Odd Lots - 59: What Sneakers Can Tell You About How Financial Markets Work

Episode Date: December 16, 2016

One of our favorite topics here at Odd Lots is market structure. On multiple occasions, for example, we've talked about how trading bonds is fundamentally different than trading stocks. This week our guest is Josh Luber, who has built a market for a non-financial asset: sneakers. The market for collectible sneakers (like Air Jordans) is worth over $1 billion, but it's very hard to get transparent pricing, in part because the action happens across a variety of different sites and venues. Luber explains how his startup StockX wants to unify the industry, bring about transparency, and fundamentally change how this market works.See omnystudio.com/listener for privacy information.

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All investing is subject to risk vanguard marketing corporation distributor. Hi, and welcome to another episode of the Odd Lots podcast. I'm Tracy Allaway. And I'm Joe Wisenthal. Joe, I bet I can guess what shoes you've got on your feet. Oh, no, I totally messed that up. Why? What were you going to guess?

I totally messed it up. I was supposed to say, I bet I can guess what you've got on your... No, what shoes you've, you have, oh, no, I remember, I bet I can guess where you got those shoes. Where? On your feet. Oh, that's a good joke. Wow, that really was a disastrous opening to this podcast. I know, I can't believe I messed that up so much.

Okay, well, with that embarrassment aside, we are actually going to talk about shoes today. I'm really excited because not only are we talking about shoes, we're going to be talking about sneakers in collecting sneakers in the market for sneakers. And as someone who owns a lot of Nikes, including one or two pairs of Jordans and dunks, I am particularly excited about this discussion. So I know nothing about the market for sneakers. Are Jordans better than Nikes?

Well, Jordan's Nike, you know, it's a kind of, it's a category of Nike. Oh, oh, God. I just keep embarrassing myself today. Okay, well, all right, without further ado, then, why don't we bring on our guest for this episode? It is Josh Loeber. He is the founder of Stock X, which is basically a stock exchange for sneakers. So we're going to talk all about what it's like to make a market in a semi-unusual asset, I would say.

Josh, thank you very much for joining us. Tell us about your stock exchange for sneakers. What is it? Sure. Well, thanks for having me. StockX is a consumer marketplace, not unlike eBay or Amazon. It's a place where we connect buyers and sellers. And in particular, right now, we connect them to buy sneakers.

But the way that we do that is in the exact same format, the exact same process that the stock exchange uses. And what that means is, first of all, it's anonymous, right? buyers and sellers, you know, transact with the market. You don't have to worry about who the seller is or where they're located or what the review is. It's totally anonymous, just like buying the chair of stock. Second, there is data. There is data to understand what things are worth, what things are selling for, and have a history of data. So unlike going to Amazon and saying only what something is listed for, you can see every price that it's ever sold for. But more importantly than those two things is what's called the live bid-ask market, which is how the stock exchange, how the stock market reaches a market price. Buyers place bids how much they're willing to pay for something. And seller's place asks how much they're willing to sell it for. And when a bid and ask meat, the transaction happens automatically. There's a reason why the stock exchange has been the most efficient form of commerce for hundreds of years. And this is why. And we are taking that process that the stock exchange uses and bringing it to consumer goods. And we're starting with

sneakers. Josh, can we step back for a second? Because when I think about in investible assets, I have to admit, I do not necessarily think about sneakers. What is the market like for high value sneakers? The biggest distinction between sort of calling this a stock market versus how people traditionally think about it is that it's really about connecting buyers and sellers to exchange a physical good. The fact that you may or may not be able to invest in sneakers and make money is almost tangential to that. But that said, the Re-Sneaker Resel Market within the United States is about a $1.2, $1.3 billion industry. So that's people buying a pair of sneakers at, say, Foot Locker and then going and turning

around and reselling them on Stock X for $100 more or $200 more than they paid for it. So let's back up. Tell us about yourself. How did you get, what made you want to create this? What's your interest in sneakers and how did your interest in financial markets come together? My background is that I'm a startup guy. I've started and run a few startups before this, and none of them have ever been within the sneaker industry. Because on a personal note, I have collected sneakers since I was probably in middle school. I am 38 years old, and I have the exact same story as every other 38-year-old sneaker head,

