising prices and/or quantity supplied. For starters, price increases can deter some resellers or some consumers on a tight budget. A low quantity of a new shoe produced can also allow Nike to reveal how many shoes are being produced, which can provide validity to a shoe’s limited quantity. Shoe releases are a social event and an opportunity for resellers to conduct business or for sneakerheads themselves to make trades, so a lower turnout at these events would certainly mean less chances to make transactions and stay involved in the sneaker market. Resellers themselves are also highly likely to purchase sneakers for themselves, so keeping their role in the market a profitable venture ensures their loyalty and ultimately money.

In reality, Nike always artificially keeps supply significantly under demand so as to increase allure and exclusivity of certain shoes. They do this so they can brand the sneakers, then later release follow-up releases with increased supply so consumers think a shoe that is more readily available has the same exclusivity of the prior release, prompting more purchases.

Issue 2: The sneaker market has no official marketplace, meaning many transactions are done face-to-face without any insurance in case of scamming or theft.

By design, limited edition sneakers will be exchanged on a secondary market. Yet, despite Nike indubitably knowing this, they have taken no steps towards facilitating this exchange. The closest thing to a market system for sneakers is StockX, an online valuation and middleman system for sneakers. Certainly StockX is one solution for the market’s marketplace problem, but the issue is like all services, they take a cut. Thus, prices on StockX for already resold sneakers will be even higher, leading to people resorting to face-to-face transactions. Kixify and eBay are two other noteworthy marketplaces. In an industry where the primary consumers are 18-21 years old, it certainly does not provide hope that 18-21 has the highest violent crime rate of all offenders. The curve below, which should in theory reflect similar trends for crimes such as theft and scamming, demonstrates this:

Via NIJ

Thus, conducting business with mostly 18-21 year olds can be risky when there is a significantly higher chance of crime or otherwise unplanned transaction taking place. This fear of losing a high value pair of sneakers with no safety net may dissuade transactions or involvement in the market, making the market less efficient. One solution to this may be encouraging trading at Nike stores, where there is less chance of scamming inside of a monitored building. Nike can pander to its community by encouraging trading days accompanied with either sales or a sneaker release, where chances of theft or scamming are ultimately minimized. This has led to a shift to purchasing limited shoes online rather than in person, simply because the more limited a shoe (and ergo, more valuable) the higher the risk of a transaction not going as planned.

What’s the issue with purchasing online? Sneaker websites are vulnerable to bots, which can purchase shoes faster than humanly possible. Then, the owners of the bots can simply resell the shoe at a higher price, having completely starved interested parties of all the supply of the limited sneaker, forcing consumers to pay the resale price. Shoes cost more, the shoes are only available a few weeks after the release date, and the consumers eventually grow tired of constantly being behind the curve due to the buffer these bots create. Similar trends can be observed in the ticket industry, where bots can buy tickets and resell them at almost double or triple the venue price.

Issue 3: High prices may leave those without the means to pay for high-demand sneakers completely unable to participate.

Those without a steady income or several commitments (high school, college, low-paying jobs) may find themselves in a tough position to participate in the sneaker market. Naturally, those without a steady income or those with low-paying jobs are in a tough place to begin with. However, students do not have the time to wait for sneaker releases so they must settle for high prices that have been accrued from reselling.

It is entirely possible that by raising prices and making reselling less profitable, dedicated resellers will begin to find other hobbies or jobs and the market price of the sneaker will settle at a lower price, making the sneaker more accessible to those without the means to pay. Less resellers will also be chasing after the sneaker, so more consumers with intent to hold or trade will purchase the sneaker. This does present the issue that exclusivity is very much synonymous with price, so a lower market price will either hurt the shoe or a realized demand will force a higher market price.

Issue 4: Specialized sneakers are mostly sold for basketball, which excludes several other sports.

When we discuss sneaker sales, many of these sneaker sales are for basketball. A similar culture around exclusivity has failed to develop in soccer cleats, American football cleats, or other kinds of footwear. Shoes of these kind do not come with disproportionate price tags like those in basketball. It is easy to throw around potential reasons for this, because there are probably hundreds. Perhaps it was a resurgence in 1990’s streetwear that prompted a rise in the importance of fashionable sneakers. The obvious: cleats are also not ideal day-to-day shoes to wear on the street, of course. But what’s not so easy to diagnose is how to enable these other niche parts of the sneaker market to turn into cash cows.

Getting famous athletes involved in backing new sport shoe releases is costly, but could prove instrumental in jumpstarting individualized sport sneaker economies. Athletes can not just promote a sneaker, but must emphasize the culture and live in it. To make ostentatious and fashionable the normal in sport shoes would be an important step towards creating a large secondary market for shoes in other sports.

In summation, while the obvious, low-hanging solution for Nike would be to just raise prices and make more shoes, that would kill the secondary market that drives nearly all transactions in the first place. Nike must find a careful middle ground where they can raise quantity enough to generate more profit without oversaturating their limited edition market. It’s impossible to predict how changes to pricing, availability or reselling may affect the market, but it may prove fruitful for Nike, or other sneaker companies, to explore other ways of driving profit while maintaining their sneakerhead culture.

Read More Here:

http://www.forbes.com/sites/deborahweinswig/2016/03/18/sneaker-culture-fuels-1-billion-secondary-market/#71d964a56776

https://www.reportbuyer.com/product/3289833/footwear-market-global-industry-analysis-size-share-growth-trends-and-forecast-2015-2023.html

http://fivethirtyeight.com/features/you-see-sneakers-these-guys-see-hundreds-of-millions-in-resale-profit/?ex_cid=538fb

About the author

Harry Kuperstein is 17 years old, hails from Southborough, MA and is a VI Former at St. Mark's School. He will be attending Johns Hopkins University as a member of the Class of 2021, majoring in Neuroscience. He is a captain of the school's boys JV soccer team and robotics team. He is interested in investment strategies, and all things science and writing. Unsure of the future, but motivated and driven, he aims for nothing but success, whatever “success” means.

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