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LISA CHOW, BYLINE: So, Robert, I live next to a Footlocker up in Harlem. And it never fails; when it is a Friday night, there are young men camping out on the sidewalk waiting for the Footlocker to open so they can buy the new hot shoe going on sale Saturday morning.
QUAY JOHNSON: I got here, like, at 6.
CHOW: Now, you know the store doesn't open for another - what is it? - 14 hours.
JOHNSON: Yeah, it opens at 8 in the morning.
CHOW: So that means you're going to be sitting here for 14 hours.
CHOW: And so why would anyone do that?
JOHNSON: I don't know, I'm a sneakerhead. Like, I like collecting sneakers. My grandmother always say, when I die, she's going to bury - she's going to put my sneakers in the ground with me.
SMITH: Now, I remember this whole basketball shoe hype thing back from the 1980s, back when Michael Jordan was actually playing basketball and not just promoting shoes. And I have to say, until you came in to bring us this story, I wasn't entirely sure it was still, like, a big thing.
CHOW: Oh, yeah. It's bigger than ever. Every single week there's a new shoe, and every week people line up, desperate to get it. When did you get here?
SHIROD INCE: Wednesday.
CHOW: Are you serious?
INCE: I'm so serious.
CHOW: Shirod Ince is at the very front of the line, and he's been waiting three days. And he's here specifically for a Nike sneaker called What the LeBron.
SMITH: That's the name of the shoe - What the LeBron.
CHOW: Yes, What the LeBron. It's not just any What the LeBron. It's What the LeBron 11s. People tell me it's like all the other LeBron sneakers mixed into a blender. It's a rainbow compilation.
FRANK TAYLOR: Get them all mixed in one. It's like, if you like a girl with long hair, short hair, everything, you got it all in one. There's nothing you could put on and it not matches because it has every color.
SMITH: I feel bad because I didn't know about the shoe, and we've been looking online, and apparently the hype over What the LeBron 11s has been going on for months. This video on YouTube came out in June. (SOUNDBITE OF YOUTUBE VIDEO)
MIKE: Youtube, what's good? It's your boy Mike from asneakerlife.com. You know, I've got a special review today, you know, probably a very, very, very extremely hyped LeBron that's dropping, you know...
CHOW: All this anticipation is leading to this one moment. The shoe goes on sale the next morning at 8, and each person is only allowed to buy one pair - 250 bucks. Some people want to buy it to wear it, others want to resell it.
SMITH: Anywhere there is scarcity and hype there is a business opportunity, especially - especially if you are the first guy in line, like Shirod.
CHOW: How much do you think you can get for this shoe?
INCE: I think anywhere between 500 to 900 bucks.
CHOW: Think about that - pay $250, resell immediately for 900 bucks. If everything goes according to plan, Shirod will make a bigger profit on this pair of What the LeBrons than Nike will.
SMITH: Hello, and welcome to PLANET MONEY. I'm Robert Smith. And with us today on the program is a familiar voice - Lisa Chow, who joins us after being away for many months. She did this reporting for fivethirtyeight.com. Welcome.
CHOW: Thank you, Robert. Today on the show, we go deep into the strange economics of sneakers and their life after they leave the store, where some pairs trade like stocks, selling for double, quadruple, 12 times the retail price - even used sneakers.
SMITH: Nike is a smart, multibillion-dollar company. But some scrappy guys on the street, they figured out how they can get a better price for the sneakers than Nike can. And that is fine with Nike. (SOUNDBITE OF SONG, "AIR FORCE ONES")
NELLY: (Singing) I said, give me two pairs. I need two pairs - so I can get to stomping in my Air Force Ones.
SMITH: Here's an overview of how the business works. Nike actually makes it easy for the shoe scalpers. They often give plenty of warning that this exciting, new shoe is coming out. They put out a photo. They will send actual shoes to shoe bloggers, who will talk all about it. And then, a couple of weeks before the shoe drops, Nike tells everyone the details - where the LeBron and when the LeBron and they remind people, one pair per customer.
