There are moments in sneaker culture that rock the foundation of how the entire industry is perceived. Typically, these moments happen when big names leave brands; like Kobe leaving adidas for Nike, or like Kanye leaving Nike for adidas. In most instances game changing moments in kicks aren’t really game changing. When the SNKRS app is updated and people still miss on kicks they love, that’s just how it is. There isn’t anything revolutionary about the updates in SNRKS or the Confirmed App. Foot Locker’s update to FLX and their app still leaves the culture unable to login and reserve. Many of the things sneaker enthusiasts think are going to crack the foundation, really aren’t that bad at all and nothing really changes. I mean… when West Coast Joe (son of ex-Nike executive Ann Hebert) was busted for using his mom’s Nike benefits and her credit card to run his resale business, for a month everyone knew big changes were on the horizon, but nothing really changed.
Actually, that isn’t true. West Coast Joe was a harbinger. It was a sign that the entire market around resale is being disrupted, but it isn’t by what many think. The latest ground shaking event in sneakers is the Zadehkicks scandal. While the reports being delivered talk about the mindblowing dollar amount taken from customers, Michael Malekzadeh wasn’t really creating an intentional Ponzi scheme as many sneakerheads think. He was definitely stealing, as he took payments and instead of keeping the funds in escrow so he could return the funds if he couldn’t deliver, he was buying McLaren’s and 5,000sq foot homes, but it wasn’t initially a Ponzi scheme. In this article from Action: Shoe Reseller Zadehkicks Mysteriously Dissolves, Leaving Customers With Millions in Limbo (actionnetwork.com), Darren Rovell writes,
A popular shoe reseller filed for voluntary dissolution last week, citing the fact that he had millions more in debt than in sales, a move that has the FBI investigating.
Zadehkicks, which has mysteriously offered hot shoes at low prices, built up a huge database of customers, many of whom paid way ahead of time to preorder shoes that would eventually release.
But the business, run by Michael Malekzadeh, said it was “unable to meet its debts as they become due in the ordinary course of business.”
In the past 48 hours, customers have been scrambling to try to get money back. Because of the nature of the pre-orders, many customers could be out because it is beyond the recovery date.
Customers, who said they were out as much as $100,000, showed their receipts on social media, begging for some help.
It’s understandable that there have been countless YouTube videos and Twitter conversations about what happened with Zadehkicks, but many of those hypotheticals overlook the reality of a constantly shifting resale market completely controlled by Nike internally, externally and via their own doors. This is the fact: People paid Zadeh money that he couldn’t refund because he misappropriated the funds, but there is another discussion on the Zadeh Scandal and it isn’t as complex as many have made it out to be. More important, Zadeh’s issue was a simple business problem. The market shifted before, during and after Covid and this led to a decline in resale for many of the large players. I’ve established that resale has been declining for six to seven figure sellers for years. Zadehkicks proximity to Nike’s Employee Store in Beaverton allowed his business to function until Covid and reckless behavior by big time bulk buyers destroyed a funnel of goods that had been a source for years. Unlike many who assumed the guy was taking a loss, the reality was Nike’s decision to double down on loss prevention and increase grey market investigations have slowly eroded margins eating away at resale’s elite.
Think Differently About the Zadeh Scandal
In the chart above are facts that can’t be argued. Covid continues to hang-up supply chains for every brand. “The price of shipping a container from Asia to America’s West Coast ports is now $6,288, up from $2,811 this time last year, according to the Freightos Baltic Index, an international freight rate index. About 99% of all footwear sold in the U.S. is imported, with the vast majority coming from Asia, where recent port delays in China have added to supply chain pressures. Now, American companies are struggling to get new product onto shelves.” Matt Priest of the FDRA made this statement in 2021. Ocean freight is at -$11,000 per container approximately double this time last year and up approximately 10x over 2020. What many sneakerheads aren’t discussing, and what isn’t in the fact sheet above is that along with Nike’s improving control of inventory, resale has begun to suffer under the weight of price increases being used to offset freight and tariffs. The increase in shipping and tariffs applied to sneakers has led to Nike’s classic Air Force 1 being increased in price by 5 to 10 dollars on certain models. The GS version of the white Air Force 1 is now 85.00, up from 80.00. The Vapormax is now 210.00 up from 200.00. Jordan Brand retros are now 200.00 up from 190.00. These increases seem small, but for a bulk buyer who operates on quantity this is a major shift. This price increase has cut into resale and limited the type of shoes that can be flipped. For instance, the bricks that West Coast Joe was making the bulk of his money on, the margins are now razor thin. Consider that Nike has limited the flow of both bricks and heat into their own doors after the embarrassment of West Coast Joe and Fact 1 and Fact 5 become factors. When you add in that China has had another outbreak of Covid, the supply chain continues to be disrupted. In Fact 1 above, the decrease in inventory is a culprit which has hurt all big resellers. Now place this info in context with the pre-orders Zadehkicks was doing and you see immediately that Nike’s adjustment in pricing diminished his margins and Nike limiting access at their own doors has to be discussed (but no one is talking about this).
Each fact listed in the infographic above slices away at margins. Fact 2, Fact 3 and Fact 4 are closely aligned, but equally as important. The introduction of flipping culture by Gary Vee, Cook Groups saturating the bot market, and YouTubers offering courses on flipping has contributed to more people kicking it in a club which was controlled by select players in every city. The club is no longer exclusive. The club has turned into one of those spots where it’s all dudes and like three women. Resellers are fighting everyone for fewer sneakers.
