Don’t Go Gaga Over Shein’s “Ultra-Fast Fashion” Model. It’s Mostly a Low-Priced DTC Apparel Story. (Tech Strategy – Daily Article)

In the past year, Chinese online apparel brand and retailer Shein surpassed Amazon (briefly) as the #1 downloaded ecommerce app in the USA. That got people’s attention. People are remembering how TikTok did the same thing to Facebook 1-2 years ago. And there are unconfirmed reports of 100% year-over-year revenue growth for Shein, reaching $10B in 2020.

The problem is Shein is a private cross-border retailer with surprisingly little information available. Most of the numbers people are pointing to are app download numbers.

But Matthew Brennan, a longtime fellow “Chinasaur” and someone you should pay attention to, recently did a collaboration on Shein with Packy McCormick. That resulted in the article Shein: The TikTok of Ecommerce.

I don’t really buy the take on the business model. But it is one of the few researched articles on Shein. So most of the information in this update is from their research. Everything in quotes is from that article.

Here are some of the numbers people are pointing to.

  • “Shein ranks as No.1 in the iOS App Store’s Shopping category for 56 countries, and garners a top 5 spot for 124, out of total 174.”
  • “Since mid-February, Shein has seen an unbroken run of being ranked second only after Amazon for shopping apps in the United States.”
  • “Shein’s website ranks 1 in the world for web traffic in the fashion and apparel category, according to SimilarWeb, putting them ahead of household names Nike, Zara, Macys, Lululemon and Adidas.”
  • “The average duration of a site visit is estimated at 8 mins 36 seconds, higher than every major US fashion brand.”
  • “A recent report claimed Shein was the most talked about brand on TikTok in 2020.”

But here’s the factoid that matters for this discussion. Shein (reportedly) launches +1,000 new products every day on its sites.

That’s why people are starting to call this a new type of fast fashion business model. More on that below.

An Introduction to Shein

Shein is pronounced “She In”. Note: it’s not a Chinese word. They don’t even sell in China.

The company is a US-China cross-border online direct-to-consumer (DTC) retailer. And as a cross-border retailer, they buy from Chinese apparel manufacturers and sell to US consumers. They sell to lots of other countries, but the US is likely their biggest market by far. They do not sell in China. Shein describes itself as an “international B2C fast fashion e-commerce platform” with business in more than 220 countries and regions around the world.

By sourcing directly from Chinese manufacturers and selling directly online, they are cutting out retailers and distributors. They are online DTC from China and are able to offer much lower prices compared to US retailers. This DTC approach with direct connections to manufacturers is common in China. And the domestic space is notorious for brutal competition and low prices. This looks like a cross-border version of this. Americans are basically buying clothes at Chinese prices.

Shein focuses overwhelmingly on women’s fashion. And on young women. They reportedly get most of their activity from Gen Z women, who are active on social media and TikTok.

Shein also appears to be particularly agile in digital marketing, social media and influencer marketing. The founder’s background is both in cross-border ecommerce and SEO. The company was early to Pinterest, Instagram and TikTok. They are also on Facebook, Amazon and AliExpress. If you search any US social media or influencer platform, you will get a ton of hits for Shein.

I encourage you to take a look at their webpage or mobile app. You will see a huge selection of women’s clothing at very low prices. Note the numerous sales and discounts being pushed as well.

And, no, I did not search for attractive women. I couldn’t find a page without them.

The company was founded by Chris Xu in 2008, shortly after his graduation from a university in Qingdao – and after a short stint as a consultant in cross border ecommerce (doing search engine optimization). The company appears to have naturally found its way to its current business. It was originally focused on cross-border sales to the US and finally got some traction by selling wedding dresses and other “customized, special occasion apparel”. Think wedding dresses, graduation dresses, bridesmaids, groom wear, and formal evening wear. The low price of Chinese apparel manufacturing was attractive to American buyers of wedding dresses. It was their break-out product and apparently one of the hot products for US-China commerce (second only to electronics).

