SHEIN, the most anticipated and mysterious star unicorn in China, couldn't escape the chilling winds that blew in 2023.
Established in 2008, initially headquartered in Nanjing, SHEIN primarily focused on overseas women's fashion. With its lower prices than Taobao and faster product updates than Zara, it quickly gained worldwide popularity.
At its peak, SHEIN reached a valuation of a staggering $100 billion, making it the third-largest unicorn globally, after only ByteDance and SpaceX. However, in 2023, SHEIN's valuation suddenly plummeted to $64 billion, almost losing the entire market capitalization of the entire A-share clothing sector in just one year.
While other e-commerce companies like Amazon and Shopee also experienced declines, SHEIN, with its IPO aspirations, appeared more anxious.
During a meeting with investors, SHEIN set remarkably high targets for itself: achieving $80 billion in sales and $7.5 billion in profits by 2025. The former surpasses the combined annual sales of H&M and Zara, while the latter requires SHEIN to increase its profits by more than tenfold compared to the previous year.
Despite its lofty ambitions, SHEIN is currently facing external challenges. Its growth rate, which relied on the pandemic-induced penetration, is noticeably declining. The independent women's fashion track, where SHEIN excelled, is now facing an influx of competitors. Moreover, Temu, an e-commerce platform emphasizing cost-effectiveness and backed by Pinduoduo, has also entered SHEIN's primary battleground, the United States.
So, what kind of breakthrough path is SHEIN plotting to fulfill its promises to investors?
《1》 The Current Challenge: Incremental Crisis
Interpreting SHEIN's Success Model always traces back to the pioneer of fast fashion: ZARA.
In the small town of Arteijo, Spain, ZARA's headquarters and thousands of factories laid the foundation of fast fashion: small batches and quick turnovers - producing smaller quantities of clothing and pushing them to the market at a faster pace. This internet-minded approach transformed fashion from an inspiration into a probability problem.
Unexpectedly, a new challenger emerged with the rise of the mobile internet era. SHEIN, born in this era, surpassed ZARA with a more advanced model.
SHEIN's speed of releasing over 5,000 new items per day far exceeds ZARA. Moreover, SHEIN's women's clothing is consistently priced below $20, often less than half of ZARA's prices.
SHEIN further revolutionized the supply chain. While Chinese girls had to pre-order clothes on Taobao 35 days in advance, SHEIN's newest women's clothing could be designed, produced, and shipped in as little as 3-5 days, all the way into containers.
While countless competitors were busy following the brand marketing guide, trying to tell a story, SHEIN proved the truth of "great strength brings miracles." What story could be more effective than "more, faster, and more cost-effective"?
From 2015 to 2020, SHEIN achieved an annual compound growth rate of 189%. In the first half of 2022, SHEIN, which was born 40 years after ZARA, had already surpassed the fast fashion progenitor in terms of sales.
However, in 2022, the concerns of investors began to surface. Although SHEIN's revenue growth rate remained high at 52.8%, it had clearly slowed down. What was even more worrying was the profit of only $700 million, which declined for the first time.
While SHEIN has become the most adept clothing company at capturing consumer demand on this planet, it faces a harsh reality: there are few fertile markets left for SHEIN to explore.
Before 2014, SHEIN's newly established sites were mainly concentrated in economically affluent regions of Europe. Entering the Middle East market in 2016 brought another wave of dividends, contributing up to 12.5% of SHEIN's annual sales at one point.
Although SHEIN subsequently expanded rapidly into Southeast Asia, South America, and other regions, the contribution of these new markets remained low.
One example is the average order value. The average order value for Middle Eastern users was around $130, approximately $75 in the United States, and less than $50 in the Latin American market. Hence, Europe and America still constitute SHEIN's main markets, accounting for 60% of its sales.
At the same time, the path SHEIN has taken to chase after the freshness desired by young people has become increasingly crowded.
On one hand, incremental growth is hard to come by and competition is intensifying. On the other hand, SHEIN's profits are being eroded by rising costs.
In its early years, SHEIN relied on cheap traffic, but those opportunities have diminished. In the past, internet celebrities could be persuaded to promote the brand in exchange for clothes, but now cooperation is not considered without tens of thousands of dollars.
