Sneakers, Scooters, and Startups: A Race to the Bottom (And to the Top)
What happens when the consumer demand for a new trend or technology explodes? Often there are many competitors all jockeying for market share of a quickly growing industry, but in the end very few, possibly only one of those companies will survive. What differentiates a winner from a loser when they sell the same thing? Today we’re going to examine just this in two examples that are playing out right before our eyes: the fight to be the dominant sneaker marketplace and the great scooter wars.
It’s a race to the bottom, but whoever gets there first will end up on top.
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Sneakers and scooters are two fascinating examples of new industries born out of existing products. Neither sneakers or scooters are new or revolutionary, yet the demand for each has skyrocketed to the point of creating multi-billion-dollar markets which previously did not exist.
In the wake of these new opportunities companies new and old have gone all in on trying to secure a major piece (if not all) of the market. The companies who are trying to become the dominant marketplace for selling sneakers (GOAT, StockX, Kixify, and others) face a similar challenge to Lime, Bird, and other scooter startups: how do you make yourself different and better than everyone else when you offer an identical core product?
Differentiation and Moat Building
In the sneaker business there are two fundamental problems that each company is trying to solve: availability of any shoe the buyer wants (inventory), and authentication. There are likely more ‘fake’ sneakers in existence than real ones which makes the task of purchasing shoes on the resale market a frightful proposition for any buyer. This is where GOAT and StockX come in, both companies offer authentication services for a cut of the sale. In the case of GOAT that fee is 9.5% + $5, for StockX it’s 9.5% + $5 as well, the commission can drop to as low as 8% once you’ve sold higher volumes and become a trusted seller.
This is a win-win for the buyer and the seller. The buyer isn’t paying an extra fee and can sleep soundly knowing they aren’t getting ripped off by some hustler, and the seller doesn’t have to build trust with the buyer because they are essentially paying a “trust fee” to GOAT or StockX. Not to mention for the seller the marketplace provides access to a massive swath of buyers that they otherwise wouldn’t have privy to.
This is how GOAT and StockX have differentiated themselves from the likes of eBay, Amazon, and other larger marketplaces. They specialized in a niche a provided a far better customer experience. When you buy from eBay or else where there is no guarantee the shoes you are buying are real.
However this leads to the next point, how does one differentiate from the differentiated? GOAT and StockX have proven themselves as the clear superior alternative to everyone else, but now they find themselves deeply entrenched in a battle with one another. This is a question facing both Bird and Lime in scooter land as well.
We’re gonna need a bigger moat.
This is where the ‘race to the bottom’ aspect comes in. When your core offerings can no longer be differentiated you become a commodity, and in commodity markets there’s only two ways to beat your competition: brand and price.
In the sneaker wars both StockX and GOAT have realized this and each has chosen to go down separate paths, StockX has focused primarily on price by frequently removing or discounting seller fees and by giving discounts on sneakers, often selling at a loss. StockX is willing to do this aggressively in hopes of expanding their network. The value of a marketplace comes from its ability to quickly and easily match buyers and sellers, which means the more of each StockX has, the more valuable they become.
Meanwhile GOAT has never wavered on its 9.5% + $5 seller fees, and only on rare occasions will raffle off pairs for free through its app. This makes sense since buyers are more difficult to acquire than sellers. Sellers will put up with more because there’s an economic incentive to do so, buyers however want what’s most convenient. GOAT has chosen to focus entirely on brand, which is why they acquired the sneaker space ‘OG’ Flight Club back in February. Flight Club, which has been around since 2006, is the largest sneaker consignment site in existence, and they also have retail stores in New York and Los Angeles (they reportedly plan to open more soon).
Regarding the acquisition GOAT’s CEO Eddy Lu had this to say: “They are best in class at retail, have great SEO to their web presence and tons of social following […] We’re great on technology, great on mobile and don’t have stores […] The pieces of the puzzle perfectly fit together.”
GOAT bought Flight Club for the brand. Flight Club has 2.3 million followers on Instagram and is a household name in sneakerville. But they also bought them for the first party data and access to the most premium customers. GOAT has a reported average sale price of $330, while Flight Club’s is north of $400. GOAT now owns those coveted ‘whales’ who make a up a small percentage of the sneakerhead population but outspend everyone in sight.
The distinct approaches from StockX and GOAT has proven successful in their own right, and there is enough room for two winners, but don’t think for a second that either of the two venture backed marketplaces are looking to settle for 2nd place.
The dynamic on the scooter front however is different, both Bird and Lime have focused entirely on expansion. Because the industry is so new, no consumer habits have yet been formed. Both companies want to expand to as many geographies as possible to be the first app downloaded, in hopes that lock-in and laziness will keep customers using their service over any other. This strategy requires a tremendous amount of up-front capital, since the only way to enter a new geography is by flooding it with hundreds or thousands of new scooters with prominently placed logos to identify them. Scooters aren’t free, so to the VC’s they’ll go. Both companies have raised hundreds of millions of dollars and don’t expect the investor inflows to slow any time soon.
This first mover advantage only works to a point, in the end if the other service is cheaper customers will get over the tremendous hurdle that is downloading another app. Which is why this is truly a race to the bottom. Again, the only way to compete in commodity markets is on price and brand, and so far both companies have disregarded brand. The question for the scooter market versus sneakers is whether or not there’s room for two. I believe there is, but margins will be slim. The question for Bird and Lime is how they’re able to further monetize their user bases beyond scooters once the market has matured and the opportunities for growth are sparse. But that’s a topic for another time, and problem that is still far down the road for them, and considering they’re racing on scooters it might take a while before they get there.