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In the Secondary Sneaker Market, It's No Longer Just About Nike

When Enrico Moretti Polegato took over as president and CEO of Diadora in 2014, he inherited a sneaker brand that had been producing quality products affiliated with sporting success for more than six decades.

Tennis superstar Bjorn Borg wore Diadora during the 1970s and 80s. Soccer players including Dutch legend Marco Van Basten, rat-tailed Italian hero Roberto Baggio, and George Weah, the only African man to win the FIFA World Player of the Year award, all donned Diadora during their impressive careers.

What Polegato's company lacked was modern caché, a hook that would appeal to kids and adults who collect shoes. These sneakerheads, the majority of them young men, wait for hours outside boutiques on Saturday mornings, desperate to scoop up limited releases, which they either keep to impress their friends or sell for profit on secondary markets like eBay or Grailed.

Nike and its money-printing Jordan brand dominate the billion-dollar resell industry, but Polegato decided to see if his company could make a small dent.

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Nike running shoes on display the Nike headquarters showroom.
Jessica Golden | CNBC
Nike running shoes on display the Nike headquarters showroom.

They partnered with Patta, an Amsterdam-based boutique, and released three versions of the N9000, a sneaker that originally hit shelves in 1990. It was a success with streetwear sites running headlines like "How Diadora Became the Brand Everyone Is Talking About Again."

Polegato and his company gained entrée into the world of rare shoes, and his customers responded. "I knew the strength and the power of the brand when I took over, but the affection that the consumers showed to the brand and the quick way they understood the history surprised even me," he said during a phone interview.

The initial collaboration led to additional ones with more boutiques around the world. Diadora will release around 10 limited-edition sneakers this year, many of which will sell out in minutes, some of which will appear on the secondary market as flippers look to make a quick buck. The Diadora N9000 Soulbox "Ferro," for example, lists at $500, a significant premium over its retail price.

But if that pair, or any other sneaker, does get resold on the secondary market, Diadora won't make a cent. And selling 1,200 pairs of a limited-edition release in stores around the world won't have much of an impact on Diadora's bottom line, either. For Polegato, however, the goal isn't dollars; it's marketing and brand-building. "It's not a matter of money," he said. "The value on the brand is way bigger than the cost of the collabos."

Diadora isn't the only company trying, and succeeding, to grow by inserting itself into the sneakerhead world. Saucony, New Balance, and Asics release around a dozen collaborations a year. Under Armour is finding success with the signature shoe line from two-time NBA MVP Steph Curry, specifically the Curry 1 MVP and their 200 percent premium.

When Curry unanimously won his second MVP, just this month, Under Armour celebrated by releasing a Back 2 Back MVP Pack. The sneaker quickly sold out and is going for 125 percent premium from resellers. In the secondary market, it's not just Nike anymore.

So far, the biggest winner has been Adidas, which launched the Kanye West-backed Yeezy line in early 2015. Individual pairs can sell for 10 times their retail cost, and the Yeezys dramatically altered the secondary market landscape.

In 2014, the year before Yeezy, Nike owned 96 percent of the $1.2 billion market, according to Josh Luber, who runs the price tracking website StockX.com. a, meanwhile, accounted for just one percent. (Estimates on the size of the secondary shoe market vary widely, with industry analyst Matt Powell citing a figure of less than $500 million.) By 2015, however, Adidas made up 20 percent of the dollars spent, and Luber expects that figure to grow to 30 percent this year.

The success of Adidas goes beyond Yeezy, too, as the company followed up with much-loved lines. The Ultra Boost and the NMD are extremely popular silhouettes, according to Stadium Goods owner John McPheters. He sees a different type of consumer on Adidas release days than he does during Nike drops. "If you look on a Jordan line, a lot of people are there to buy it and then resell it," he says.

"With the NMDs, a lot of people are buying to wear. It says good things about Adidas." McPheters estimates that 65-70 percent of his business by volume is Nike with 15-20 percent coming from Adidas, although the Yeezy Moonrockmight be the best-selling "dollar-for-dollar shoe" in the store.

At Stadium Goods in SoHo, Nikes take up the majority of the spots on the two store-length display racks. There's a heavy selection of Adidas as well – with plenty of Yeezys in the "Trophy Case" that's reserved for the most expensive pairs – but smaller brands like Saucony, New Balance, and Asics are finding room as well. All the models from these brands are collaborations with sneaker boutiques, similar to what Diadora did with Patta.

