Ann Herbert was forced to resign from Nike because of the truth of her success, being promoted to lead North American operations due to leading the Direct to Consumer Offensive, with a major player in that industry being none other than her own son, using her credit card. Over the last four years, Nike has nearly doubled direct to consumer sales, and is now at roughly ten times their 2012 level, turning the tables on Adidas who they once trailed. Surely selling more shoes at retail to consumers would be profitable and direct internet sales are preferable to opening stores and exposing the firm to risk, although Nike continues to open some businesses like this. What really sparked the rally in Nike stock was everything that isn’t an efficient supply chain — the explosive popularity of limited run shoes and the immense good will and energy of the brand.
The story of the fall of Herbert has a splash of Fyre fest flavor. It isn’t the double standard (Nike employees know reselling ends in termination) but the brazen claims and self-aggrandizement. It all fell apart when Herbert’s son Joe decided to give an interview to Bloomberg establishing his bootstraps story and special genius for finding these very special goods — arbitrage is an old business model, finding goods to buy low is the hard part, selling high is easy. Finding ultra-rare sneakers in a random storage locker and striking the luck to find shipments of valuable inventory in mom and pop shops is just that unlikely.
Sneaker ethusiasts had known for sometime that something was a miss, that they were not winning the lotteries for shoes that they once were. And that is the sentence where you should stop and say as the kids do: wut? Sneaker lotteries?
Hypebeasts and Sweepstakes
Hypebeast is both a cool fashion website and a semi-derisive term for a clothes horse. Shoes are particularly important for any given look. The world of the internet has not only provided a critical source of aesthetic education, infinitely scrolling magazines and niche fashion information, but the ability to facilitate fashion transactions. Used Prada bib overalls? No need to shop the consignment stores of Beverly Hills, you have Firefox and can search Farfetched, “the global destination for modern luxury,” or at least so they claim.
Aftermarkets for sneaker resale, mostly for unworn sneakers, have transformed how we think of direct to consumer retailing. Hypebeasts can dramatically change the value of sneakers, increasing the value of a pair by a degree of magnitude. Some analysts are even describing these dynamics as forming a new asset class for this multi-billion dollar segment. Underlying this market would be demand for certain rare products, the shifting sands of AESTHETIC (as the youths say) in this case sneakers, but also the mechanics for price discovery and transaction facilitation.
StockX, the market of things, is a central player here, providing a never ending stock ticker of recent shoe prices, guarantees of authenticity, and even market reporting. The ticker above is from StockX, flowing along like any other capital market. Investments in shoes are ostensibly as rational as any other capital market, and given the extreme artificial scarcity in the market, and the known demand for the product, shoes would surely be priced in car equivalents.
Initial public offerings of sneakers would be a critical point in this process. While some shoes are available via Nike’s direct to consumer primary platform, the shoes that feed this bubble are not easily available. How could they be? For an initial public offering of stock the money tends to go to the firms that facilitated the sale. In the context of an IPO of shoes, the gains can’t be distributed to investors because there are none, and it would look terrible for Nike to simply charge one thousand dollars a pair for shoes on their website. Fancy shoes are a Veblen good, demand surges as price increases, but the dynamics aren’t that simple. Noam Yuran gets at the duality of value in What Money Wants, the desire for things, power, and money are real of course, but we would be seen as quite gauche if we were to play with money itself. Nike thus must remain distant from the final “stock market” that demarcates the value of the product, it must remain nonchalant, cool, and aloof, merely making the cool and reaping the rewards without actually getting dirty hands.
Sweepstakes are the key. When Nike releases a new shoe a certain number are sent to retail partners, these partners then distribute the shoes via raffle, other shoes are released via the SNKRS app. For a local raffle or even a very limited retail distribution at Nike’s key partner, Foot Locker, the potential for hitting the aftermarket may be limited. A sneaker on a foot is not a sneaker on the market. Outside the dynamics of the bubble world, the sneaker will reach the end of the line, a user who wants to use it to protect their feet.
Access to these high end products can produce windfall returns and can promote relationships with local boutique businesses. Among the biggest concerns from the Herbert story is not simply the financing or conflict of interest, but the Discord account. Selling access to the key inside information is the smoking gun. Anyone with a computer and a pile of sneakers can make a mint, the story for Bloomberg was always: where does he get them?
Hypebeasts can monetize their in a number of ways, but like an art dealer, buying and selling from their personal collection is an important part of the business. The model described here is also somewhat similar to something you are familiar with — a retail store. Target works because they buy goods at wholesale prices and convey them to you in a centralized facility where you can browse and pick. Online retailing is appealing because the assortment is far less limited. Unlike Target, the hypebeast retail process depends on a sweepstakes to distribute the goods and operates in a fairly narrow domain. In the Nike case, they clearly support StockX and others trading their goods. Nike’s largest resale partner Foot Locker operates the GOAT platform to access this transaction market as well. The act of trading is part of the performance that makes the Veblen good so enticing. In other cases this may play out differently.
Beyond shoes there is a thriving market. Farfetch, aligned with Alibaba, offers luxury resale across the world, as well as TheRealReal (herein TRR). Establishing the chain of evidence on StockX is fairly straight forward. Amazon is entering the game with AmazonWardrobe offering a pair of SB ChunkyDunks, a rare sought after shoe, for nearly two-thousand dollars, but with no claims to where it came from or a story describing how they ended up with this single pair of shoes. For firms like Farfetch, Grailed, or TRR it is far more difficult. Authentication is at the heart of the legal action between Chanel and TRR — if a few fake bags slip through, does TRR dilute the value of Chanel’s mark?
Retail isn’t going away. In the post-pandemic we should expect dramatically increased traffic and with Apple partnering with Target, the world of destination retailing will get stronger. When a good destination experience is coupled with access to premium goods that are scarce value will be created. In a fascinating report, the consulting firm Deloitte zeroed in on the future of retail: excellent malls that serve as destinations for fulfillment for very specific experiences. What is notable is that the vision of the mall as a civic site is much closer to what Victor Gruen intended in his design for Southdale.
On the other side of the spectrum, access to retailing can be restricted to those who are truly part of a brand ecosystem. Southern-psychadelic-soft-rock band The Kings of Leon, are offering their new album this week as a non-fungible token. Holders of a token will receive a superior experience, merchandise, and music. Although the token offered by this band is likely among the sweetest that will be offered, the model allows bands to produce goods intended for an after market — raising funds on the release of tokens and then allowing the development of a Veblen good status to drive the rest. Once again though, the proper distribution of the tokens will be the key to market stability. Technosurrealist performer Grimes sold six million dollars of this product, which given the position of some of the transmedia art, may indicate a new business model that will include physical experiences and assets.
Auctions as Alchemy
In Selling Social Media, I argued that the discourse of social media firms, especially in secondary advertising markets has three distinct types: extraction, arbitrage, and alchemy. Extraction in the social media segment involves the pure collection of user information. Here we see what are ostensibly arbitrage models — buy low sell high, buy in St. Louis sell in NYC, buy now sell later — standards businesses, and the dream alchemy. Branding has always been magical.
Nearly thirty years ago, I marveled in a thrift store at a Pepsi delivery driver shirt. It was beautiful. Now such a shirt, of similar age, would be worth hundreds of dollars on an auction site. The question is how the benefits of thse auction markets will be distributed? Will they be given to chosen friends and family, kept for critical producers and firms themselves, or part of a never ending grind and hustle where bot fleet drivers might chance upon a stash of goods deep in the heart of the internet?