Cross-Border Update: Shein - ChinaTalk (2024)

In the summer of 2022, Iwrote extensivelyabout cross-border e-commerce from China. Since there have been many developments in this area, I am publishing another series of articles on the initiatives of relevant companies. In the previous articles we looked at the overseas initiatives of Alibaba, Bytedance’s/TikTok’sand JD/Ochama. Today we’ll look at what might well be the most successful cross-border e-commerce platform from China yet: Shein.

While AliExpress basically simply sells products from Chinese manufacturers on a cross-border e-commerce marketplace, Shein has taken a very different approach. After starting in 2008 as a Chinese company selling wedding dresses to overseas markets, it pivoted to selling women’s clothing under the name Sheinside in 2012, changing its name to Shein in 2015.Shein operates more than 10 self-owned brands in many of this and other product categories including main brand SHEIN, MOTF and beauty brand SHEGLAM.

Instead of acting like a marketplace, Shein decided to design clothes themselves, or work with Original Design Manufacturers (ODM) that propose designs. These designs are then manufactured by the ODMs or other experienced Chinese OEM (Original Equipment Manufacturers) factories under tight control of Shein. OEM’s don’t design and simply produce the designs Shein provides them with. About half of Shein’s suppliers are ODMs and the other half OEMs. Shein has about 1.000 primary suppliers (with 40% of these considered core suppliers) and 3.000 backup suppliers.

In other words, Shein is a so-called SPA, Specialty retailer of Private label Apparel, producing its own clothes and selling them through its own sales channels, in Shein’s case a website and app. The company is following the DTC model (Direct to Consumer), not distributing through third-party wholesale or retail companies like some of its competitors in the fast-fashion industry.

While some media might have you believe that the secret of Shein lies in some smart AI-driven trend identification tool that combs the internet for upcoming trends (in reality it’s most probably just a small army of young graduates browsing the web), the company’s real ‘secret’ is to be found on the supply chain side.

Shein works closely with its suppliers and provides them with R&D, IT Tools and sometimes even investments to help them make their production processes more efficient. LatePost reported (link in Chinese) that Shein has invested RMB 6 million in developing ‘standardized factory buildings’ based on 8 years of experience in the sector, and is planning to invest RMB 100 million more in the future.

Shein even goes deeper into the supply chain and procures some of the raw material and semi-finished products used by its supplying clothing manufacturers, something few overseas brands are willing to do. This gives Shein larger bargaining power while the manufacturers can order these materials directly on the Shein ERP system. Shein can even search for new suppliers if certain materials are not on its fabric supplier library.

Small order and quick response

Shein uses a “small order and quick response” system which works like this:

• A design is completed and pictures with models are taken.
• Between 4 and 6 pm, Shein orders a small quantity (100-500; one week’s inventory) with a manufacturer.
• The manufacturer calculates production costs and places an order for fabrics in Shein’s ERP system.
• The next morning the fabrics arrive, and the manufacturer creates a sample, which is sent to Shein for approval.
• After approval, production starts, and the manufacturer delivers the small quantity at Shein’s warehouse within 7 days of the initial order.
• The designs are immediately made available on the website, which is basically providing an enormous A-B test. On average, Shein launches 2.000 new items every day, letting pageviews and orders determine what stays there.
• Through their IT system, Shein shares the sales data with its suppliers, which is unique in the sector. The next day the manufacturer can see how the design is doing and if it seems to sell well he can prepare for a new order by already purchasing the fabrics.
• For popular items, Shein’s system automatically places new orders with the manufacturer daily. These repeat orders, which might be larger but normally still only several hundred to a thousand pieces, continue as long as the item is selling well. Some items continue to be ordered for 2-3 months this way.
• Manufacturers of the initial small orders are expected to respond quickly with fast deliveries to Shein. New orders can normally be delivered to Shein within 3 days. In some cases, this is done through a JIT (Just-In-Time) system in which the order is broken down into several partial shipments to Shein’s warehouse.

By making these initial small orders Shein reduces potential waste and can thereby offer low prices. Even though countries in Southeast Asia, like Vietnam, Cambodia and Bangladesh, are now competing in the fashion production market with lower labour costs, Shein’s business model can still ensure low consumer prices. While labour costs in China may be rising and the country is facing a decrease in its workforce, digitization, automation and lean production methods will give Chinese players like Shein an edge over these new market entrants.