which is I grew up playing basketball when Jordan played, and I always wanted Air Jordans, and my mother never buy me Air Jordans. As soon as I had some money, I bought Air Jordans. Right, exactly. And so that was a personal passion. And at some point along the way, as I was doing a lot of other data work in my career, I decided to try to figure out whether we could pull in sneaker data and whether we could build a price guide. And so in early 2012, I created a company that was called CampLAS, C-A-M-P-L-E-S,

and it was a price guide. It was the Kelly Blue Book for sneakers where we were pulling in data from all the other places that sneakers sold, primarily on eBay and figuring out what they were actually worth. And that was the genesis of this. As the sneaker data company, as the price guy grew as people started using it, there was a natural progression of, well, if I know the price of one pair of sneakers, then I could tell you the value of your entire sneaker collection. And you could look at that data the same way you would look at a stock portfolio.

And once you know the price of one pair and you know portfolio pricing, then there was this natural leap of maybe we could actually create a marketplace that operated like a stock. market. So what is in your collection, what is your single prize pair of Jordans? And give us a range for the value of your collection, if you don't mind, based on the prices on your site. Can I hijack Joe's question and say, can you also explain the difference between Nike's and Air Jordans? Sure. So there's a lot of different sneaker brands out there. And Nike, which owns the Air Jordan brand, but they are separate brands, have historically been the dominant part of the resale market,

the secondary market for sneakers, dating back to 1985 when Air Jordans were first released. And so it's just a distinction between the two brands that Nike's and Jordan brand makes Air Jordans, but they're both make up the dominant share of the resale market. In fact, through February of 2015, Nike, including Jordan Brand, accounted for 96% of the resale sneaker market. And in February 2015, Adidas released the Yeezy, which is Kanye West's shoe with Adidas.

And it started a really year and a half process of Adidas becoming a lot more relevant on the secondary market. And today, Adidas makes up about 30% of the resale market in terms of dollars, but it is still overwhelmingly dominated by Nike's and in particular, Air Jordans. All right. Now, tell us about your collection a little bit. So, you know, I've been collecting sneakers for probably 30 years, and I have a very average collection within the sneakerhead world. I have about maybe 350 to 400 pairs of sneakers, which sounds crazy, but there are people with thousands of pairs of sneakers. So, you know, within the sneaker universe, you know, it's a pretty average collection. But I do have one pair in particular that is pretty special.

So we announced a couple months ago that Eminem is an investor and partner with StockX. And through that, I was able to become friendly with people there. And I was given a pair of Air Jordan for Eminem Carhart. And this was a collaboration that Eminem and the brand Carhart did with Air Jordan. And there were only 10 pairs released to the public. They were sold on eBay. This is before Stock X existed. and they sold for an average price of $23,000.

Nice. And so I have a pair of those. I will not be selling mine. Mine is there's more sentimental value in terms of our relationship with Eminem, and the fact that it came from him. But it's certainly the most valuable and most interesting pair in my collection. That is pretty sweet. Josh, I have so many questions right now.

I'm trying to narrow them down. Okay, so first of all, I have to ask, do you wear? your collection of sneakers? Everyone within this sneaker world, there's a spectrum from people on the far one end who are pure business people and are here just to make money, to the sort of pure sneaker collectors who could care less about the value of the shoes and they wear them and aren't really trying to, aren't concerned about sort of maintaining the value or the condition. sneakers just like anything else once they're worn the more they're worn the value of them goes down

me in particular i wear pretty much all of my sneakers i buy sneakers for myself and i wear them and i'm not a very big reseller trying to make money but with about 400 pairs of sneakers there's certainly some pairs i haven't worn yet but i'm certainly i certainly will at at some point all right let's get to the subject of the you know your financial market for sneakers because this sort of speaks to a reoccurring theme that we've discussed on the Oddlots podcast, which is the relationship between the listing of a price, the creation of an index, the creation of transparent pricing, and then the market itself. And we've discussed this in several ways. We've had multiple episodes about the bond market and its relative transparency or lack of transparency. We've

