Lindsay Firko used to be a loyal Target customer, but ever since she downloaded the Shein app, her shopping habits have changed. Instead of browsing through local stores, she now spends hours scrolling through Shein’s million+ product offerings, filling up her virtual cart at unbelievable prices.
The Chinese-founded and Singapore-based company, pronounced “shee-in”, took the world by storm during the pandemic-era e-commerce boom. Known for its norm-breaking supply-chain model, Shein offers affordable fashion and household items that appeal to Gen Z’s taste for trendy pieces at a fraction of the cost of traditional retailers.
In fact, Shein was the most downloaded shopping app in the world last year and has gained the attention of big-name venture capital firms such as Tiger Global and Sequoia Capital China. With a valuation of roughly $66 billion, it surpasses even established fast-fashion companies like H&M and affordable-apparel companies like Gap.
For Firko and many others, Shein has become the preferred shopping destination, leaving big-box retailers like Walmart and Target in the dust. Will traditional retailers be able to keep up with Shein’s rapid rise?
Shein: The Fast Fashion Giant’s Global Expansion
Since its founding in 2008, Chinese fast fashion company Shein has quickly risen to become one of the world’s largest online clothing retailers, with a valuation now estimated at over $15 billion. And while Shein has been a hit with young consumers seeking ultra-affordable trendy clothing, the company has even bigger aspirations.
Despite allegations of everything from labor abuses and damaging environmental practices to mishandling customer data and copyright violations, the company is putting down roots in the United States, hiring American employees and investing in distribution facilities. There have also been rumors of a U.S. initial public offering, although Shein has declined to comment.
Shein is also taking its supply chain global, partnering with hundreds of factories in Brazil, India, and Turkey. And as the company expands beyond apparel and into categories like home goods and beauty, it has also opened its platform to third-party sellers with its “Shein Marketplace.”
According to Donald Tang, Shein’s executive vice chairman, the company’s success is due to its ability to give customers “the products they want and the price they love.” While its first customers were Gen Z girls, Shein now offers men’s products, pet products, shoes, bags, accessories, beauty products, and home goods.
Despite the company’s impressive growth, many retailers are still not paying attention to Shein. U.S. firms may object to being lumped in with a start-up that has faced numerous allegations, and the ongoing trade war between the U.S. and China is also a concern for the fast fashion giant’s aspirations in the American market.
Nevertheless, Shein’s global expansion shows no signs of slowing down as it continues to disrupt the fashion industry with its low prices and ever-expanding product lines.
Shein: The Formidable Competitor in the Fast-Fashion Industry
Fast-fashion retailers need to watch out for Shein, the Chinese-based company that accounts for around half of U.S. fast-fashion sales as of November 2022. With its expansion plans, Shein puts itself on a collision course with industry giants like Amazon, Target, and Walmart. Moreover, its business model opens the door for more competition from other entrants trying to emulate its success, like Temu, an online marketplace with over 50 million downloads on Apple and Android app stores.
According to TD Cowen analyst John Kernan, Shein is a formidable competitor with a very different model than what U.S. traditional retailers are used to. For a first-time shopper scrolling through the website, the initial shock is the prices. Shein offers a pair of kiwi- and lemon-bedecked swim trunks for only $6, a glittery one-shouldered women’s jumpsuit for $10, and three-pack children’s shorts for $6.56.
However, what sets Shein apart from other retailers is its sheer volume. Unlike other online shops, Shein breaks its “new arrivals” section into individual days. On June 2nd, for instance, the retailer added 2,257 new women’s styles – and this does not include the site’s other categories such as men’s clothing, children’s wear, and home items. Some even estimate that Shein adds about 6,000 to 8,000 new designs each day.
With this in mind, ignoring Shein could be a costly mistake for fast-fashion retailers. Despite the price point and volume of products on their website, their business model should not be overlooked. As they continue to grow and expand globally, they are well on their way to becoming one of the biggest players in the fast-fashion industry.
The Revolutionary “On Demand” Business Model of Shein
Shein is notorious for its vast selection and low prices, and it’s all attributed to their “on demand” business model. Unlike traditional apparel retailers who rely on forecasting sales trends, Shein uses user activity on their app to determine which products are taking off in real-time. The company then uses this information to quickly iterate and produce more of the most popular designs.
By partnering with thousands of small Chinese manufacturers, Shein can produce thousands of styles in batches of just 100 to 200 items. This miniaturized approach means that if a design is popular, production can be quickly scaled up in less than a week. If it fails to resonate, the company is left with only a handful to be marked down.
The Shein model revolutionizes the traditional retailer’s approach. The company maintains low-single-digit inventory levels, well below the industry average, by creating new products based on real-time market trends. This approach leverages digital tools and data science to stay ahead of consumer preferences and create a more sustainable supply chain.
