June 28, 2024
3 mins read

Can SHEIN Create Another Miracle?

China’s most watched and enigmatic unicorn, SHEIN, has not escaped the chilling winds of 2023. Founded in 2008 and initially headquartered in Nanjing, SHEIN quickly captivated global markets with its low prices—cheaper than Taobao—and its rapid inventory turnover, faster than Zara. At its peak, SHEIN’s valuation soared to $100 billion, making it the third-largest unicorn globally after ByteDance and SpaceX. However, by 2023, its valuation plummeted to $64 billion, shedding almost the entire market cap of the A-share apparel sector in just a year.

Although e-commerce giants like Amazon and Shopee have also seen declines, SHEIN, with its IPO ambitions, is particularly anxious. SHEIN has set ambitious targets in investor meetings: achieving $80 billion in sales and $7.5 billion in profit by 2025. These goals surpass the combined annual sales of H&M and Zara and require SHEIN to multiply last year’s profits tenfold. However, as SHEIN outlines its ambitious escape plan, external challenges remain.

The Crisis of Incremental Growth

Interpreting SHEIN’s success often leads back to the fast fashion pioneer, Zara. In the small Spanish town of Arteixo, Zara’s headquarters and thousands of factories established the fast fashion ethos: small batches and quick returns. This internet-inspired approach turned fashion from inspiration to probability. Yet, the times have brought new challenges. Born in the mobile internet era, SHEIN surpassed Zara with a model that delivered over 5,000 new items daily—far more than Zara. SHEIN’s prices, often below $20, are sometimes less than half of Zara’s.

SHEIN also revolutionized the supply chain. While Chinese consumers had to pre-order clothes 35 days in advance on Taobao, SHEIN could complete the entire process—from design to production to shipping—in 3-5 days.

From 2015 to 2020, SHEIN’s compound annual growth rate was a staggering 189%. By mid-2022, SHEIN’s sales had surpassed Zara’s, despite being founded 40 years later. However, in 2022, investor concerns became apparent. Despite 52.8% revenue growth, SHEIN’s profit dipped to $700 million for the first time.

Transition to a Platform Model

A question has always accompanied SHEIN’s rise: Is it a brand or a platform? For a long time, SHEIN aimed to be a superior brand. But recently, in plans shared with investors, SHEIN prioritized becoming a “better Zara.” It developed over ten sub-brands to push higher price points and profits. For example, its high-end brand MOTF sells dresses at eight times SHEIN’s usual prices.

SHEIN’s actual scarcity lies in its mobile traffic gateway. In Q2 2022, SHEIN surpassed Amazon as the most downloaded shopping app in the U.S., with over 74 million active users that year. Possessing both a fast fashion supply chain and a coveted traffic gateway, SHEIN has multiple options. Transforming into a platform could enhance product variety, increase commission and advertising revenue, and model its valuation after Amazon rather than Zara.

The Competitive Landscape

For SHEIN, Amazon is both an early model and the most significant local competitor. Amazon, founded in 1994, initially sold only books. By 2000, it launched a third-party platform, expanding product categories and increasing gross margins. SHEIN aims to retrace this path but faces challenges.

Amazon’s dominance in North America stems from its superior logistics, which is supported by 86 aircraft and over 1,500 logistics facilities. SHEIN’s deliveries still take 10-15 days, a significant disadvantage. Comparatively, Temu, backed by Pinduoduo, seems to be SHEIN’s immediate rival. Launched in the U.S. in September 2022, Temu surpassed SHEIN in app downloads within two months, leveraging aggressive marketing and competitive pricing.

Temu’s advantage lies in its extensive supplier network, which was built over the years by Pinduoduo. Temu’s pricing strategy, often undercutting SHEIN by 20-47%, poses a significant threat. SHEIN must offer more favourable policies to compete, potentially weakening its profitability.

The Road Ahead

From its inception, SHEIN has consistently made the right strategic decisions. In 2008, it offered affordable clothing amid the financial crisis. 2012 it shifted from profitable bridal wear to branded women’s fashion. 2015 it relocated its core operations to Guangzhou to enhance supply chain efficiency.

SHEIN’s journey has been marked by restraint in quick profits, investing more time and effort into building a flexible supply chain and maintaining strict control over partner factories. This strategy has set SHEIN apart, propelling it to the forefront of the fast fashion industry.

Now, as SHEIN eyes an IPO, it faces intense scrutiny over its revenue and profit projections. Transitioning to a platform model introduces new challenges and opportunities for sustained growth and higher valuations. Whether SHEIN can navigate this crowded path remains to be seen, but its track record suggests it might pull off another miracle.

What do you think about SHEIN’s ambitious plans and its transition to a platform model? Share your thoughts in the comments below!

Joe Zhang

Independent Consultant. 2X Founder and Contributor. Based in Shenzhen, China.

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Joe Zhang

Independent Consultant. 2X Founder and Contributor. Based in Shenzhen, China.

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