CHOW: Then in the days before the store opens, the scheming begins. Quay Johnson, the guy who said he'll be buried with his sneakers, he tries to avoid the line altogether.
JOHNSON: Any sneaker I always got because, you know, I have a connection or whatever.
CHOW: When you say you have a connection, what do you mean by that?
JOHNSON: Like someone who works in a store, and they'll get you a deal. Like, they'll - you don't got to wait - you don't got to go through the hassle of this.
CHOW: It's like insider trading, but this time, Quay didn't have a connection and had to wait in line with everyone else.
SMITH: Well, there is another way to game the system. Ernesto Gomez paid three people 100 bucks each, to wait in line for him. Their goal was to get three pairs of What the LeBrons.
ERNESTO GOMEZ: I'm kind of just here, like, to micromanage - make sure everything goes good. I mean, my money's there - it's invested, you know.
CHOW: You hear this again and again in line. This is an investment.
GOMEZ: I'm telling you, man, this is a business. It's a business.
SMITH: All of this just adds to the excitement. On the night before the Footlocker opens, everyone's already speculating on how much they can resell the shoe for once they get it. And they can make a pretty good guess. There are websites that specialize in this, like Flight Club. It's a high-end consignment store for sneakers, and you can see all of the new shoes. And you can see the prices changing constantly based on the demand for those shoes.
CHOW: I spot these guys, Michael Lester and Frank Taylor. They're staring at their phones, watching the market prices move for different sizes.
MICHAEL LESTER: OK, here we go. They went down $600. And now, wait, wait, wait - that's just for a size eight-and-a-half.
TAYLOR: How much are 11-and-a-half going for?
LESTER: Eleven-and-a-half is 750.
SMITH: The amazing thing about this exchange is that these guys sound like sort of stockbrokers from the 1980s - like, actually talking about, you know, prices dropping as they see it on the floor of the stock exchange. And this same discussion is happening all along the line. And, in fact, at hundreds of different lines at hundreds of different Footlockers around the country, there is, essentially, this sort of real-time market where people are literally sitting on the streets, watching the price of the shoe they're about to buy go up and down.
CHOW: But of course, you don't have to be on the street to do this. There are people who are at home, watching it from their computers and searching the data for patterns.
JOSH LUBER: My name is Josh Luber. I'm the founder of Campless, which is a sneakerhead data company.
CHOW: Josh is a sneakerhead. He's also a data nerd. And he used to stand in line when he was young, but he has a 2-year-old daughter now. So he sits at home on Saturday morning and tracks the prices on eBay - probably the largest secondary marketplace for sneakers.
SMITH: And before Josh came along, if you wanted to know how popular a speaker was, you kind of had to look at the length of the line in various stores across the country and figure, yeah, yeah, that seems like a pretty popular shoe. But Josh has made whole thing much more scientific.
LUBER: How long people have been waiting in that line, whether it's been hours or days or even weeks, is directly proportional to the projected resale value, they think, of that sneaker. So how limited is it going to be? How hard is it going to be able to get it? How much am I going to have to pay? How much can I make if I turn around and sell it? And, you know, stores open at 8 o'clock - 8:01, thousands of pairs are on eBay.
SMITH: By pulling in price data and analyzing it from those eBay auctions, Josh has essentially created the Kelley Blue Book of sneakers. He tracks 1,000 sneakers, and you can look up at any one moment what they're selling for.
CHOW: You can do a lot more than that. You can sort the sneakers by price, total number of units sold in the last 12 months, rate of return, volatility. Josh has found that the projected resale price of a shoe peaks a couple of weeks before it's sold. Everyone thinks it's going to be super hot, then the price dips down when people actually get in line. And then the shoe appreciates over the next year or so. When you graph it, it actually looks like the Nike swoosh.