According to Sheng Lu, associate professor of fashion and retail studies at the University of Delaware, “It’s a study on how to leverage digital tools and data science to…create new products based on the market trends observed from interacting with consumers.”
By focusing on the consumer experience and rapidly responding to shifting market trends, Shein has disrupted the traditional retail industry and set a new standard for “on demand” manufacturing.
How Shein’s On-Demand Model Propelled It to the Top of the Fashion Industry
Shein, the China-based fast-fashion company, has disrupted the fashion industry with its unique on-demand model. According to Derek Yan, senior investment strategist at KraneShares, Shein’s “speed and flexibility in production is really phenomenal” and gives them a core advantage compared to competitors like Zara and H&M.
Shein’s redesigned supply chain anchors their on-demand approach by eliminating overproduction and keeping unsold inventory low. They are asset-light and do not own supply-chain factories, delivery vehicles, planes, marketing platforms, or anything at the last mile. This approach keeps overhead low and lets them retail exclusively online and mail goods directly to consumers from their warehouses and partner factories in China.
The company links all the pieces of its supply chain from designers to manufacturers to raw material suppliers with its operational software. Shein’s unique infrastructure propels its business, making it difficult for competitors to replicate.
The company’s $23 billion global revenue in 2020, with earnings of $800 million, and a little under 30% of sales from the U.S. solidifies their position in the fashion industry. Shein’s revenue growth of about 50% year-over-year outpaces larger fast-fashion companies’ sales growth like Zara parent Inditex, which saw year-over-year growth of 17.5% in 2022; H&M and ASOS (ASOMY) were up 12.4% and 0.7%, respectively. Boohoo Group (BHOOY) was down 10.8%.
Overall Shein’s on-demand model has proven to be a game-changer in the fashion industry, and other companies will need to step up their innovation to keep up.
Shein’s Growing Threat to Legacy Apparel Retailers
Shein, a fast-fashion brand that appeals to middle-class teens and young adults, has experienced exceptional growth in the U.S. apparel market–from 0.1% in 2017 to 1.6% by 2022, according to Neil Saunders, managing director and retail analyst at GlobalData. However, few in the industry consider Shein a threat to midtier legacy apparel retailers such as Kohl’s, Gap, and Macy’s. But every dollar spent at Shein is a dollar not going to these established brands, warns Kearney partner and retail analyst Brian Ehrig. The average order value at Shein in the U.S. was about $70 in April 2021, compared to $93 for Zara and $46 for Amazon.
The Murky Middle
According to Neil Saunders, managing director and retail analyst at GlobalData, Shein’s exceptional growth in the U.S. apparel market poses a threat to midtier legacy apparel retailers–otherwise known as the “murky middle.” These retailers include Kohl’s, Gap, and Macy’s among others. Shein held just 0.1% of the market in 2017 but by 2022, increased to 1.6%, an impressive feat according to Saunders.
Underestimating Consumers’ Purchasing Power
Many competitors underestimate the purchasing power of Shein’s shoppers, warns Kearney partner and retail analyst Brian Ehrig. While some may not view Shein as a direct competitor because of their different business model, every dollar spent at Shein is one less going to rival brands.
Shein’s Average Order Value
According to data aggregator Measurable.ai, the average order value at Shein in the U.S. was approximately $70 in April 2021–less than Zara’s $93 average, but more than Walmart’s $52 and Amazon’s $46.
Undoubtedly, Shein’s rapid growth in the apparel market cannot be ignored by legacy retailers seeking to maintain their market share.
Shein’s Demographics May Surprise You
A common misconception about Shein is that it caters only to low-income consumers. However, according to Shein’s SVP of Global Marketing, Katie Ehrig, this is not the case. To place an order from Shein, you need a debit or credit card, something that less-affluent shoppers have historically struggled to access.
Ehrig notes that Shein serves a customer who has access to credit, which is not the bottom 20% of the economy. Shein attracts a more diverse demographic than initially suspected, including those with middle to high-income levels.
Striving for Success in Home and Beauty
As Shein continues to expand, it threatens to encroach upon territory claimed by big-box retailers such as Target and Walmart, as well as e-commerce companies such as Amazon. While Amazon currently considers Shein a partner, it may not stay that way for long.
For example, Shein recently launched a third-party marketplace in Brazil, which allows the company to add local sellers, reduce shipping times, and sell bulkier items. This expansion shows a promising future for Shein and its customers.
IPO Potential in the Near Future
For the past three years, there have been rumors that Shein plans to go public in the U.S. But with reports saying that the company is now raising funds for a U.S. listing in the second half of 2023, it’s looking like this may be a reality.
An IPO would enable Shein to continue its evolution as a business, making it a more robust competitor to U.S. retailers. According to Brendan Ahern, Chief Investment Officer at KraneShares, such a move would be beneficial, noting that an IPO would provide Shein with even more resources to achieve success.