The 2.000 new designs it launches on its website on an average day, combined with its constant monitoring of data on that website, helps Shein to identify trends in popular colours, prices and patterns early and adjust designs and manufacturing accordingly.

Manufacturers hope that one of their products will become popular, resulting in larger repeat orders totalling to (tens of) thousands. Shein has been perfecting its system and 80% of designs now result in additional orders. If the daily sales reach a certain level, it will be ‘bound’ to a specific manufacturer so he can make greater quantities of the same product and better margins. By binding products the manufacturer will also be willing to purchase fabrics in advance and speed up production.

While manufacturer margins on products are thin and the initial orders are very small, Shein is known to pay on time and relatively fast (30-45 days for core suppliers, compared to a standard 60 days in the industry). In periods of promotions and large orders Shein might even reduce this to one or two weeks to give the manufacturer sufficient cash flow to continue deliveries. Suppliers do however get financial penalties if they don’t deliver on time.

Shein is proud to be working with five “no” for its suppliers: no deposits, no entry fee, no promotion fee, no sales commission and no international logistics fee. All the supplier has to do is provide stable delivery. As soon as the goods are delivered to Shein’s warehouse, the manufacturers don’t have to worry about how the goods are being sold. This is in stark contrast to marketplaces like AliExpress and Amazon, where merchants need to forecast demand, ship products to fulfilment warehouses of the platform and have to do a lot of their own marketing and sales.

Shein also uses project teams that help manufacturers solve issues. If, for instance, a product shows consistent issues with spots, Shein will set up a project team and send people to the factory to detect and solve the problem with the manufacturer.

At the same time, Shein leaves a lot of autonomy with the manufacturer, who can set up the production process the way he wishes and can normally even use part of his production capacity for other customers. Manufacturers tend to have separate teams for the small initial orders (skilled workers experienced with small quantities) and larger repeat orders (assembly-line type staff).

While originally Shein’s suppliers were mostly located in Guangdong province, it now also works with factories from provinces further removed.In 2021 Shein also started creating ‘front warehouses’ in several cities, where local manufacturers can deliver their goods instead of at the central warehouse. When customers place orders on the website the items will be transferred to the Foshan warehouse in Guangzhou and shipped internationally. Some front warehouses are even operated by manufacturers.

Shein is often compared to Uniqlo and Zara, but besides the fact that Shein does not use brick-and-mortar stores there are other important differences according to an article by Titan Media (link in Chinese). Uniqlo starts planning designs a year in advance and has a limited number of styles, while Shein has thousands each day. Zara also uses a small-scale production approach, but its initial order can take 2 months and each new order 3 weeks. It thereby has only 3 turnovers in a season.

Shein Marketing

LatePost reported (link in Chinese) how Shein in 2011 was an early user of western social media influencers. At the time, these influencers that would later ask hefty fees for brand promotion, were more than willing to promote the Shein brand in exchange for free products. They unpack and try-out their ‘Shein hauls’ on TikTok and YouTube. Nowadays, Shein reaches 150 million people across its combined social media channels, among which 26 million Instagram followers in October.

This marketing approach helped Shein to build brand awareness at low costs and now people mostly know how to find the brand, with 70% of consumers searching for the brand or directly going to its website.As a matter of fact, research by Money.co.uk found Shein to be the most popular fashion brand in 113 countries, based on Google searches. Not only did Shein dethrone Zara, it also was a new entrant in the leader board.

In 2021 the repeat purchase rate at Shein rose from 30% in the previous year to 55%. Average purchase frequency was 10 times a year.

Offline, Shein has been using temporary pop-up stores, for instance in Japan, UK, US, The Netherlands, and The Philippines. It also opened its first offline store in Tokyo in November. Although products cannot be purchased directly in these stores, customers can try on items and order them by scanning QR codes.

While it has its own website and app, Shein took the remarkable step of also opening a shop-in-shop on Amazon in July 2022. Still, shopping for Shein items on Amazon does not look like a good idea since prices tend to be much higher than on Shein’s own site.

In the autumn of 2022, Shein also started testing a membership system called ‘Shein Club’ in the US. For $6.99 per quarter members receive 5% discount on 100.000 items.

Shein in 2022

In the second quarter of 2022, Shein surpassed Amazon in app downloads on US platforms for the first time (and Amazon worldwide app installs for the 3rd time). Although Amazon US still had three times the number of monthly active users Shein had, the fast-fashion platform had decreased that factor from 10 in 2020 and 4 in 2021.