SMITH: It is amazing how much money you can make if you pick the right shoe. So good example - sneaker that was released earlier this year, it's called the Air Yeezy 2 Red October. It's a big, red shoe. But it made a big splash because Kanye West designed it.
CHOW: Yeah, this sneaker sold for $250 at retail. But on eBay, the secondary market, people paid on average more than $3,000 for an unused pair - more than $2,000 for a used pair - a used pair.
SMITH: I love that, a used pair of shoes.
CHOW: And you have to wonder what the folks at Nike think as they're watching all of this. I mean, they've just gone through all this time and trouble to manufacture a shoe for Mr. West and are essentially selling it for a tenth of what it's worth. They could get so much more for the Kanye sneakers.
SMITH: They could, but Josh says he thinks that Nike knows exactly what it's doing.
LUBER: It's about what's limited, right? It's just supply and demand. And Nike is really, really, really good at controlling that supply and demand to basically prop up this secondary market. I do not speak for Nike. I've never talked to anyone there about it, right? They've never made any public statements that they intentionally create the secondary market. But they intentionally create the secondary market.
SMITH: But why would they intentionally do this? Why would Nike want somebody to make $3,000 off their pair of Air Yeezy 2 Red Octobers? Because that kind of money does add up. Josh estimates that Nike lets resellers walk away with $230 million in profits last year, $230 million that they could've had, money that did not go to Nike, money that would amount to 9 percent of Nike's earnings.
CHOW: It's an enormous number. I reached out to Nike several times to ask about this, but they didn't want to comment. So we're left with this question - why doesn't Nike just sell the shoes for what people are willing to pay on eBay?
LUBER: This is kind of the - I don't know - the sort of Holy Grail of sort of sneakerhead questions. People talk about this all the time. And people sort of write it off as if it's sort of an easy answer, right? It's like, oh, well, Nike knows what they're doing. You know. Their - they do this, they sell more shoes. I mean, that's the - that is the really, really short answer of that. But it's a really complicated question.
SMITH: And to answer the question, you have to sort of get into the mind of Nike. Now, Nike's role in the secondary market has sort of evolved over the years. It's been issuing special sneakers since the '80s. You may remember the classic Air Jordans. But the resale market didn't really take off until the late '90s, which is when the Internet, of course, made it possible to resell rare shoes - not just to your neighbor, not just to your fellow sneakerheads, but to anyone around the world.
CHOW: And there was this period in the '90s where Nike was going through kind of a rough spot. They were a fashion company, but a fashion company that had become pretty generic. The Nike swoosh was on everything.
SMITH: And there were all those reports about Nike using sweatshop labor. So there was definitely this period where Nike was not hip, where people thought the company wasn't cool anymore.
CHOW: So in some ways, the secondary market helped revive the brand. You had these limited-edition sneakers. There were lines outside the stores. People started taking photos and sharing them on Instagram. And suddenly, Nike didn't just have Michael Jordan or LeBron James selling its brand. It had all these cool kids - you could call them style curators for the brand.
SMITH: So when Nike was coming out with a limited-edition shoe, when it was deciding what the price would be and what the supply would be, it had to make sure it was the right price and supply in order to get all these cool kids standing in line outside the store on a Saturday morning.
CHOW: One of those cool kids is definitely Frank Taylor. I find him near the front of the line. He tells me he's old school. He only buys retail. And over a dozen or so years, he's collected 150 pairs of sneakers. What is that, like, over $40,000 worth of shoes?
TAYLOR: Easy, easy.
CHOW: So you really have spent that kind of money for shoes.
TAYLOR: Easy. Some people spend that money on weed. I just decide to spend mine on sneakers.
SMITH: This all makes much more sense when you don't think of Frank as just a sneakerhead on the street, but as a special kind of celebrity - as a taste maker. Now, Nike could sell What the LeBron 11 to some rich guy for 1,000 bucks on eBay. But by selling it to Frank for cheap, for 250 bucks, they're essentially rewarding a sneaker superstar who will be their publicity agent - wear it like a luxury item.
