In the grand scheme of things, alternative assets are usually alternative for a reason. Beanie Babies didn’t make too many people very rich at all, and most of these “assets” are simply collectibles masquerading as an investment.
However, according to a new report, “Sneakers as an Alternative Asset Class: Ahead of the Curve,” released by NYC-based investment banking company Cowen & Company, sneaker resale is a market ready to rise—and its growth could have a major impact for brands able to participate.
Already valued at more than $2 billion, Cowen expects sneaker resale to grow double-digits every year up to 2025, when its value is likely to eclipse $6 billion worldwide. Analysts at Cowen believe this growth should cement the sneaker as a reliable alternative asset for more than just sneakerheads, and enforce the resale market’s position as an arena ripe for investment by both major and minor players.
“We propose the idea that sneakers are now an emerging alternative asset class that 1) earns illiquidity premiums; 2) provides diversification—non-correlated with traditional asset classes; and 3) earns favorable risk-reward characteristics with Nike as the driving force in the concept of sneakers as an alternative asset as the sneaker resale market scales,” Cowen analysts said.
Outside of the potential available for savvy private sellers, brands that are able to activate the market are likely to grow in value, too. As a result of its research into resale, Cowen has raised its price targets for major resale icons. The firm has raised its price target for Nike to $100 from $90, with Adidas rising 20 euros ($22.60) for a price target of 245 euros ($276.91). Puma is expected to perform closer to the market, but Cowen also raised its price target 46 euros ($51.99) to 500 euros ($565.12).
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“This market is important to understand for investors because of the changing dynamics of distribution—a mobile-led ecosystem fueled by data, community and brand loyalty,” analysts said. “The market is led by innovative marketplaces, young consumers and a cultural mindset that views sneakers as a critical form of self-expression. The growth of the market will generate value creating opportunities for brand’s able to participate.”
Exclusive sneaker drops, according to Cowen, have been able to reliably increase demand and brand interest through traditional retail channels, while also leading to the growth of sneaker resale. The report found that Nike is the clear leader in managing these exclusive drops, with Nike products representing more than 90 percent of the market share in resale.
“Each week, a new release with a ‘rich backstory’ fuels demand among core sneakerheads,” Cowen said, drawing from a speech given by StockX CEO Josh Luber in 2015. “The new release drops through Nike’s own DTC or key retail partners such as Foot Locker, Dick’s Sporting Goods and Finish Line. Some of these sneakers then find their way to the resell market the next day where premiums can be several multiples above the original retail price.”
This has created a situation in which major sneaker resellers are able to ask for take rates of 10 percent to 14 percent on orders with average values upward of $400, according to the report.
Retailers and brands have already taken notice. Foot Locker and Farfetch have both recently invested millions in sneaker resale platforms GOAT and Stadium Goods, supporting a market that has been mostly irrelevant to their profits in the past.
“Historically, sales/profits from these secondary market transactions in sneakers don’t explicitly flow to the brands such as Nike and Adidas or traditional sneaker retailers such as Foot Locker,” Cowen noted. “However, they nonetheless catch a cool factor tailwind for their brand/retail format if supply of new launches and archival re-issues remain tightly controlled such as Nike Air Force 1, Jordan brand sneakers and Adidas Yeezy.”
Although Nike can’t claim resale has increased its profits directly, Cowen says the brand has nevertheless found a way to capitalize on its ability “to create hype around drops.” In analysts’ view, this ability gives Nike industry-leading durability in both revenue and EPS growth.