An overvalued stock market has investors seeking shelter in ‘alternative assets’. While the term conjures up thoughts of investments in gold, stamps, coins and even trading cards, Cowen & Company recently published a report stating confidence “in the idea that sneakers are [also] now an emerging alternative asset class that can be bought and sold for both collection, price appreciation and investment.” The investment bank touted the “digital growth surrounding sneakers and the shifting dynamics of distribution,” “the theme of resale scaling across the retail ecosystem” and a series of “emerging products and services” as drivers of a market that has the potential to reach $30 billion globally by 2030. But Dylan Dittrich, author of Sneakonomic Growth, says investors should be “extraordinarily cautious if they’re thinking about [sneakers] as an investment. There are no guarantees here. A lot of the headline-drawing profits in resale are made by well-connected resellers that flip new releases in the short term.”
Our Take: Buying and selling sneakers is not a new phenomenon. But before the advent of the internet, “sneaker resale was often quite seedy and people [looking to do business] were often placed in dangerous situations,” Dittrich explained. It got better as the market moved online with eBay, but because the platform was rife with authentication and payment issues, it wasn’t really realistic to treat sneakers as an investment vehicle. The rise of the authentication and resale platforms changed that. Said Dittrich, “Companies like Stock-X, Goat (which just raised another $100 million in funding at a $1.75 billion valuation), Stadium Goods and Flight Club added a greater degree of trust and transparency to the space and have made it much easier to transact.”
Those bullish on the sneaker resale market will cite its potential size (Cowen pegs the North American market to be currently worth $2 billion, increasing +20% YoY), adoption rates (users climbing +20% YoY) and growing addressable markets. “There are more female sneakerheads entering the space, and a lot of people who grew up liking but not able to buy sneaker collections in their youth are at their peak income-producing age right now and are spending discretionarily on sneakers,” said Dittrich. Cowen noted that the fastest-growing demographic on the retail sites are those aged 35-44. There is also a COVID-19 tailwind working in investors’ favor. “Sneakers have become acceptable in man offices,” Dittrich said. For what it’s worth, our efforts to reach the Cowen analysts who wrote the report went unanswered.
But Dittrich urges caution because he sees investing in sneakers as far more art than science. “There aren’t cash-flows, revenue growth or margins you can look at to really get a good feel for what a price target on a given shoe should be,” he said. “[Investors also] need to have a feel for trends, for what is going to come into or fade out of style.”
It’s fair to mention that graded trading cards—another alternative asset experiencing a boom—are not providing the cash-flows, revenue growth or margins investors typically look for, either (and that hasn’t prevented investors from pouring money into the space). But Goldin Auctions founder Ken Goldin says the card market is significantly “more defined” and “more valuable” and thus a safer class to invest in: “The quantity of similar items [for sale], the number of sales that can be reviewed and the fact there is a standardized grading system make graded trading cards the closest thing there is to a true alternative asset class [in the sports world]. Cards have always been collected and have been a place to store value.”
Another reason Dittrich advises prospective sneaker investors to “exercise great discretion in what they’re buying” is that the resale ecosystem is for all intents and purposes just five years old (the online resale platforms were first developed in 2015-2016; Flight Club, formed in 1999, is the exception). It’s simply too early to tell how the market will react as more resellers enter the space and fewer pairs of sneakers are digested (i.e. worn) upon release. While not a problem to date, as more inventory is released over time it is easy to envision a glut of supply. Dittrich says that could cause investors to shift their focus from quantity to quality, “elevating the value of the most sought-after stuff and resulting in a broader deflation to the rest of the pack.” Of course, if there’s limited to no demand for all but the most desired sneakers on the resale market, a decline in retail sales would likely occur.
There is also always the possibility (as with any collectible produced by a specific company) that companies will overproduce the products designed to be collectible. Misjudging consumer demand would certainly have a negative impact on new releases, but Goldin said it’s not a long-term risk investors need to worry about: “[Overproduction] won’t destroy sneaker collecting as an industry, just as overproduction of trading cards in the 1990s did not affect the prices of cards from the ‘50s, ‘60s or ‘70s.”
Considering the sneaker market remains in its relative infancy and that the asset holds minimal intrinsic value, it’s fair to wonder if there’s any chance investors might be buying up 21st century Beanie Babies. Dittrich doesn’t think so. Unlike the Beanie Baby bubble, “where people were relying on magazines with sales data that was often stale and perhaps not even accurate, [sneaker] market participants are able to base their decisions off real sales or bid and ask data from a variety of sources,” he said. “There’s far more transparency and better information [surrounding sneakers].” That certainly does not mean sneaker values can’t or won’t decline—but at least investors should be able to see the writing on the wall.
Worth mentioning: The limited releases that drive the resale market are not huge revenue drivers for the brands themselves. The footwear and apparel companies benefit from the “halo effect created by these hard-to-get, hyped releases, which has traditionally directed consumer attention to readily available, easily attainable substitutes.” Dittrich said.
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