Supreme Cracked The Veblen Code — Making More Money By Selling Less Product
A version of this article previously appeared in Forbes.
This Louis Vuitton / Supreme boxed logo t-shirt recently sold for $1,750. The shirt was produced by Supreme, which originally sold it for $485.
You may think that this item is an anomaly, but it is not. A Louis Vuitton / Supreme hoodie resold for $7,500. Other Supreme apparel sells in the aftermarket for hundreds more than their retail prices, including box logo hoodies which typically sell for between $500 — $1,000.
Supreme even sold a brick, emblazoned with its logo for $30. The logo brick now resells for $100 — $999, depending on condition, inclusion of packaging and the IQ of the buyer. The Supreme crowbar, which retailed at $32, is a much better deal, reselling for $80 — $399.
Thorstein Veblen coined the phrase “conspicuous consumption” in 1899 when commenting on the human desire to publicly display wealth through the acquisition of consumer goods. A Veblen good does not adhere to the traditional laws of price and demand. As shown in the accompanying graph, below a certain price, the price/demand dynamics are consistent with conventional products — higher prices result in a lower demand. However, above a certain price, this relationship reverses, and demand rises along with price increases.
Veblen products are typically luxury goods, such as super-cars, which routinely sellout before production is begun, despite (or due to…) prices in excess of $2 million.
For the demand of a Veblen good to reach the luxury portion of the demand curve, supply must be limited. Popular, rare items are expensive. When emblazoned with a highly recognizable logo, these goods allow conspicuous consumers to flaunt their wealth. Therefore, De Beers operates a cartel. Without strict control of supply, the Veblen aspect of diamonds would diminish, along with their popularity and prices.
Behavioral psychologists have repeatedly demonstrated the power of scarcity in driving human behavior. We are essentially primates with an evolutionary drive to want more of the things we cannot have, driven by a fear of loss. The appeal of a scarce product is further enhanced when it also publicly conveys social currency, in the form of wealth, status or power.
Econ Geek Alert: Veblen goods differ from Giffen goods, which also rise in demand as they become more expensive. Giffen goods tend to be necessities, such as food, in which the inverse demand/price relationship is driven by poverty.
Supremely Popular, Supremely Restricted
The Supreme brand was created in 1994 by James Jebbia, who opened his first retail outlet in Manhattan. Since that time, Jebbia has resisted the temptation that typically destroys successful apparel brands.
Fashion companies usually ramp production, as demand increases. This growth is often funded via debt. This model works well until the brand falls out of favor. When this occurs, as it nearly always does, retailers return unsold inventory, which makes it difficult (at times impossible), for the fashion company to service its debt, resulting in bankruptcy.
Despite unprecedented worldwide demand for its products, Supreme only operates eleven retail locations and restricts the number of units it sells online. This disciplined constraint of supply ensures that its products sell out within minutes in stores, and within seconds online.
Despite the retail sector experiencing its worst downturn since its inception in the 1830’s, Supreme routinely sacrifices sales by completely shutting down its stores and website, for weeks at a time, while it prepares the next season’s launch. In contrast, the rest of the retail industry discounts its products at the end of each season, to free-up floor space and fund production of its upcoming line, thereby undercutting the implicit value of their brand.
When Supremes’ stores reopen, the lines routinely stretch for blocks. During the summer of 2017, the rumor of a popup store in LA generated a crowd of 500. The line began forming at 4:00 AM and by mid-morning, the crowd became unruly, resulting in the company cancelling the event.
In-store customers are limited to purchasing one unit of each product. Some online customers utilize bots, at about $100 per use, to ensure they will have a legitimate shot at fulfilling at least part of their wish list. Without a bot, getting what you want is largely a crapshoot. If you don’t complete your transaction quickly enough, items in your cart can be purchased by other online buyers, adding to the urgency of the Supreme shopping experience.
Supreme’s ardent control of supply has resulted in a vibrant secondary market, in which resellers hire people to stand in line, as described in the 2015 documentary entitled, Sold Out. Like ticket scalpers, the reseller community crowds-out ordinary consumers and routinely sells goods at significant markups. Despite the company’s frustration with the secondary market, Supreme has resisted increasing its supply, or its prices, to counter the impact of the resellers.
Supreme also benefits from another powerful influence principle — social norming. The huge crowds at stores, items quickly selling out online, celebrities wearing the apparel and the highly visible logo on all its products, all reinforce the judgmental heuristic, “it’s popular, so it must be good.”
In October of 2017, Jebbia confirmed that the Carlyle Group made a significant investment in his business, rumored at $500 million for a fifty percent interest. Will the financial pressures of a private equity firm cause Supreme to follow the path of most fashion brands and increase its supply until it eventually exceeds demand? If this occurs, Supreme will lose its Veblen status and be subject to the conventional laws of pricing and demand.
You can follow John on Twitter: @johngreathouse.