This is a calculated strategy, according to Brandon Williams, the global business unit manager at Saucony Originals. The company puts out about 15 limited-edition collaborations a year, keeping them to between 1,200 and 2,400 pairs globally to create scarcity and, hopefully, interest. "We hope that someone will be interested in the resale value," he says. "When the next release comes around, if everything is right about it, then of course, you're hoping that we're going to see it on eBay or some of these different selling platforms that are popping up."

Williams credits an early collaboration with Bodega, a boutique in Boston, as the most significant moment in bringing the Originals line back to sneaker culture relevance. "They are the tastemakers," Luber says of a store like Bodega.

When a brand creates a successful collaboration, two things happen: first, the boutique's buyers decide to carry more down-line Sauconys, further boosting the brand's appeal to sneakerheads; and, second, buyers from lesser-known boutiques see Bodega carrying Sauconys, so they pick up the brand as well. "Hopefully at the end of the day we are widening our audience and introducing them to some of the products that aren't that limited," Williams says. Diadora's Polegato calls the collaborations "a marketing tool based on authenticity," an honest assessment of their purpose.

It's also true that the market can only bear so much. There's a real question about whether the smaller brands are reaching the saturation point. Multiply 10 to 15 releases per brand per year times half a dozen companies, and suddenly it becomes very difficult to breakthrough in any meaningful way, especially when Nike and Adidas gobble up so much of the sneakerhead oxygen. "There are so many collaborations today that it's really just noise," analyst Powell says.

If there's a wild card in the future of the sneaker game, it's Under Armour. The Maryland-based brand, which passed Adidas in 2014 to become the second-largest sportswear company in the United States, doesn't need to rely on boutique collaborations because of its size. But it is, according to Luber, "the one brand that really hasn't been using the resale market and the sneakerhead model for their benefit yet."

The only shoe that's seen much traction on the secondary market is the Curry 1 MVP, released last year after the Golden State Warriors star Stephen Curry was named the NBA's best player. While that model still sells for twice its retail price, no one I spoke thought that Under Armour strategically planned for that jump. Rather, it occurred organically, simply because of Curry's massive stardom. (Under Armour declined to comment for this story.)

The secondary market success of the Curry 1 MVP had another unintended consequence: the price for in-line Curry models that were no longer available in stores increased on eBay. Not by huge amounts – a $150 shoe was selling for $200 or $210 – but enough to conclude that the vibrant market for the limited-edition Curry 1 MVPs inflated the interest, and, therefore, the price of additional models. That Under Armour doesn't see any cash from the secondary sales is beside the point; they are building something for the future.

Could the Curry line become the new Jordans, which spins off absurd amounts of money every year? (Fun fact: In 2014, Jordan made $100 million in royalties from the Nike, Jumpman, and Air Jordan lines, which was more than he took home during his entire playing career.) Almost certainly not, as there's no way that a single star can dominate popular culture the way MJ did.

But the company could emulate that model, introducing 30 new colorways every year and making six or seven of them extremely rare. In theory, those pairs will go for massive money on the secondary market and kids who can't afford to buy them will look down market. The resellers win, but so does Under Armour.

It goes beyond Curry, too. Under Armour recently signed Dwayne "The Rock" Johnson to a long-term marketing deal that will include footwear. "That's a progressive, smart, savvy way to look at things," McPheters says. "They'll get his follower base dialed in the mix with product."

While The Rock might not be an athlete, at least not in the traditional sense, sneakers sell because of an icon's cultural relevance, not because of their achievements in sport. Look no further than the success of Kayne's Yeezys for proof. Few thought West could sustain a sneaker line. He not only built something from nothing, but the resulting sneakers boast some of the highest resale values on the market.

Under Armour is approaching the sneakerhead market in a smart way, building slowly with the right kind of celebrity endorsers. The company is finding space, just as Adidas did and Saucony, New Balance, Diadora, etc. are. While Nike will be the biggest brand by virtue of a 20-year head start, their narrative softens a bit with each passing season.

"A lot of kids who are buying Jordans today don't actually know who he was or his games or how important he was," McPheters says. "Every year that passes, the harder it is to tell that story and have it resonate." In other words, Jordan isn't gone, but he's slowly being forgotten. And half a dozen sneaker companies are rushing to take advantage.

—By Racked.com's Noah Davis