The Jordans: An Economic Sensation
Phil Knight, a co-founder of Nike
The story starts with Phil Knight, an Oregon native, fresh graduate from the Stanford School of Business, and a passionate track and field runner. Knight was aiming to disrupt the running shoe industry in the United States by starting a business that resold Japanese shoes. Fast forward a few years and a grueling entrepreneurial journey, Knight founded Blue Ribbon Sports with his track and field teacher Bill Bowerman. BRS is now referred to as the precursor to the shoe industry behemoth, Nike. Knight named the business Nike for the Greek Goddess of Victory. The swoosh logo was introduced in 1971. This paragraph has served as a crash course of Nike’s ambitious founding, and truly is an understatement representing Knight’s passion, ambition, and his entrepreneurial ventures about making Nike a short term success (at least then). Any budding entrepreneurs out there or curious minds about Nike’s early days should certainly consider reading Knight’s autobiography, Shoe Dog. Here’s a quote from his biography that represents Phil’s initial journey in a nutshell: “So that morning in 1962 I told myself: Let everyone else call your idea crazy . . . just keep going. Don’t stop. Don’t even think about stopping until you get there, and don’t give much thought to where ‘there’ is. Whatever comes, just don’t stop.”
Phil Knight and Bill Bowerman
Nike eventually sold its shoes with the “unique selling proposition” of having superior footwear technology to make it comfortable for different athletes to compete in their respective sports. Nike’s first shoe designed for runners was the Waffle Runner (pictured on the left). Interestingly, it was an accidental invention after Bill Bowerman dropped rubber on his waffle maker. Subsequently, Nike invented the Blazer (named after Portland Blazers; pictured on the right) which was technology for the next-gen basketball shoe. Soon enough, these products started gaining traction, especially as cameras zoomed on The Iceman’s (a basketball player who signed with Nike) fancy new shoes.
The Waffle Runner and the Blazer
Fast forward to the year 1984, the beginning of a cherished era for sneakerheads and the source of economics for this article. It started with Nike anxiously signing a $250,000 contract with the rising star, Michael Jordan, who hadn’t actually established himself even close to a good NBA player at the time. With the signing of Michael Jordan, Nike introduced the Air Jordan 1, Jordan’s basketball for the first year after signing the contract. However, this shoe had a black upper instead of a white one, resulting in a design that violated NBA’s dress code and charged Nike $5,000 in fine fees every time Jordan stepped on the court (per game).
The move of signing Jordan was used by Nike as a marketing strategy. Luckily for Nike, Jordan won the Rookie of the Year award. The whole sensation behind the Jordans started to develop: people felt that Jordan emitted an unexplainable swag; that he was a cool and rebellious character who was killing it on the court. People wanted to look cool too and they could do that by wearing the coveted Air Jordans. Nike sold the Air Jordan in 1985 for $65 per pair, generating a $100+ million revenue for the brand.
Nike made the Jordan 2 for Michael Jordan, though he was fairly unhappy with it, partly due to its design and comfort. However, the Jordan 3 proved to be a game changer. It was designed by Tinker Hatfield, commonly known as the architect for modern sneaker design. Besides the revolutionary design of the Jordan 3, its mid-cut basketball shoe feature was widely commercialized by memorable commercials directed by legendary filmmaker Spike Lee. The Jordan 3 had the Air bubble, integrating Nike’s signature Air technology in it. Seeing Jordan wear the Jordan 3 and make historic dunks made teens covet the Jordans, but for a hefty price. It was gaining traction as a luxury item throughout the U.S., becoming a status symbol for the new generation around the world. Michael Jordan then wore a new Jordan model every year of his basketball career.
Michael Jordan and Spike Lee
Jordans release new sneakers every year. But sneakerheads consider the original colors the holy grail. Recall yourself watching Spiderman: Into the Spiderverse – the shoes Miles Morales was wearing was the original colorway the first Air Jordan released in. The price of this sneaker has skyrocketed. Nike can certainly make shoes, but they also have an exceptionally innovative marketing team executing impactful marketing campaigns to increase the demand for Jordans. When ESPN released Michael Jordan’s documentary, The Last Dance, Jordan’s sales jumped by 15%, creating $3.6 billion in revenue. Jordans have also been designed by artists like Travis Scott and designer Virgil Abloh (Off-White) and have increased by multitudes from resale to retail.
The Jordan brand does a wonderful job in combining nostalgia from the basketball days of Michael Jordan to current trends in pop-culture, driving sales to enormous numbers. With Jordans being such a coveted brand, Nike deliberately limits supply to not keep up with demand, making the shoe an exclusive luxury even among those who can afford it. Almost all models sell out as soon as they’re released.
Now that you’ve understood the hype driving insane demand for these sneakers, let's discuss its economic implications. There are two components to sneakers’ pricing: retail and resale. Retail is the price at which Nike directly sells the Jordans while the resale is the price at which someone resells a Jordan for. This is how the pricing looks for an Air Jordan 1 Fragment:
Here’s a breakdown for Air Jordan 1 Travis Scotts:
Why the price discrepancy? The answer is simple: Supply, demand, and a stock-market-like resale avenue for sneakerheads. In terms of demand, you know why demand can get so high for Air Jordans based on the story described above. Let’s look at the supply side: as mentioned earlier, Nike limits supply to make the sneakers an exclusive product and the products sell out almost instantly since so many buyers covet them. Only a select few can get their hands on a $175 Travis Scott Mocha Air Jordan 1 even though a much broader audience can afford it. When Nike limits supply, people who buy the products at the low “retail” price, usually resell the shoe for the higher “resale” price where the price reflects the true demand of the market (equilibrium price). You can see above that Nike sold the Air Jordan for $175 but on the resale market, it’s selling for $1,500+. If you bought the shoe at $175 and resold it at $1650, it’s almost a 1000% return on investment, probably better than most stocks you’ll invest in! If you know the supply and demand model, picture it like this:
The sneaker resale market has become a $2 billion industry where people buy shoes for low prices at the Nike website and resell them at higher prices to others who couldn’t buy the shoe at retail. This concept is a finance phenomenon known as “arbitrage,” where the same product can be sold for 2 different prices in 2 different places, and people usually profit off the price discrepancy. Because Nike limits supply so much and the people who want the shoe aren’t satisfied, the resale market creates the supply that matches the demand, reflected in the price of resale sneakers. It’s almost impossible to buy on retail since the shoes sell out so quickly and resellers use complex computer software to buy the sneakers on retail. Websites like StockX and GOAT are trusted marketplaces for people to buy these sneakers at resale price. These platforms connect resellers to buyers and there’s a stock market like interface built into these websites. So if you aren’t 100% set on investing in stocks, you might consider the unconventional security, Jordans! A lot of kids start sneaker resale businesses and make good pocket money and it can be done very easily from the convenience of your home!