Another turning point appeared to be the emergence of social media. Shein was early to Pinterest and was one of its top sources of traffic in 2013-2014.

From there the company grew in size and products. But with the same basic playbook. It went from purchasing goods from Chinese manufacturers and wholesalers to designing and contract manufacturing its own. On the consumer side, it grew on social media, rode the waves of TikTok, Instagram and others – and built its own apparel brand (Shein). It also built out its IT capabilities.

That’s the basic story. But I’m getting this from mostly one source.

Today, Shein is a US-China DTC apparel brand and retailer with surprisingly low prices and surprisingly effective digital marketing.

So why are people talking about its business model (which is my area)? And Shein as a new and upgraded version of fast fashion?

From Fast to Ultra-Fast to Real-Time Fashion?

The argument goes like this:

First, apparel and fashion are a very big retail sector with unusual characteristics – including:

  • High turnover rates and product changes. Apparel is seasonal – and has trends and fads. It is also influenced by influencers, fashion houses and many others.
  • There are regional tastes.
  • There is a big variety. Retailers have tons of SKUs.
  • There are lots of returns.
  • It is notoriously hard to predict demand.

Second, fast fashion pioneers Zara and H&M turned these problems into strengths.

Fast fashion pioneers shortened their cycle times for testing demand, design, manufacturing and delivery.

  • In Zara’s case by having these activities done in Spain. And closer to the European markets.
  • In H&M’s case, they manufactured in China and used other techniques.

But this fast fashion approach let them respond faster to changes in demand – which both increased revenue and decreased costs. Specifically, they could dial up production of popular SKUs faster than others, which resulted in increased sales, reduced inventory waste, reduced inventory cost and fewer markdowns.

Zara is famous for constantly updating its products throughout the season. It can design new items, manufacture them and get them in their stores in under two weeks.

Third, a new breed of online retailers is doing ultra-fast fashion.

Basically, because it is DTC with no physical stores. Just online which makes it faster (at least until delivery)

Conclusion: Shein is taking fast fashion to the next level with real-time fashion.

The argument is the company does real-time demand analysis and then launches thousands of new products every day. It can do this because of its TikTok-like IT system and its manufacturing base in China. They are doing data-driven matching and personalization for each country, city and maybe consumer. They are matching demand changes in real-time.

But I don’t really buy it.

***

An ultrafast DTC retail business model that matches demand and supply in fashion in real-time may be coming. Shein may be aiming to become a master at keeping attention and matching, like TikTok. Or a master at engagement-first shopping, like Pinduoduo. That may be the future.

But I don’t think that is how Shein got here.

What Digital Superpowers Does Shein Have?

These are my standard, simple questions to determine if any competitive game-changers are going on. Or if this is just normal tech evolution that everyone will soon copy.

Superpower #1: Is there a dramatically improved user experience?

Yes, but it will soon be copied.

Shein created a cross-border DTC brand that was able to offer US consumers low China prices. That’s great. Cheaper prices matter to consumers.

DTC competition in apparel is brutal in China. Prices are low. Selection is huge. It looks to me like Shein just offered this to American consumers. That’s a powerful move. But also an advantage that is likely short-lived. There are lots of Chinese manufacturers. There are lots of cross-border ecommerce plays. This will be copied fast.

Superpower #2: Is this enabling a platform business model?

No. It’s an online DTC fashion brand and retailer.

But could it add a marketplace to its retail business in the future? Maybe.

It could do a C2M marketplace like Pinduoduo. Or it could add a traditional marketplace like JD in 2010-2011.

Superpower #3: Is there a network effect?

No. They do have data-driven customization and personalization. That is good. But it is also becoming standard.

Superpower #4: Are they capturing other competitive advantages?

Possibly.

As a fashion brand and retailer, their biggest potential competitive advantages are customer capture and economies of scale. This or creating a marketplace are probably their best strategies going-forward.