Fact 5 No More Access
This is what many people know, but don’t truly understand about Zadehkicks’ business. He was intentionally living near the best Nike Stores in the country. Lower-level employees and family members are the best suppliers of Nike goods. Zadehkicks had countless employees bringing him sneakers from brand doors. Why is this important? Zadeh has been labeled a Ponzi scheme. The idea that he was taking money and paying full retail for sneakers, so he had to take more pre-sales isn’t accurate. Nike fueled resale as it grew DTC. In 2015 when Nike began removing accounts, those additional sneakers ended up in Nike Stores. Zadeh worked with a network of people who had discounts. If an Air Jordan costs 190, at Nike it costs 95 plus tax. Pay the people buying a set fee for quantity and at the most Zadeh was paying 130 per pair. Sell those shoes to the bulk buyers at 150-170 and even if the shoe doesn’t hit large resale numbers, there is a profit for everyone involved. When the quarantine hit and since that moment, Nike employees have left for other jobs, and they began to sell sneakers themselves. StockX and GOAT allowed for the risks around resale to be removed. In the past a reseller had to accumulate product and wait for it to sell. Resellers held on to inventory. They used eBay and Amazon as their third-party platforms. Since StockX arrived, it has grown 900%, but because it’s hard to breakdown data on StockX, evidence of the decline in resale is difficult to gauge. I took the time to see how resale has declined in the report link below. Resale is now a race to the bottom. Sellers in today’s marketplace use StockX to dump sneakers affecting the resale price of a given sneaker for months to years at a time. The sellers capable of holding inventory for an extended time win eventually, but with the changes in how the supply chain works, holding can actually lead to losses instead of gains. The quarantine accelerated the employee as reseller at retail and inside of brands. West Coast Joe shined a light on the brand’s role. It was only a matter of time before Zadeh felt the pressure.
Sneaker Resale is Broken: A Year over Year look at a Month on eBay is Astonishing
In Portland and in any city near a Brand store, traditional retail locations are in direct competition with the brand. Kicks in sneaker stores near Nike and adidas stores used to sit on shelves. Resellers in various cities began offering store managers payments to undercut each other. Resellers paid to get the heat. Backdooring has been exposed lately with Michael Jordan’s son being mentioned in a scandal at his Trophy Room shop. Jump ahead to the quarantine and every seller (big and small) became stagnant. Orders were on hold and for four months people like Zadeh were paying warehouse and office bills and household bills from savings. Looking at images of Zadehkicks’ homes and cars and I can only imagine what 2020 did to his business income and that was compounded by the changing sourcing in resale.
Fact 4 and 5 Hits Even Harder
Zadeh was more than likely a victim of his own design. His access to the Nike stores trained those working with him to become the plugs. When you consider StockX has run ads during the Super Bowl and during NBA games, they are reaching more potential sellers than ever. Combine this with Fact 4 becoming a factor even for Store Managers at retail and the people who worked with Zadeh no longer had to work with Zadeh. As stores ramped up Raffles inside of their apps, it became more difficult for retailers to hold kicks for bulk buyers. Retailers had to hope that corporate wasn’t putting certain sneakers in the digital raffle. Then retail managers had to hope that people didn’t pick up their raffles. In some instances, retail managers began telling people coming in to buy their sneakers won on raffles, the kicks were gone, or never arrived. The supply chain problems disrupted online drops and raffles; nothing was consistent.
The heads of the resale mafia sitting in VIP were replaced by a multitude of wrecking crews/plugs. Relationships had long been replaced by money and the teams VIPs built disappeared. Access to the product diminished. Imagine being able to get 1-2000 pair of kicks a month and then being reduced to an inconsistent launch schedule where newbies were overpaying for product? Zadehkicks was focused on wholesale. For four months during quarantine, the wholesale business became non-existent. What didn’t stop however was retail stores selling via online. The store managers were fulfilling online orders with zero customers coming in store. Those store managers and employees at brands and traditional retail had all the time in the world to learn about sneaker resale, but all of that product that was sold in 2020 and 2021 was never replenished. Remember my statement on reckless behavior? Long before West Coast Joe, resellers were posting pictures of daily hauls of 600 pair of sneakers from Nike. Nike got those pictures, improved grey market analysis, and West Coast Joe and others like him flexing on Instagram have led to an inconsistent King Push level drought in these streets.
Zadehkicks in all likelihood didn’t INITIALLY have a Ponzi scheme. The dude was a victim of evolution. There are a variety of factors that have led to a decline in resale, but at the root of it all is that there are more people walking around the club. I mean, people are literally walking around the club everyday trying to get lucky. Ask a store manager, a good one, about new resellers. They will explain that the age and race of resellers has become a blend of the United Nations, when originally there were only a few players in the VIP section at the club. With only a few options in the club (thank Nike SNKRS App, Digital Raffles and store policies) the battle is more difficult than it’s ever been. Resellers are all down on the year. I don’t think that Zadeh set out to steal money at the start. I think Nike’s supply chain issues and the amount of people involved in resale, finally caught up with him. Think about it, even Nike implemented a raffle system for their own employees on the limited product coming into their stores. His proximity to Portland was his fortress. The trebuchet outside of his gates were filled with the training he unintentionally gave and the Facts above. Those warheads were loaded into the basket, set ablaze, fired, and his walls tumbled.
Note: This is not in support of Zadeh. This is written to explain how the business originally operated and when the breakdown in the business began. The guy was greedy and did become criminal but use this to discuss how the business was able to originally operate.
