Case Breakers and the Value Cycle

Editor’s note: What follows is an edited excerpt from The Modern Baseball Card Investor.

When talking about new card issues, one thing that should be clear is that secondary market values drive the entire value/supply chain. When supply is favorable and demand is relatively high, then secondary market values are high, and thus box demand is high; collector-investor confidence is also high, helping drive future box demand. But when supply is too high and secondary market values are correspondingly weak – as was the case with the late 1980s and early 1990s issues – people stop buying unopened boxes; collector-investor confidence weakens, future box demand drops, and the entire supply chain fails.

Modern Baseball Card InvestorSubsequently, new supply falls to potentially more attractive levels such that secondary market values may return, enabling box demand to rise once again.

This is the Value Cycle.

That secondary market value drives box value is easy enough to demonstrate. Let’s say you have a card with an average street value of $50, and it appears at a rate of one per box. In this case, an unopened box is generally worth at least $50. But if the value of the card rises to $100, the value of an unopened box generally also rises to at least $100.

That said, the challenge for the collector – and everybody else in the supply chain – is that when conditions are favorable and supply is relatively low, such conditions cannot be expected to persist indefinitely. This is because when excess value exists on the secondary market, other players in the supply chain – from the manufacturers down to the case breakers – will attempt to capture it.

These attempts to capture value inevitably result in increased supply.

Manufacturer Forces

Manufacturers typically have two basic methods of capturing excess value:

  1. Raise prices
  2. Expand supply

A manufacturer might raise prices by raising wholesale prices of the staple product lines like Topps or Bowman Chrome, with rising costs working their way down the supply chain.

Alternatively, a manufacturer might simply include less per pack or fewer packs per box. Retail blasters, for example, generally have a fixed price of $20; a manufacturer may adjust the contents of those blasters from year to year or set to set. Another example is Bowman Sterling: 2011 Bowman Sterling Baseball included five cards per pack, including two autos, a relic, an RC and a prospect card; 2012 Bowman Sterling Baseball included only four cards per pack, including three autos and one base RC or prospect card.

2012-13 Panini Flawless metal briefcaseIn addition, manufacturers might introduce increasingly “high end” products, such as Upper Deck Exquisite Collection, Topps Five Star or Panini National Treasures, which might run $500+ a box with one pack per box; another example is 2012-13 Panini Flawless Basketball, which was released on October 2013 with a suggested retail price of $1,250 per pack/box and came in a briefcase (by the end of November, prices of Panini Flawless had passed $2,000 per briefcase).

But the “easy” approach to capturing value is simply to expand supply.

Now it should first be pointed out that a manufacturer can’t print a product and – if it’s successful in the secondary market – simply go back to the well and print more of it (don’t worry – Topps has other ways of doing this). For one thing, Topps prints to pre-order demand; and for another, Topps can’t print more 1/1 superfractors, or another set of #/5 red refractors for the same set, etc. But more to the point, the day that Topps goes back to the well would be the end of the game, because the whole market depends on the assurance of a fixed print size, and that the manufacturer is not going to screw the supply chain.

Consequently, when a product performs well, the manufacturer must capture value in later issues, whether in the same product year or the next one. That said, card manufacturers can increase supply in two basic ways:

  1. Add new product lines. In addition to its staple Bowman, Bowman Chrome, and Bowman Draft products, Topps has added new products to its Bowman prospecting lineup in Bowman Sterling (2004), Bowman Platinum (2010), and Bowman Inception (2013).
  1. Expand existing lines. Increase the production sizes of the existing product lines (a.k.a. attempting to print money).

Neither option benefits secondary market values, but the expansion of existing lines is potentially of greater negative impact. However, to the extent that Topps prints to pre-order demand, the company is essentially trying to let the market dictate growth, rather than simply expand supply on its own accord.

But as we are about see, Topps’ policy of printing to pre-order demand comes with hazards.

Case Breaker Forces

Box BreaksAny time there is an easy profit to be made and little barrier to entry, you are going to attract competition. Or put differently, if it is possible to turn meaningful profits simply by opening a box of baseball cards and selling the contents, then a lot of other people are going to want to do it as well.

