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a UNSW Business Society official publication

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Supremenomics: The Economics of Streetwear

Written by Varun Amin

Date Published: 27/05/2020

It’s 8:30 am and you’re briskly walking down a packed CBD street, passing Pitt Street Mall  in an attempt to get to your 9 am lecture.  A swarm of youths are lining up for what seems like a kilometre. Each is clad in articles of clothing from Supreme, Louis Vuitton, Gucci and Stussy, waiting for the latest drop from a streetwear giant. 

 

Streetwear seems to be a phenomenon we have all heard of, but not something that many of us have investigated in detail. It’s a style of fashion which incorporates distinctive and scarce items into an outfit, and an industry which has experienced shockwaves in recent years. 

 

When you think of streetwear it’s likely that one brand in particular comes to mind; Supreme.

 

As of late Supreme have been making headlines for its unique business model and unprecedented growth. With high demand and low supply, Supreme stores rarely have inventory, and yet their clothing seems to saturate online secondary markets. What are the economic principles behind Supreme? Why are the secondary market prices so expensive? Where is Supreme headed in the coming years?

 

The Origins

 

Initially, Supreme opened in 1994 on Lafayette Street in New York as a small skate shop. Since then it has become a remarkable trend in skate culture. Skaters were combining ordinary brands such as Levi’s and Carhartt with high-end fashion labels such as Gucci and Louis Vuitton. Supreme began to understand that individuals who were into hip hop and skate culture were willing to pay extra for high-end brands. Through a process of collaborations, Supreme built recognition and hype around the brand and its clothing. 

 

A scarcity of supply business model

 

Supreme has created business and powerful demand for their products through a scarcity of supply business model. The law of supply states that the quantity of a good supplied rises as the market price rises, whilst  the law of demand says that the quantity of a good demanded falls as the price rises. Streetwear markets rely on the concept of manufactured scarcity, to create hype and drive an aftermarket. Despite the fact that there is demonstrated demand for a particular item or brand, manufacturers and labels will not increase supply to match it, going completely against the law of supply. 

 

In fact, Supreme’s founder James Jebbia stated, “If we can sell 600, I make 400”.  There is a basic supply and demand issue that the brand has created here. There will always be a greater number of people that want the product than the amount of the product actually available. In fact, Supreme only has 11 stores globally with 6 of those in Japan. Having limited stock creates an image of exclusivity due to product shortage. Brands have manipulated this with precision to create immense hype. This exclusivity aspect of streetwear is appealing as it enhances the consumer’s status within their subculture if they’re able to secure highly sought- after goods. 

 

By successfully manufacturing scarcity, brands can build suspense and future demand. This idea has existed before, with brands such as Ferrari, iPhone and Cristal, and now streetwear brands such as Stussy, Off- White, A Bathing Ape, Kith and Palace have followed suit. Brands effectively sacrifice meeting current demand with an eye on growing future demand and building brand recognition. 

 

The Economics 

 

This has gone so far in the markets as to push Supreme to be a Veblen Good - types of luxury goods for which the quantity demanded increases as the price increases, a contradiction of the law of demand. These are often thought of as status symbols since they have no real differentiation in the quality of product but rather just a high price. So why buy goods with such a premium?

Diagrams Courtesy of Tomasz Tunguz

 

Consumers want to purchase Supreme products because of their collaborations, product scarcity and their distinctive, almost satirical nature in products such as crowbars, fire extinguishers and bolt cutters. The Supreme insignia is more than just a label on an item. It’s an image which endows an image of exclusivity. 

 

As an example, in 2016, Supreme released a branded brick, which sold out in minutes. The brick which originally sold for $30 USD each, the bricks are now fetching nearly $270 on Stock X, which is a 900% mark-up.

 

The Secondary Resale Market

 

The secondary market or reselling economy is another important factor in the rise of Supreme and other streetwear brands. Traditionally, high-end fashion brands have been advocates against an aftermarket. Over the past five years, Burberry destroyed $90 million worth of unsold inventory so that it would not be resold at a markdown. On the other hand, Supreme thrives off of resale economy, where their products are resold at a mark-up caused by high demand. 

 

Resultantly thousands of people line up on the day of drops to resell products on secondary markets such as Stock X - an online marketplace for buying and selling sneakers, streetwear, watches, and designer handbags. The website acts as a middleman between buyers and sellers, making otherwise potentially shady resale market transactions safe and secure. This creates more hype around their products, increases their price, and further reiterates their Veblen good status. Take, for example the Supreme-North Face collaboration jacket bought for around $400. This jacket was turned around for $1,600. That's a 400 percent mark-up.

 

What does the future hold?

 

So what does the future hold for Supreme in the next few years? In 2017,  global private equity firm The Carlyle Group invested in the brand with a $500 million investment for a 50% stake in the company. This injection of money and billion-dollar valuation gives Supreme the required capital it needs to grow in both domestic and international markets. The question now is whether Supreme can sustain its business model without “selling out” from its humble streetwear roots. Will the hype premium last and how long will it last for?

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