There's a simple formula that explains how Nike lost its sneaker mojo

Getty/Maja Hitij

Nike has had a problem with its Jordan brand recently.
There is a simple formula that explains how Nike came to this problem, and how it can fix it.
The problem probably can be traced back to decisions made years ago.

In 1987, Nike partnered with then-rookie Michael Jordan and released the first Air Jordan, which forever changed the shoe industry. Nike’s crown as king of the sneaker market lasted until just recently when the unthinkable happened and the brand suddenly lost its “cool factor.”

According to Josh Luber, CEO of sneaker reselling site StockX, Nike has lost ground to competitors, like Adidas, in recent years and its decline can be explained by one simple formula.

“In February 2015 — so right before Adidas launched the Yeezy, Adidas was about one percent of the resale market and Nike and Jordan were about 96 percent,” Luber told Jefferies in an analyst Q&A recently. “Since then, fast-forward all the way to today, Adidas is (60, 6-0, percent) of our business in terms of dollars. And Yeezy dominates a lot of that but it’s also Ultra Boost and NMDs.”

Luber told Jefferies analysts that Nike and Jordan’s dominance was based on a simple formula. Making a crazy-popular sneaker is a classic supply and demand problem, with disastrous consequences if you get it wrong. Luber said that the Jordans were so popular for so long because they were hard to get. You couldn’t walk into a store and pick one up at the retail price, so your only option was to go to a reseller who would sell the shoes at a premium.

Nike figured this out early, and for a long time, they would only produce a limited number of the new Jordan shoes to make sure demand outpaced supply. In the last couple of years, Nike got too greedy and produced too many shoes at too high a price point. It was a kiss of death for Nike, Luber said.

He explains it pretty simply like this:

“If demand for a shoe is… 100 units. And Nike makes 96. Well they will sell out 96, no problem. Easy sellout at retail. There will be some secondary markets, there’ll be some premium but it will sell out. But demand for that shoe is 100 and they supply 101, just slightly more, they might sell 70 or 60 or 50 or some number way below 96.

“As soon as you cross that line and there’s no longer greater demand for product than there is supply, even if it’s just nominally, the whole secondary market evaporates. Shoes don’t sell out at retail. And that’s really what happens.”

Edgar Su/Reuters

The minute Nike produced enough shoes for there to be one extra shoe on the shelf, the shoes weren’t cool anymore. Everyone who wanted to buy the shoe could, and there was still one extra for those who weren’t in the know to pick up, which immediately makes the shoes less cool, according to Luber.

The biggest problem for Nike isn’t overproduction, though, its the shoe production timeline. Luber said that when Nike makes a shoe, its often working as much as two years in advance to allow time for manufacturing. In 2015, when Nike was designing a shoe for 2017, it had no idea that Adidas’s Yeezy line would be a huge competitor. Nike assumed that demand would continue to stay high for Jordans and other shoes, and so it hit that poisonous 101 number and suddenly its Jordan shoes weren’t as elusive or cool.

Nike and Jordan aren’t sitting still though. Luber said that the company knows of this simple supply and demand formula, and is probably working on correcting it.

“So Jordan absolutely understands they need to do less releases, they need to have lower supply across the board and figure out where that sweet spot is. And I do believe that they can recover,” Luber said.