Moreover, SHEIN itself operates on a low-margin, high-volume business model and is now forced to combat the inflation of raw materials and labor costs. In today's era where college students are forced to live frugally, it has become increasingly rare for workers in SHEIN's supply chain to earn a monthly salary exceeding $10,000.
As a result, SHEIN's net profit margin dropped significantly from 7.5% in 2021 to 3.2% in 2022.
Faced with no other choice, SHEIN quietly increased its prices, betraying its consumers. As a consequence, angry SHEIN Girls launched a trending topic expressing their resentment. Some American netizens expressed outrage at the doubling of prices for shoes they had been eyeing, calling it "absurd."
How can SHEIN achieve its grand blueprint for 2025 and generate high profits elegantly? In the face of this question, SHEIN is anxious, but investors are even more anxious than SHEIN.
《2》 The Path of SHEIN's Rise: Brand or Platform?
Throughout SHEIN's journey, there has always been a lingering question: Is SHEIN primarily a brand or a platform?
For a long time, SHEIN had its sights set on becoming a brand. Even in recent times, in its business plans presented to investors, SHEIN continues to prioritize becoming a "better ZARA."
Following in the footsteps of ZARA's parent company, SHEIN has also developed over 10 sub-brands to target higher price points and profits. One of these is the high-end women's clothing line, MOTF, which offers items priced in the range of $20 to $40, with some series exceeding $100 per piece.
But if SHEIN is merely aiming to emulate ZARA, then the accolades and praise it receives on its path to success may seem overly exaggerated.
In 2022, despite the substantial revenue gap between SHEIN and ZARA, the capital market still valued SHEIN at over a hundred billion dollars, surpassing the combined market value of H&M and ZARA at that time.
The true rarity of SHEIN lies in its possession of a mobile traffic entrance. In the second quarter of 2022, SHEIN surpassed Amazon to become the most downloaded shopping application in the United States, with over 74 million active users that year.
With both the supply chain of a fast-fashion brand and the coveted traffic entrance of an e-commerce platform, SHEIN has numerous choices to make. Undoubtedly, in the eyes of investors, there is always a better option.
The platform transformation model not only signifies an accelerated increase in the variety of product categories but also brings commission and advertising revenue to SHEIN, expanding its sources of income. Importantly, the valuation reference model shifts to trillion-dollar Amazon, rather than the ZARA of the previous era.
In reality, SHEIN, which once solely aimed to become a "better ZARA," is now blindly rushing down a different path:
Recruiting talents for platform transformation. In November 2022, SHEIN hired Liu Xiuyun, the former president of Lazada with experience in third-party brand management. In 2023, SHEIN also poached executives from Amazon to lead its strategy of expanding product categories.
Aggressively recruiting sellers. To compete with platforms like AliExpress and Temu for domestic sellers, SHEIN offers extremely favorable recruitment conditions: no commissions or traffic fees for the first three months, and covers the cost of return shipping for sellers. Additionally, SHEIN supports sellers in conducting small-scale product testing, effectively reducing their inventory pressure.
Infrastructure development overseas. SHEIN plans to establish three large-scale distribution centers in the United States. The distribution center in Indiana has already been put into operation, with the goal of shortening order fulfillment time.
On May 4th of this year, SHEIN finally announced its official transition to the platform model by launching Shein Marketplace in the global market.
SHEIN's founder, Xu Yangtian, who rarely appears in the public eye, made an appearance and stated the new goals for this new era: "We will introduce more third-party sellers through the platform model."
However, is this path really as smooth as it seems?
《3》 Future: Intensifying Competition in North America
For SHEIN, Amazon is not only the standard answer that came 20 years earlier but also its biggest domestic competitor.
Established in 1994, Amazon initially focused on selling books as a single category. As the number of users grew, in 2000, Amazon officially launched its third-party platform business, greatly expanding its platform categories. Amazon's gross margin subsequently increased from 20% in 1999 to 30% in 2001.
Now, as SHEIN seeks its own transformation, it is essentially retracing the same path. However, SHEIN will find it challenging to become the next Amazon.
The secret to Amazon's dominance in the North American market lies in the superior consumer experience brought by its self-owned warehousing and logistics. In the unevenly distributed population of the North American continent, 72% of users in the United States can enjoy Amazon's same-day or next-day delivery service. In contrast, SHEIN typically takes 10-15 days to complete most deliveries.