As we know, competition creates pricing pressure and squeezes profits. But in the baseball card business, this winds up being a double whammy.

Why? Because in this case, the competition is also pumping up supply and devaluing the product in the process.

The emergence of the profitable case breaker has led to the emergence of many other case breakers chasing case breaker profit. As a result – whether it is large case breakers ordering through distributors or smaller case-breaking collectors ordering cases through online wholesalers – pre-order demand rises accordingly. And because Topps prints to pre-order demand, supply also rises along with it.

Growing supply in itself is not necessarily problematic, so long as collector demand is growing along with it. But when the case breaker segment of the supply chain is growing significantly faster than actual collector demand, secondary market values will suffer and case breaker profits will be squeezed even further.

2013 Topps Chrome BoxIn his 2013 mid-year review, case breaker Brent Williams reported that he had been generating his lowest ROI (return on investment) on case breaks since 2009. And in the fall of 2013, Topps provided a triple whammy when it released its 2013 Topps Chrome, 2013 Bowman Chrome, and 2013 Finest – three of its biggest releases for mid- to high-end collectors – all within a span of two weeks (In 2012, Finest and Topps Chrome were August releases separated by two weeks, while Bowman Chrome was an October release).

As we’ll discuss in Part VIII (of the book), the first two-to-four weeks following the initial release of a new card issue are key for collector-investors looking to acquire the rarest parallels because the bulk of the new supply is broken within the first two weeks, thus creating both availability and pricing pressure for rare cards. But with three big releases within two weeks, an incredible amount of supply was dumped on the market by case breakers in an incredibly short period of time, with the ultimate result being that some incredible values on anything other than Yasiel Puig (bubble) were easily found, despite being Yasiel Puig signed 2013 Topps Chromean unusually strong RC-logo (but not prospect) class including Yasiel Puig, Manny Machado, Jose Fernandez, Wil Myers, Gerrit Cole, Michael Wacha, Hyun-Jin Ryu, Shelby Miller, Jedd Gyorko, and Christian Yelich (plus several other notables), not to mention some other high-end RC-year players who may yet pan out in Dylan Bundy, Jurickson Profar, and Mike Zunino.

If nothing else, the probability is that by the time the 2013 Finest release rolled around, collectors had simply run out of money.

Moreover, the other thing that was noticeably clear about the 2013 Topps Chrome and 2013 Bowman Chrome releases in particular was that print runs were up significantly from 2012. Judging from the pack odds on the 1/1 Superfractors, roughly 3,865 hobby cases of 2013 Topps Chrome were produced, up 32% from roughly 2,927 hobby cases of 2012 Topps Chrome.[1]  Other clues were the inclusion of new, limited print, serialized refractors in both Bowman Chrome and Topps Chrome in addition to the standard color refractors.

Unless we see a large bump in collector demand, then at some point – if it hasn’t happened already – we are going to see some case breakers squeezed out of the market, while others peel back on orders, until some point where box value returns. 

And so, though Topps policy of printing to pre-order demand was probably intended to let actual collector demand dictate the growth of supply, what’s actually happening is that Topps’ policy is letting the supply chain determine supply, and at the peril of the market. And as a result, the market may be prone to accelerated value cycles with wild swings in supply – swings much greater than changes in actual collector demand. These swings might occur not in the long run, but rather from year-to-year or even set-to-set.

Jeff Hwang is a gaming industry consultant and the best-selling author of Pot-Limit Omaha Poker: The Big Play Strategy, the three-volume Advanced Pot-Limit Omaha series and The Modern Baseball Card Investor. Follow Jeff on Twitter @RivalSchoolX.

[1] Found by taking the Superfractor odds (1:3,832 Hobby packs in 2012, and 1:5,060 Hobby packs in 2013), multiplying by 220 (the number of cards in each set) to get the total number of packs produced, then dividing by 24 packs per box, and 12 boxes per case. Note that this case figure is not precise, as it does not account for cards that Topps may hold back for use as replacements.