In terms of customer capture and branding, they appear to be doing well with Gen Z consumers. Going for the next generation of consumers is a good idea. It’s easier to capture consumers who do not have their buying preferences and habits set yet. Plus, this group seems to live on social media and places like TikTok. Building their brand and capturing this group is important and probably their best play long-term. Shein is also doing all the typical tech-enabled habits and behaviors (points, notifications, etc.).

Second to to this, they can go for economies of scale in purchasing. And in building out their IT capabilities and supply chain.

This is the standard big retailer playbook. But I don’t think this is what is fueling their rise.

Superpower #5: Do they have virality or other powerful growth hack?

Not really. But they did get good traction by being on social media early. And they appear good at digital marketing and influencer marketing.

Superpower #6: Is it scalable?

Yes.

This is actually one of the things I like most about Shein. And this is where the analogy with TikTok and YouTube makes sense. They are basically software tied to a Chinese manufacturing base. And their software is culturally agnostic. Like TikTok, it just takes in data and then presents the right products. They might have the rapid, global scalability of a software company.

From the article:

“Shein doesn’t have a style. It doesn’t try to impose its taste on global consumers. It doesn’t even have its own taste. It’s a mirror that reflects each country’s current style back to it, in real-time, based on data alone. Remaining generic, storyless, and nationless allows it to project whichever image is needed in the moment on its loose army of local influencers across the globe.”

So What Explains the Recent Rise of Shein?

Most discussions about business models and competitive strengths happen later. Rapidly growing companies like Google and Facebook didn’t really figure out their business models until later. Their rapid “lightning in a bottle” growth came from other things. Note: Zoom, Xiaomi and Meitu are still looking for their business model.

I would point to 4 factors that really explain the recent rise of Shein:

Factor 1: They took a DTC model we commonly see in China and applied it to the US-China cross border space. That got them strong product-market-fit with low priced (and acceptable quality) apparel.

Chris Xu began in US-China cross-border ecommerce and struggled in this space for a long time. But, according to the article, he didn’t break out until he started selling $1,200 wedding dresses for $200 from China. Being way cheaper with acceptable quality apparel was clearly the biggest lever for consumer adoption. Even today, it looks like their primary draw for consumers.

And that is great. As I have said many times, offering customers something they are already buying at a much lower price (and maybe even free) is a big, big lever. Really low prices is a big part of how Pinduoduo got its initial growth. It offered low cost consumer staples by doing C2M and cutting out the distributors and retailers.

Shein cut out all the physical retailers and middlemen – and sourced from China. That enabled them to drop their prices. They pushed their low-priced products (and their brand) through all the channels. They did their own website and app. They went through online retailers like AliExpress and Amazon. And they went into all the social media, media and influencer platforms. It was a full court press.

Note: This cross-border DTC approach required getting the mobile app and user experience right. They had to overcome a lack of trust in buying low priced Chinese goods. They had to create processes for returns and other issues.

But low price was the first big lever. An increasing selection of goods over time was probably the second.

Factor 2: They rode the rise of social media, KOLs / influencers and TikTok.

Building their business on the back of social media, Instagram, TikTok and KOLs / influencers was a great growth hack. Working with KOLs and influencers has been common practice in China for five years. And that probably put Shein ahead of the curve in the US. They were also early to Pinterest though. Shein appears to be quite good at digital marketing overall.

This got them sales. But it also got them engagement. You can find lots of discussion of Shein online in the US. You can see lots of influencers reviewing their clothes. You can see celebrities creating their own product lines on Shein.

These growth tactics won’t last forever as TikTok and others will eventually want that ecommerce value for itself. And it wouldn’t surprise me if the big platforms begin cutting off other ecommerce links (like they are doing in China). But there is a window of time for which this is a great growth hack. And they are using it to build their brand, traffic to their own app and hooks into consumers.

Factor 3: They targeted and got traction with the next generation.