talked about baseball cards and the Beckett magazine and Beanie Babies and the magazine that came around those in the 90s and how that led to price booms. So let's talk about what the creation of transparent pricing and consistent listing means for the actual functioning of the sneaker market. What have you seen in terms of the back and forth what your initial recording of eBay prices is meant to the market and how it traded. And then, of course, your new site, StockX, and how that has affected the market itself. That's a phenomenal question, right? Transparency of data is everything. And it is so rare to find true transparency of pricing information in any market right now besides the actual stock market. And that's a big part of what drives us and was the foundation

of creating this. A phenomenal example of this, go back to the campless days. And so when we were a price guide, we were sort of the index for sneakers and what they were selling for, we created a blog that was kind of like freakonomics for sneakers and doing this really high-level data analysis and putting it out on the blog. And one of them was an analysis into the difference between actual price and the perception of price on eBay. So there was this perception within the sneaker community that sneakers were very expensive on eBay. And we had a hypothesis that whatever you see on eBay at any given moment is something that is overpriced because it's been sitting there for a long time, or the inverse, right?

It's been sitting there for a long time because it's overpriced. And that you're more likely to see those because the good deals will disappear immediately and someone will buy them. And so by having access to the actual sales data, and to be able to look through that and create transparency into what did sinkers actually sell for, what we found was there was a difference of about 30% between people's perception of price, given the average number of days that we see each auction. I mean, we can go into the details of it. But essentially, between the actual price of what a shoe sold for versus what people would think it sold for, given how often they saw it, there was a difference of 30%. in the perception of what a sneaker was worth. So, Josh, Joe kind of already touched on this, but we've done a lot of episodes about the bond market

and how difficult it is to trade bonds, simply because unlike stocks, a bond will come in all sorts of flavors of maturity and coupon and things like that. And it kind of strikes me that sneakers are similar in that at the very least, you have a variety of sizes. right so like how does the size issue affect trading of sneakers do people only want to buy sneakers in their sizes or do they look beyond that because they're betting on future value there's i think there is some similarity in this sort of lack of transparency in the sneaker market but it's not really

around um size right it's really about channel um first to mention quickly on size um you know the entire sneaker resale market is just supply and demand, right? It is Econ 101. It is the difference between the supply that the brands put out and what the demand is for those particular sneakers. And the gap in that, and how big or small that is will depend, you know, how much the shoe sells for. I mean, it is pretty straightforward. And in general, even on the limited and exclusive sneakers, the brands know pretty well the size distribution of the population. So there may be less size 14s in the market, but there's less people that want to buy a size 14 in the market. So in general, that doesn't have too much difference or too much disparity in the price based on the size. But where the

majority of the sort of lack of transparency still happens is in the distinction between the channels. So unlike, you know, a stock market, which essentially has a monopoly on any particular stock, you can buy yourself sneakers anywhere. You know, eBay is still the largest marketplace. StockX, there's other mobile sneaker apps. There are people buy and sell on Twitter, on Facebook, on Instagram. I mean, anywhere that sneaker heads come into contact with each other, shoes are going to be bought and sold. And the majority of those channels, just like in the majority of other marketplaces,

there's just, there's imperfect information, right? The seller is the one who really understands the market better and the buyers left it, well, whatever the sellers, I can see, whatever they're selling for. And so I bring that all in one place, right? And a really fundamental tenet of how Stock X works and why it's like the stock market is that there's one place. There's one called ticker symbol for one shoe, right? So if you go to eBay and you type in the Air Jordan 11 Space Jam, which is a shoe that is the most popular shoe that Air Jordan put out in 2016, and there's rumored to be over a million pairs where people are buying and reselling them, if you type in Air Jordan 11 space jam on eBay, you will get a thousand listings, maybe 5,000 listings. But if you go to the New York Stock Exchange and you want to buy a share of Apple stock, there's one ticker symbol for Apple.