Shein generated $15.7bn in revenues in 2021, a 60% increase on the $9.8bn it made in 2020. Shein’s net profit margin was estimated to be 6% in 2021 and slightly lower in 2022. It became the largest fast-fashion retailer in the US in the second quarter of 2021

Shein’s GMV (gross merchandise volume) exceeded $16 billion (link in Chinese) in the first half of 2022, growing 50% year-on-year.It is expected to have made $24 billion during the whole of 2022, with the first half of the year being its high season. Average daily users grew by 15% to 30 million, while average order value increased to $75.

The increased customer spend can be attributed to the introduction of new product categories like shoes, bags, household items, cosmetics, and pet supplies, which increase the average number of items per package from 6.9 to 7.8. In some cases, these new products concern third-party brands that Shein allows to be sold on its platform to complement its own range. An estimated three quarters of Shein’s sales are still apparel though.

In the first half of 2022 costs of goods was 35% of GMV, logistics 20% and marketing 8%.

Europe and the US each make up 30% of Shein’s sales, the Middle East 17%, Mexico, and Brazil both make up 3%.The Middle East is the region with the highest order value at $130, compared to $75 in the US and $45-50 in Latin America ($30 in Brazil).

While a change in cross-border trade legislation in the EU means that Shein now has to pay value added tax and import duties when selling there, it is still exempt from such taxes in other large markets like the UK and US because of the low value of its deliveries. Shein has however had to increase some of their prices to offset rising costs in manufacturing, logistics and advertising.

Growth in South-East Asia has been relatively poor despite investments in logistics and advertising. Many Chinese brands were already active in this region and therefore Shein is less unique in its price offering.

Shortening delivery times and other challenges

As we have seen with AliExpress and TikTok in previous articles, fast delivery times remain a challenge for cross-border platforms from China. Orders delivered from Shein’s Guangzhou warehouse are on average delivered worldwide in 10 days.

According to The Wall Street Journal Shein is planning to shorten this lead-time. Since October it can deliver in the US in 5-7 days from its Indiana warehouse. Shein plans to build two more warehouses in southern California and the Northeast of the US by 2025.Shein has also leased warehouses in Poland, a popular location for fulfilment of e-commerce orders to Europe.

Another way in which Shein is trying to reduce delivery times is by looking for ways to produce goods closer to its target markets. Shein started doing so in Turkey last summer, as mentioned in the previous article on Alibaba, who has come up with the same plan.

In November LatePost reported (link in Chinese) that since March 2022 the company has been piloting a marketplace approach in Brazil. Shein founder Chris Xu had visited Brazil in 2021 (link in Chinese) to inspect clothing manufacturers and in May 2022 Shein recruited Shopee’s former head of Latin American e-commerce. Brazilian merchants, who generate 40.000 – 50.000 orders per day, can sell on Shein in Brazil, but are responsible for their own operations and logistics. One of the reasons for the choice of this model are the high tariffs on imports in the country. Shein was also planning to open 5 pop-up stores in Brazil in 2023.

In the meantime, TikTok has accelerated its plans for the launch of TikTok Shops in Brazil to the first half of 2023.

While Shein’s market value was estimated to be $15 billion in 2020, it rose sharply to $100 billion in April 2022, higher than established players like Zara ($66.5 billion) and Uniqlo’s parent Fast Retailing ($60.7 billion). In October Shein’s valuation decreased to $65-$85 billion when some venture capitalists and private equity funds sold shares in the private market. Experts claimed the company wasn’t facing problems but it had probably been overvalued in April.

Shein has received some criticism about intellectual property theft, environmental impact, working conditions at its supplying factories and not informing all 39 million users after a 2018 data breach. The pushback has resulted in the notoriously opaque company becoming slightly more talkative, like in an interview in November in which they also explain their CSR and sustainability initiatives. Shein also says to support independent designers with their Shein X incubator program, which gives them 10% commission on sales of their designs.

Furthermore, Shein is countering its negative image by launching a resale program called Shein Exchange in October. Through this functionality in the app and website users can buy and sell second-hand Shein products. Shein also claims that while the level of unsold inventory in the industry ranges from 25% to 40%, its business model has enabled it to reduce its own to less than 10%.

It remains to be seen if Shein ca stay as successful as it has been. The company is said to be planning an IPO, but is also facing stronger competition by Chinese competitors like Bytedance’s TikTok and Pinduoduo’s Temu, that have also entered the international markets.

In the next article in this series of updates on cross-border e-commerce from China we will look at Pinduoduo’s Temu.