Behind Amazon's speed is a logistics department supported by 86 cargo planes, over 1,500 logistics facilities, and over 50% of Amazon's investments in recent years being dedicated to warehousing and distribution. The difficulty SHEIN faces in breaking through Amazon's moat is evident.
In comparison, Temu, which also relies on the domestic supply chain and focuses on the low-price segment, may be SHEIN's most direct competitor. The rivalry between the two has long been underway.
In September 2022, Temu, incubated by Pinduoduo, launched in the United States. Liu Jun, CFO of Pinduoduo, once stated during a financial report that Temu is not driven by financial indicators. In other words, they have sufficient financial resources.
In its first month, Temu spent 1 billion USD on marketing expenses and even advertised during the Super Bowl, a major event in the United States. In less than two months, Temu surpassed SHEIN and successfully topped the rankings of shopping apps in North America.
While SHEIN temporarily lost a move on the marketing front, its greater concern when facing Temu is the advantage in the supply of low-priced goods.
An employee from Temu has revealed that Temu is almost exclusively targeting SHEIN. Whenever it's the same style as SHEIN, Temu prioritizes listing it. Moreover, Temu is even more aggressive in terms of low prices, with prices ranging from 53% to 80% of SHEIN's in certain categories. Their advantage is significant.
Temu's internal goal is directly aimed at SHEIN: to have at least one day of Gross Merchandise Volume (GMV) surpass SHEIN before September 2023.
Behind Temu's confidence lies Pinduoduo's network of over 11 million suppliers that have been accumulated over the years. It is these numerous white-label sellers willing to sacrifice profits due to fierce competition that provide Temu, backed by Pinduoduo, with a stable and low-cost source of goods.
To retain these suppliers from Temu's grasp, SHEIN naturally needs to offer more favorable policies, which undoubtedly weakens its profitability.
Superficially, SHEIN's challenge is to establish a solid position in the current platform battle. However, if we look back at the history of other e-commerce platforms, the challenges in SHEIN's transition to an e-commerce platform may have just begun.
For example, Amazon, which, like SHEIN, has self-owned products, faces the issue of traffic distribution between self-owned and third-party products. In addition, long-term investments in infrastructure have kept Amazon's e-commerce business profitability low.
Pinduoduo, which follows a similar low-price e-commerce path, provides a cautionary lesson. While pursuing extremely low prices, Pinduoduo sacrificed seller interests to please users in its management, ultimately leading to a collective backlash from sellers.
Taking these lessons into account, SHEIN not only needs to handle the distribution of interests between self-owned and third-party products but also consider the balance between infrastructure investments and profitability. Additionally, they must navigate the delicate balance between low prices, customer experience, and seller rights.
Even if everything goes smoothly, in the end, SHEIN will have to struggle long-term, just like Pinduoduo, to shed the label of a low-price e-commerce platform. These are the longstanding issues in the development of platform e-commerce, and SHEIN urgently needs to provide a new answer.
SHEIN has almost always made the right decisions when faced with significant choices throughout its history.
In 2008, Xu Yangtian realized that the middle class would collapse under the financial crisis, so he provided them with affordable clothing. In early 2012, Xu Yangtian withdrew from the profitable bridal business and took the lead in entering the path of branded women's fashion. In 2015, SHEIN keenly recognized the importance of the supply chain and directly moved the company's core departments to Guangzhou, thousands of miles away.
In fact, over the past decade or so, SHEIN has taken a path that few others have ventured on: restraining the desire for quick profits, investing more energy and time in building a flexible supply chain, and strictly controlling cooperative factories. Each step has meant higher efforts and longer return cycles.
But it is precisely because of this that SHEIN has left countless competitors behind, skyrocketing from a vertical track to the mainstream spotlight. In the crowded internet market with giants, it has become one of the most mysterious and attention-grabbing unicorns in recent years.
Before this, SHEIN told its own story, aiming to become a "better ZARA." However, in 2023, as SHEIN holds its breath and prepares to knock on the doors of the IPO market, it faces the skeptical gaze of the capital market regarding its revenue and profitability. SHEIN has turned towards a more crowded track.
But in today's environment, there may not be as many miracles left for SHEIN as there were in the past.