Pinduoduo’s success was a lot about getting to fourth and fifth tier cities first. They went after an underserved demographic with few established online behaviors. And their tailored their services to what that demographic really wanted (i.e., household stables at really low prices. And that you could buy on your smartphone).

Shein appears to be getting traction with Gen Z American women. And it appears they are giving them what they really want: a huge selection of really low priced, acceptable quality apparel on their smartphones. Plus a nice user experience, lots of new choices and integration with social media, TikTok and influencers / KOLs.

Factor 4: They avoided the competition.

This is simple but really important.

Retail and mobile apps in China are ridiculously competitive. It’s totally ruthless. Copycats are guaranteed in any business. And not just a few. By going to the US, Shein avoided the other Chinese retailers and DTC brands. They probably kept quiet about what they were doing for this reason. But that’s a guess.

In the US, they also sort of minimized their competition. They were one of the few companies with direct connections to Chinese manufacturers. What other US mobile apps can design and manufacture clothes in Guangzhou? They were also likely just faster and more aggressive than US competitors. They were operating at China speed and already understood integrating social media, influencers and such into DTC brands and retail.

***

I thought the Packy and Matthew article had a good ending, summing up most of what is going on. Saying Shein is uniquely suited to win along three vectors:

  1. Price: “affordability”
  2. Selection: “choice”
  3. Retention: “addictiveness”

And that “Shein’s ability to deliver on those three pillars are based on its advantages on the back-end (affordability and choice)front-end (addictiveness), and in the connection between the two.”

Final Question: What Is Shein Doing That Can’t Be Copied?

When it comes to business models and competitive advantages, this is where the rubber meets the road.

  • Can other Chinese DTC apparel brands sell in the USA?
    • Can they match Shein’s brand awareness and loyalty? Do they have to with low priced goods?
  • Can US DTC brands and retailers connect directly with Chinese manufacturers?
    • Can they match Shein’s cycle times?

I write a lot about structural advantages versus operational speed and excellence. Both are required for real competitive strength and defensibility.

Shein is definitely far down the road in terms of operational speed and excellence in its core activities. And it may be on its way to building structural advantages (i.e., a powerful business model). But it’s not there yet.

I suspect most of what they are doing is going to be copied in the future.

  • The data-driven real-time measuring and matching of demand.
  • The rapid cycle times for design and manufacturing.
    • For example, the addition of +1,000 new products per day is shocking today but will be matched in China soon (if it isn’t already). And probably the US after that.
  • Lots of factories in China and elsewhere are being digitized and going DTC or C2M.
    • Alibaba’s new manufacturing project in Hangzhou (called XunXi) is focusing specifically on apparel.

Shein’s biggest advantages long-term are share of the consumer mind in the digital world and economies of scale in the physical and digital worlds.

As mentioned, the biggest sources of advantage in most retail businesses are some degree of customer captivity and economies of scale. Others are going to copy what Shein is doing. They have to get and hold the engagement and spending of young American women on their smartphones. That is their #1 source of competitive power. And then lots of other consumers around the world.

That demand power should enable them to build out advantages in purchasing economies and IT spending over time. For most online retailers, this ends up being spending IT and logistics / supply chain. The global scalability of Shein will make this component particularly interesting to follow.

As for a faster type of fast fashion that uses real-time demand-supply matching as an advantage? I’m not sure about this but I’m paying attention.

Thanks for reading, jeff

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Related articles:

From the Concept Library:

Relevant Concept 1: Digital-Physical Hybrids

Relevant Concept 2: Cost, Timing and/or Difficulty of Entry

Relevant Concept 3Bargaining Power with Suppliers / Purchasing Economies

From the Company Library, companies for this article are:

  • Shein

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I write, speak and consult about digital strategy and transformation.

My book Moats and Marathons details how to measure competitive advantage in digital businesses.

I also host Tech Strategy, a podcast and subscription newsletter on the strategies of the best digital companies in the US, China and Asia.

This content (articles, podcasts, website info) is not investment, legal or tax advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. This is not investment advice. Investing is risky. Do your own research.

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