TAYLOR: You know, you got this sneaker. You waited in line, you know, hours and hours and hours. So people, you know, they respect that. One, the sneaker's worth a lot of money and you're not selling it, you're wearing it. So even if you paid $100, you got $800 on your feet. It's like having Gucci. A lot of people buy Guccis.
SMITH: In this scenario, everyone wins. Frank feels like he got a deal on the shoes. Nike gets compared to Gucci.
CHOW: And the people who invest in Nike have no problem with a little sneaker scalping. In fact, they encourage it. I ran this by Sam Poser. He's an equity analyst, which means that he spends a lot of time studying companies like Nike.
SAM POSER: Most of the questions I get are, well, if they could sell so many, why don't they just sell more? But they understand that how fleeting that would be because if all of a sudden, if everyone could get it, then the need to be there and set up the lineups and create the excitement wouldn't be there anymore. This - they're exceptionally good at keeping people hungry.
CHOW: And if they were to jack up their prices for these limited shoes, they might scare away the regular customers - people like Frank. The vast majority of Nike shoes, even the rare ones, get bought to be worn. You could put the shoe scalpers out of business, but you risk losing the poor sneakerhead who scraped together a chunk of his paycheck to get What the LeBron. This is it. It's Saturday morning, 8 a.m. Footlocker employees pull up the gate on the store, and people start ducking under and going in. Within minutes, they come out with the prize.
GOMEZ: You know, they're pretty ugly. But I guess that's the trend now of the - the uglier the sneaker, the more hype there is about it.
CHOW: Ernesto Gomez goes off to see what he can resell the sneakers for. People here had hoped the shoe would go for as much as $900 - more than three times retail. But as they waited, they realized that Nike had actually increased the supply of the shoes. They were available in more stores than they had expected.
SMITH: Shirod Ince, the very first guy in line, the guy who had waited for three days, he came out and posted his pair of sneakers on Instagram, and he got an offer. Not quite what he had hoped - 500 bucks. But double his money, so he took it.
INCE: Although it was on the bottom range of what I hoped to sell it for, I was still going to make a profit, which was my goal. And I was happy with that, that I had made a profit.
CHOW: And, like a true sneakerhead, Shirod took his profit, went to the back of the line and got another pair, this time for himself. (SOUNDBITE OF SONG, "AIR FORCE ONES")
NELLY: (Singing) I like the limited edition, the khaki and Army green, patent leather, pinstripe. You should see how I do the strings. Size 12 with the strap red and white with a cardinal cap. All flavors, well, it just depend on when and where I'm at.
SMITH: We'd love to hear what you thought of today show. So email us, firstname.lastname@example.org. Or you can tweet at us. We do read them - @PlanetMoney.
CHOW: And I'd like to thank my team at FiveThirtyEight, especially my editor on the story, Mike Wilson, and Jess Jiang, who produced this program.
SMITH: And we'll put up a link to Lisa's great piece on FiveThirtyEight because there is an animated graph of shoe returns over the years that you have got to see. And I should say, now that you are at the end of the episode, NPR recommends that you check out the Pop Culture Happy Hour. You can NPR's Pop Culture Happy Hour on iTunes, Stitcher or whatever your favorite podcasting platform is. I'm Robert Smith.
CHOW: And I'm Lisa Chow. Thanks for listening. (SOUNDBITE OF SONG, "AIR FORCE ONES")
NELLY: (Singing) We up in footlocker. I'm looking like I need those 10-and-a-half, and if you got them, give me two of those. I can tell she never seen Murphy Lee before 'cause she just standing there as if I'm shooting free throws. I said, excuse me, miss, I only want to buy shoes. She said, I love you Murph especially in the white and blue. I said, the white and blue sound nice, make it twice. And I signed her autograph, thanks for the advice.
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