Shein Sets Sights on Increasing U.S. Presence
Clothing retailer Shein has been making moves to increase its presence in the United States. Despite not commenting on any IPO plans, the company opened its first U.S. distribution center last year, and plans to open two more by 2025. This move is aimed at reducing shipping times, which can take as long as two weeks for standard shipping from China.
As part of efforts to engage with the American audience, Shein has ramped up its hiring in the U.S., including bringing on board high-profile professionals like Tang, who brokered Dalian Wanda’s takeover of AMC Entertainment in 2012 and Bear Stearns’ entry into the Chinese market in the early 2000s. However, the company is still navigating various challenges, including allegations of a sizable carbon footprint, poor labor practices, and the theft of designs.
Brejaé Chamberlain, a hairstylist from Chicago, is one of the Shein customers who are becoming increasingly disillusioned with the brand. Chamberlain, who used to order from Shein about once a month and received payment from the company to review products on her TikTok account, says she’s now reconsidering her partnership.
“I’ll probably end up shopping more on Amazon and doing more discount hunting,” Chamberlain adds.
Currently, three other Shein shoppers who spoke with us stated that they were also considering purchasing less from the company. However, none of them have taken any action yet.
Despite these issues Shein appears committed to addressing these concerns and increasing its U.S. presence:
“The U.S. is one of the most important markets and one of the biggest markets that we have, so we pay an extraordinary amount of attention to it,” says Tang.
Is Shein’s Low-Cost Business Model in Trouble?
Shein, the fast-fashion retailer known for its low prices and trendy pieces, has been making waves in the fashion industry. However, it appears that the company’s success may be short-lived.
While concerns about the negative environmental impact of fast fashion have been mounting for some time, recently, there has been a growing backlash against Shein specifically. The company has been accused of employing unfair labor practices and sourcing materials from China’s Xinjiang Uyghur Autonomous Region, where forced labor is rampant.
But the bigger threat for Shein may be brewing in Washington. Companies with Chinese ties are under growing scrutiny, especially those capable of gathering significant data about their users. Shein is already drawing congressional ire: a group of legislators sent a letter to the Securities and Exchange Commission asking that any IPO be put on hold until it can be verified that the retailer isn’t using forced labor by China’s minority Uyghur population.
Moreover, a bipartisan group of lawmakers introduced two bills that would change the rule that allows companies like Shein to avoid paying duties when shipping packages valued at less than $800 dollars from China to the U.S. Is Shein’s low-cost business model at risk?
The backlash against Shein is also being driven by Shut Down Shein, a lobbying group that claims the retailer is able to sell products at such a low cost only because it skirts billions in dollars in tariffs and employs unfair labor practices.
“Their business model is anti-competitive.… Other international companies that want to do business with America are not doing those things, and they are following the law, so we are fighting for a level playing field,” says Chapin Fay, executive director of the group.
Shut Down Shein itself may be evidence that, behind the scenes, U.S. retailers are indeed concerned. Fay declined to disclose which organizations are funding the group, saying only that it’s a coalition of American brands and human-rights organizations.
Shein’s Disputes, Code of Conducts, and Proprietary Technology
Shein has been making headlines for the controversies surrounding its low-priced products. The company, however, disputes the allegations, claiming that its prices are the result of streamlined inventory and supply-chain management.
Tang, the founder of Shein, says that the company makes its manufacturers sign a code of conduct, undergoes yearly internal audits, and uses proprietary technology to trace the origin of its products’ materials.
Temu: A Rival to Watch Out For
Despite the controversies surrounding Shein, the company has opened doors for disruptive international retailers to enter the lucrative U.S. market. One such retailer is Temu, an online marketplace that launched in September 2023 and is owned by PDD Holdings.
Like Shein, Temu sells an extensive range of cheap products shipped straight from Chinese manufacturers. It has been the most downloaded app on Apple’s app store for a significant part of 2023 and surpassed Shein in terms of U.S. consumer spending in May of the same year, according to Bloomberg Second Measure.
The Rise of Chinese Retail Start-ups
Nicholas Kaufman, a policy analyst at the U.S.-China Economic and Security Review Commission, reported that since 2019, over ten Chinese retail start-ups have copied Shein’s business model. Kaufman expressed concerns that these companies might rely on controversial practices similar to those of Shein and Temu to undercut competitors and gain a foothold in the U.S.
Surviving in China’s Retail Industry
As Kevin Ahern, the KraneShares CIO, pointed out, the retail industry in China is Darwinistic – only the strong survive. He added that if a retailer like Shein has survived it in China, then they can survive a lot, and they are at the top of the heap.
Shein has emerged as the first Chinese-born retailer to attain global recognition, but whether the company can reach the “top of the heap” status on the world stage remains to be seen. One thing that is clear, though, is that Shein has the potential to become an apex predator, and its competitors must watch their backs.