And in the same way, there's one ticker symbol for a Jordan 11 space jam on Stock X. And by bringing every bid and every ask to one place, you can now create more transparency of what's going on in the market. There's still 19 other channels and you still lose that transparency if you're within any of those channels. But that's the bigger idea around using a stock market drive transparency. It's not only historical pricing data, but it's also about what is going on right now. What are people want to buy it for and what are people want to sell it for? So I have two questions. One is, since you've had this push in sort of multiple endeavors to create transparency,

A, has there been an observed, I guess I would say narrowing of spreads where even across multiple channels, because there is this reference, the prices of a given sneaker, do they tend to cluster more as people start to form on some idea. And two, is there any sort of cross-sneaker price correlation, Gaussian copulas, so to speak, where one sneaker trades sort of similarly to another sneaker? They're not identical, but maybe they're of the same year or of the same style. And so you start to see relationships in the pricing of slightly different sneakers. Correlation. These are phenomenal questions, right? This is exactly what we see happening and what we, observe and look for as we continue to build the market and make sure that it works the way it

should. So the first question with regard to spread, and it's really about sort of narrowing of margins. The people that are most upset about Stock X on today, as we're, you know, 10 months into this, are the ones who used to be able to sell sneakers for more money and trade on imperfect information. But as you bring more buyers together, and in particular the shoes that have high volume, where there's really a lot of bids and a lot of ass happening at the same time. And you can literally see bids and ass coming off the board real time, you know, as trades are happening. What we see is that there's lower profit within those shoes within the market than people used to be able to get. And that's natural, right? I mean, that's natural to happen. As more buyers

then come into the market, right? It'll start to push that price back up. But on day one, all the sellers are constantly looking for as many places to sell as possible. So they're the ones that are more easily or more quickly going to utilize stock X and lists there. So as you have more sellers, the price will come down. And we do see spreads really low on the very popular shoes like the Jordan 11 Space Jam. So you may see a spread of $2, $5, $10. But on a shoe that came out maybe six, seven years ago,

go where there's a lot less volume, that spread might be $50 or $100. And so it's really about liquidity. And we don't have perfect liquidity the way a stock market does where every Apple stock needs to be traded through that ticker symbol. But the more liquidity that comes there, the better that becomes. Sounds like on the run and off the run bond price. No, this sounds exactly, I'm sorry, but this sounds exactly like pitches I have heard from bond trading venues for the past five or six years. It's really phenomenal, the overlap here. The larger hypothesis is that you should be able to buy or sell any consumer good using this process, right? As long as it's not a purely commoditized product already, like say plastic water bottles or toilet paper,

and it's not a complete, unique one-of-a-kind item, like a work of art or a house, anything that has some finite quantity of supply, all we're doing is adding the demand side of the equation. And once you do that, you can get into a place where you have a more efficient market that, that allows people to buy and sell leveraging, you know, the piece that no one ever had, which is the demand side. So it really is in some cases or in some views almost logical, the logical step of, you know, stock market is about the delivery of a digital certificate for ownership of a piece of the company. This is just a delivery of a physical good. Everything else should be exactly the same. Josh, what is the most value,

sneaker of all time, and what would you recommend that Joe and I go by now if we were looking for something that was maybe undervalued that was going to pop sometime in the future? The most valuable sneaker, let's say the most expensive sneaker that is sold recently. About a month or two ago, Nike released what's called the Nike Mag, which is the self-lacing shoe from Back to the Future too. They made 89 pairs, right? They made 89 pairs.

They were sold through raffles to raise money for Michael J. Fox Parkinson Foundation. And once they got into the market with only 89 pairs and it being, you know, you have the nostalgia aspect of Back to the Future and you have sneakerheads

and you have power lacing, there was one pair that reportedly sold for $200,000. at an auction and another pair that sold for $100,000 at a different auction. We had one of those sell on Stock X so far and it sold for about $25,000. And there's others that are listed right now on Stock Xx for about $50,000 or $60,000. But that shoe is so rare with only 89 pairs in the world. It essentially doesn't exist.

