Nike: Not Your Economic Professors Supply and Demand

Flashback to March 15th, 2020 - the United States began country wide shutdowns due to COVID 19. Three days later on March 18th, 2020, the VIX peaked at 90.

In the days and weeks leading up to this, Nike’s market cap withered away losing nearly 50% of its value.

This made perfect sense - people were ordered to stay home indefinitely, therefore the last thing on their minds were to buy shoes, not to mention the interruptions that were about to take place in the global supply chains. 

However, market participants were not prepared for what would happen next.

A confluence of the interrupted global supply chains, the increased amount of social media consumption amongst young Americans, and the stimulus checks that were announced and issued in the months to come, led to an unprecedented tailwind for Nike. 

Due to interruptions in Nike's supply chain, the company was forced to release fewer pairs than normal of their already coveted designs. This, mixed with the increased purchasing power brought to young Americans in the form of government stimulus, sent the resale value of the sneakers on a heater. 

As any Econ 101 professor would tell you, this makes perfect sense. The decreased amount of supply mixed with the increase of demand drove resell prices through the roof. Below is a StockX price chart of the Nike Air Jordan UNC 1. Prior to the hype brought on during covid, the resale value of this shoe was steady around $200. However, the aftermath of the previously mentioned events was the resale prices quickly ramping up to $930 just shortly after stimmies started being deposited.

There were now more dollars chasing fewer pairs than before and due to the uptick in social media usage, the releases were catching more publicity.

This went on for months, and it soon became impossible to buy a pair of Jordan 1s or Nike Dunks at the retail price without the help of computer algorithms and bots.

Kids were now making more money than their parents from their childhood bedrooms by using bots to purchase insane quantities to then resell on marketplaces like StockX and Goat.

Nike was in a great position. They were able to avoid the expected decrease in demand by accidentally creating an artificially limited supply.

However, this is a challenge for Nike. The average Jordan 1 retails for around $200, which is not an exorbitant price. If it weren't for prepubescent resellers and broken supply chains, the shoes would be relatively easy to obtain.

Fast forward a year and some change and supply chains had started to heal. With the ability to increase production quantity, I can only imagine Nike execs were pounding the table to do so. To their defense, I’m sure this is what they were taught to do at Wharton. 

The thing is though, this is not your economic professors supply and demand. People don’t want to wear the same shoes as their parents, grandparents, or peers and this is exactly what happens when the size runs and quantities increase.

This is quite the catch twenty-two for Nike. If they raise their prices to match the margins of luxury brands, they will receive negative publicity. Conversely, if they increase their supply, they will decrease demand because the shoes will be too easy to get. With this in consideration, how are they supposed to consistently increase their revenue quarter after quarter?

It’s ironic how this works and the answers most definitely aren’t located in any textbooks. For now it seems like Nike has chosen the route of increasing supply. The early results of this cannot go unseen as the stock has broken below a prominent pivot level and Foot Locker reports of weakening demand.

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