Adidas’ Yeezy. Supreme. Nike’s Air Jordan. Off-White. If these brands don’t ring a bell, you’re probably either:
a) living under a rock; or
b) missing out on a global, cultural phenomenon of the decade.
Over the past few years, these brands have paved the way for a lifestyle of street-wear which has taken the world (including India!) by a storm. Street-wear is a fashion-subset that has evolved from a few skater shops in late 1990-NYC to a global, 300 billion-dollar industry today. It integrates elements of trendy hip-hop and skateboard/surf culture with exorbitantly priced, high-end fashion.
Nike’s Air Jordan series popularized sneaker and street-wear culture globally, and now collects $3 billion of sales annually. Supreme, a streetwear-only brand, is valued at nearly $1 billion today. Kanye West, creator of the iconic Yeezy, is all set to become the richest man in the apparel industry; and that’s only if he doesn’t become US President first. Numbers don’t lie; the industry is booming. The success of such an unusual business model begs the following question : what is it that makes consumers want a $1000 Supreme plain, white T-shirt over a $15 plain, white T-shirt of any other brand in the world?
To answer this, we must look back to 1899, when a Norwegian-American economist, Thorstein Veblen, outlined his landmark economic theory of conspicuous consumption i.e. consumers’ spending on exorbitant, luxury goods because of their high prices and not despite it. In essence, his theory proposed that consumers are willing to shell out more and more money for goods which boost their social status and display their affluence. Little did Thorstein Veblen know that he had outlined the business model for the biggest hype-brands more than 100 years before they even existed.
Thorstein Veblen: the first man to recognize Hype
Today, having a Supreme box-logo on your apparel is a cultural statement almost as big as having a pair of Air Jordan’s was in the 90s. Through possessing that exclusive merchandise, consumers invest in their social image, an end to which often no cost is high enough. With economic theories from 1899 validating it, it’s no surprise that consumers often throw rational thinking out the window to buy a $1000 plain, white T-shirt. Such irrational behaviour occurs due to ‘The Scarcity Principle’.
The Scarcity Principle:
This is the idea that people are willing to shell out more and more money to get something that others want but cannot have. ‘Hype-brands’ revolve around exploiting the Scarcity Principle. This idea of exclusivity is sold through the brands’ limited drop-culture: making as low as 5–7 of a sweater or hoodie available at a time to the consumer. Thus, these brands create an artificial scarcity frenzy to ensure that the limited supply never meets the enormous demand for the trending street-wear. Their products thereby remain exclusive, more desirable, and most importantly, expensive. As the Supreme CEO stated in 2009, “If there’s demand for 600, we’ll make 400.”
The Yeezy 350, being the absolute gold standard in cultural clout and commercial worth, is the finest example of modelling a scarcity frenzy for hype. In 2015, this brand-new, in-demand Yeezy was released in such limited quantities that even spotting one in public was extremely rare. They were always sold out within seconds of release on their limited drops. And sure enough, in accordance with the Scarcity Principle, resale values peaked at almost $2000, increasing 900% from its original retail value of $200.
The Yeezy 350 is STILL a majority of the 1.5 billion$ of annual revenue that Yeezy makes today.
Does Street-wear Make Economic Sense?
Business models function upon and work in tandem with a few fundamental, underlying economic principles. Street-wear somehow manages to go against all of these principles.
Buying a $1000 T-shirt even when a $15 substitute exists rubbishes a core concept of economics i.e. the concept of consumer rationality: the idea that consumers make choices preferring the most feasible alternatives. Limiting supply of the commodity deliberately while demand for it is high in the open market goes against the basic principles of business growth which is, with an increase in demand, the production should also be increased.
Most importantly, it goes against the foundation of microeconomics today: Alfred Marshall’s traditional demand-supply model. This model states that as price of a commodity increases, the demand for it decreases; and with the increase in price, the supply of it is increased by the firm. These ‘Veblen goods’ (Hype-goods) find themselves in contradiction to this traditional demand model. As price of a Veblen commodity increases, its snob value too increases, making it even more desirable to the consumer who can afford it.
A trend of 5x more spending on Streetwear is noticed because of the Scarcity Principle and the Veblen Effect.
The main question surrounding hype has always been: is it sustainable? Maintaining exclusivity through limited drops is difficult from a growth-oriented perspective. Flooding product into the market is the only way to produce sustainable growth for a business; but doing so will indefinitely lead to the collapse of hype-brands. If they set up more shops, increase production and meet all existing demand, their exclusivity runs at risk. Due to this, they’re forced to make supply within constraint. Finding this sweet spot which gives both maximum profits and the right production levels to prevent over-supply can be extremely difficult.
The biggest threat to them is the fading of their exclusivity.
Through Veblen’s landmark theory and the Scarcity Principle, if there’s one thing we know, it is that “If everyone has it, nobody wants it.”
Anuj Khare (FYBA)
References:
1. Greenburg, Z., 2020. Kanye’s Second Coming: Inside The Billion-Dollar Yeezy Empire. [online] Forbes. Available at: https://www.forbes.com/sites/zackomalleygreenburg/2019/07/09/kanyes-second-coming-inside-the-billion-dollar-yeezy-empire/#171fef2c5ec3
2. Lin, J., 2020. Behavioural Economics Behind The ‘Hype’ Market (ECO03–Jeffrey Lin). [online] MHS Economics 2019. Available at: https://mhseco19.home.blog/2019/03/25/behavioural-economics-behind-the-hype-market/
3. Menke, A., 2019. An Update On The Global Streetwear Market. [online] Globaledge.msu.edu. Available at: <https://globaledge.msu.edu/blog/post/56785/an-update-on-the-global-streetwear-market>
4. Econlib. 2020. Thorstein Veblen - Econlib. [online] Available at: <https://www.econlib.org/library/Enc/bios/Veblen.html>
5. Dave, B., 2020. How Streetwear, A Global Fashion Movement Has Become A Part Of Mainstream Fashion ?. [online] Indian Retailer. Available at: <https://www.indianretailer.com/article/sector-watch/fashion/how-streetwear-a-global-fashion-movement-has-become-a-part-of-mainstream-fashion.a6472/>
_____
Comentarios