I mean, it might as well be a unique one-of-a-kind item because the odds of finding any one person that's willing to pay $25,000, let alone $200,000. It's just so rare. But that's what's out there right now. It's certainly the thing that all sneaker heads are sort of aware of. And it's a pretty cool thing because it literally works like in Back to the Future, too. You put your foot in it, and it laces automatically right around it. And real quickly, before you go, for an entrant like me or Tracy, who sort of, I have a few sneakers,

but I'm not really a sneaker head. Yeah, I clearly have no sneakers and am not a sneaker head. Like if we wanted to sort of dip our foot into the water, where might be like a fun place? What would be one sneaker that a beginner might buy? Something cool, but that's available and affordable. Right. And that's the key because, you know,

buying sneakers on the resale market to make money is not actually a great idea. The majority of the money is made by those who can acquire the sneakers at the retail price and then turn around and sell them on the resale. market. But, you know, what Adidas has done really well in the past year is they've taken a lot of shoes that are very limited and hard to get and sell for a lot of money. And in particular, there's two models. There's the Adidas NMD and there's the Adidas Ultra Boost. And there's been a lot of very rare colors that are sell for hundreds and thousands of dollars. But they've also put out a lot of colors that are not rare, that you can walk in the store and get. And boots is very comfortable.

and you have this model that, you know, other people wearing literally the exact same shoe in a different color that might sell for $2,000. And you can go in the store and buy it for $140 or $150. So I think that would be a sort of really good intro shoe for most people because you're not going to be able to get a pair of Air Jordans. You're not going to be able to get a pair of Yeezys because they're just too rare and they sell for too much money. All right. Josh Louber of Stockex, the stock market for sneakers. Fascinating conversation. I will hopefully have you back in the year. We can talk about how the market has evolved and gotten more liquid if it has. I really appreciate you coming on. Thank you very much for having me. The next time we can talk, we can also talk about how we've added

watches and handbags and other verticals because we're moving beyond sneakers pretty soon. Fascinating. Thank you. Thank you. So, Joe, I feel like I still have so many questions and so many thoughts on sneakers that I never thought I would have. Yeah, same. But I love all the parallels that you pointed out and that we see between how the market has evolved and liquidity and pricing between sneakers and bonds. It really is sort of fascinating that there is some sort of universal truth that's about market structure out there. Yeah, I mean, you kind of touched on this.

You could go either way, right? Like on the one hand, markets tend to beget markets and liquidity begets liquidity. So even if you have an esoteric asset like Air Jordan, you could eventually have transparent pricing for that. But on the other hand, this kind of reminds me of the conversation we had way back in the day about the Beanie Baby bubble, where there was that catalog of market participants. And they all just kind of came up with prices that tended to benefit them. And I don't mean to imply that that's what Stock X is doing. But in terms of collectibles, you can see a parallel, right? Right.

The only differences, I would say, is A, sneakers actually have some value because you can wear them unlike a beanie baby. You didn't wear your beanie babies? B, sneakers have been cool forever. So they're clearly not a fad because people have been wearing sneakers forever. And three, it's interesting. So much of the market dominated by Nike, which doesn't have, you know, which obviously is not just going to flood the market one day and sort of.

destroy all interest where so you have like this stable brand behind it but there clearly are potentially quite a few similarities between sneakers and other collectibles that have gone crazy over the time all right uh shall we leave it at that for today before i embarrass myself uh yet again you didn't embarrass yourself no i can't believe i messed up that joke all right i let's go uh i'm tracy alaway you can follow me on twitter at tracy alaway and i'm joe wisenthall you can follow me on on Twitter at the stalwart. Thanks for listening. I'm June Grasso, inviting you to join me for the Bloomberg Law podcast. Every weekday, we help you make sense of the legal stories that shape the nation and the world.

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