Why invest in Supreme when its secondary market is more valuable?

Ripcord is a weekly newsletter we started to highlight one timely and important insight about the new consumer economy, cutting out the clutter and getting to the point. This newsletter also features updates from Loose Threads Intel and the Loose Threads Podcast. Sign up.  

This week the Carlyle Group, a big private equity firm, bought a stake in the one-of-a-kind brand Supreme for $500 million, valuing it at over $1 billion, making it the most valuable privately-held streetwear brand.

Industry sources say Supreme has around $100 million EBITA, and while its revenue is unknown, it could be anywhere from $150-300 million. One must take these numbers with a grain of salt, since there have been different ones trickling out over the past week and Supreme, as a super secretive company, has no interest in proactively disclosing this info. Some say the silence is out of fear that it will continue losing its cool as it grows.

This raises an interesting question: how much upside is there for investors to capture when Supreme’s entire brand is predicated on low retail prices and high product scarcity? This means that most of the liquidity for the brand's products is in the secondary market, which Supreme doesn't directly make a dime from.

Scarcity is nothing new to fashion brands. Plenty of them use high retail prices and limited inventory to keep interest high, accessibility low and margins through the roof. Supreme, on the other hand, uses a similar but different formula.

Supreme products are accessibly priced at retail directly from the company (its only wholesale account is Comme des Garçons' Dover Street Market), but they come in extremely limited numbers. This extreme scarcity creates a thriving secondary market that commands luxury-like prices, which I wrote about previously in Building Bulletproof Brands. A Supreme box logo tee, which could cost around $30 directly from the brand, might run in the hundreds and even thousands of dollars in the secondary market.

The paradox of Supreme's secondary market is that it has no control over it and reaps nothing from it financially, yet it makes Supreme what it is.   

To get a sense of the size of Supreme's secondary market, which includes both people flipping new products and reselling second-hand products, I called up Lawrence Schlossman of Grailed, a quickly growing secondary-market for men's (and recently women's) fashion.

Supreme is the number one brand on Grailed in terms of listings, with 94,000 products currently listed by its one million users. eBay, by comparison, has over 66,000 Supreme listings. On Grailed, if you total up the next nine biggest brands, which include Adidas, Acne, Rick Owens, Saint Laurent and others, Supreme is bigger than all of them combined. The average listing for a Supreme product is $240 on Grailed, and the average sell price is $146, often anywhere from two to ten times the product's actual retail price. This means there's over $13 million of Supreme sitting on Grailed at this moment. "Supreme would have to stop existing for it not to be the number one brand on Grailed," Schlossman says.

Given these numbers, I'm guessing (conservatively) that close to $75 million of Supreme moves through Grailed each year. Maybe $30-60 million could move through eBay as well. Even so, Supreme's secondary market is splintered, beyond platforms like Grailed and eBay. Fanatics exchange products in person, on message boards and on Instagram, which makes measuring the size of the market a challenge. Regardless, Supreme's secondary market is likely equal to or bigger than the company's annual estimated sales of $150-300 million. My guess is its secondary market is somewhere between $200-300 million annually.  

Investors, however, invest in a company because it can capture the majority of the value within its four walls. Gucci, Patagonia, Nike and most other brands capture the majority of the value that they create. But Supreme is different, as the majority of the economic value it creates does not end up on its balance sheet. 

This puts the brand, and now Carlyle, in an interesting conundrum: Supreme needs to keep growing to get its new investors the returns they want in the time horizon they expect, which, as with most private equity funds, is three to five years. But at the same time, it needs to keep its products relatively scarce for Supreme to stay Supreme and for the secondary market to keep thriving, which is crucial for the brand to continue resonating.

China is the most discussed opportunity for Supreme, which is the biggest market it has not yet officially tapped. Schlossman mentioned South Korea as well. Supreme's secondary market likely has plenty of elasticity left in it to support these new markets, so the brand is not at all doomed. However, its growth plan over the next few years will need to be very carefully managed.

Supreme has created a new type of luxury, driven by price points it only indirectly sets. There is definitely money to be made, but Carlyle won’t see the majority of it. Those outsized returns are reserved for the market itself.

Correction: This article has been updated to reflect the $100 million EBITA figure, which was originally reported as revenue. A small amount of associated analysis has been updated as well.