How Shein Built a $66B Fast-Fashion Empire | WSJ The Economics Of

Summary

Shein, a Chinese online fast fashion giant, has surged to a $66 billion valuation and dominates 40% of the U.S. market with its ultra-low prices. The company's success hinges on an on-demand model that produces small batches, rapid inventory turnover, and real-time order adjustments, significantly reducing costs. However, this model's sustainability is questioned as critics highlight environmental concerns, allegations of worker abuse, and the exploitation of tax exemptions. Shein's efforts to improve its image and diversify its supply chain, including a recent partnership with Forever 21, are part of its strategy to address these criticisms and expand globally.

Takeaways

• 🚀 Shein, a Chinese online fast fashion company, reached a valuation of $66 billion in 2023 and controls 40% of the U.S. market.
• 💲 Known for extremely low prices, Shein's products like $2 T-shirts and $7 pants have attracted a large customer base.
• 📈 Shein's sales grew sixfold during the pandemic, generating an estimated $23 billion in revenue in 2022.
• 🔍 The company's low prices are attributed to a tax exemption and reported cases of involuntary labor in its supply chain.
• 📊 Shein operates on an on-demand model, producing only 100 to 200 units of each new product initially, based on customer engagement data.
• 🔄 Shein's inventory turnover rate is 40 days, twice as fast as competitors like H&M and Zara, reducing the risk of excess inventory.
• 🏭 The company hires thousands of smaller manufacturers to support its on-demand model and keep prices low.
• 🌍 Shein's supply chain transparency has been criticized, with reports of worker abuse and potential forced labor in China's Xinjiang region.
• 💸 Shein benefits from the U.S. de minimis tax rule, allowing low-valued packages to enter the U.S. tariff-free.
• 🌐 In response to criticism, Shein has moved its headquarters to Singapore, diversified its supply chain, and invested in training manufacturers.

Q & A

What is Shein's market valuation in 2023?

Shein's market valuation in 2023 is 66 billion dollars.

What percentage of the U.S. market does Shein control?

Shein controls 40% of the U.S. market.

How did Shein's sales perform during the pandemic?

Shein's sales exploded during the pandemic, growing sixfold in two years.

What was Shein's estimated revenue in 2022?

Shein's estimated revenue in 2022 was 23 billion dollars.

How does Shein's on-demand model differ from traditional retail practices?

Shein's on-demand model involves initially producing only 100 to 200 units of each new product and then monitoring user engagement to decide on further production, as opposed to traditional retail which often places large orders months in advance.

What is Shein's inventory turnover rate according to a Boston Consulting Group report?

Shein's inventory turnover rate is 40 days, which is twice as fast as competitors like H&M and Zara.

How does Shein reduce the risk of excess unsold inventory?

Shein reduces the risk of excess unsold inventory by ordering in smaller batches and adjusting production based on real-time demand data.

What environmental concern does Shein face regarding its business model?

Environmental activists argue that despite less inventory waste, Shein's cheap clothing may lead to higher overall waste levels due to increased consumption and quicker disposal of garments.

What labor-related issue has Shein faced?

Shein has faced accusations of worker abuse and has been criticized for not being transparent about its supply chains, with reports of involuntary labor in its supply chain.

How does Shein benefit from the U.S. tax exemption known as the de minimis rule?

Shein benefits from the de minimis tax rule by shipping low-valued packages to individual buyers in the U.S. tariff-free, as shipments worth less than $800 are not subject to tariffs.

What steps has Shein taken to improve its image amidst criticisms?

Shein has tried to improve its image by bringing influencers to tour factories in China, moving its headquarters to Singapore, diversifying its supply chain outside of China, and investing in training Brazilian manufacturers.

Outlines

00:00

📈 Shein's Rise in Fast Fashion

Shein, a Chinese online fast fashion company, has seen significant growth, reaching a valuation of $66 billion in 2023 and controlling 40% of the U.S. market. Known for extremely low-priced clothing, Shein's sales skyrocketed during the pandemic. The company operates on a unique on-demand model, producing small batches of new designs and monitoring customer engagement to determine popularity before mass production. This strategy reduces inventory waste and costs, contributing to Shein's low prices. However, concerns arise regarding labor practices, tax exemptions, and environmental impact due to the disposable nature of the clothing.

05:01

🔍 Shein's Labor and Ethical Practices

Shein faces scrutiny over its labor practices and supply chain transparency. A congressional report and Shein's own audits reveal instances of involuntary labor, though Shein has not disclosed specific details. The company is also under investigation for potentially sourcing cotton from Xinjiang.

Keywords

💡Fast Fashion

Fast fashion refers to the rapid production and turnover of trendy clothing items at low prices. It's characterized by quick response to the latest fashion trends. In the video, Shein is a prime example of a fast fashion company, known for its extremely low-priced items and rapid inventory turnover, which is a key factor in its business model.

💡Valuation

Valuation is the process of determining the economic value of an asset or company, often used in the context of investments. In the video, Shein's valuation reached $66 billion in 2023, indicating its significant market worth and success in the online fashion industry.

💡Micro Trends

Micro trends are small, niche trends that can have a significant impact on consumer behavior. Shein is described as being on top of every micro trend, which means they are quick to identify and capitalize on emerging fashion preferences, contributing to their competitive edge.

💡Tax Exemption

A tax exemption is a provision that allows an individual or business to be exempt from paying certain taxes. The video mentions that Shein uses a tax exemption to cut costs, specifically referring to the de minimis tax rule that allows low-valued packages to enter the U.S. tariff-free, which helps keep their prices low.

💡Inventory Turnover Rate

The inventory turnover rate measures how quickly a company sells its stock of goods. A higher rate indicates more efficient inventory management. Shein's inventory turnover rate of 40 days is twice as fast as competitors like H&M and Zara, which contributes to their ability to offer lower prices and adapt quickly to market changes.

💡On-Demand Model

An on-demand business model focuses on producing goods only when there is a confirmed customer order, reducing the risk of overproduction and waste. Shein's on-demand model involves producing small batches of new products and scaling up production based on customer demand, which

Highlights

Shein, a Chinese online fast fashion company, reached a valuation of 66 billion dollars in 2023 and controls 40% of the U.S. market.

Shein's U.S. debut in 2015 was followed by a sales explosion during the pandemic, with revenue growing sixfold in two years.

The company generated an estimated 23 billion dollars in revenue in 2022 and filed to go public in the U.S.

Shein's low prices are attributed to a tax exemption and cases of involuntary labor in its supply chain, as found by a congressional report.

Shein offers thousands of new items daily, with initial production of only 100 to 200 units per new product.

Shein's technology monitors user engagement to create new designs based on popular items, allowing for rapid inventory turnover.

Shein's inventory turnover rate is 40 days, twice as fast as competitors like H&M and Zara.

Shein's on-demand model involves hiring thousands of smaller manufacturers to control cost and inventory wastage.

Shein's ordering platform can automatically place orders in real-time based on market demand.

Shein's small batch model reduces the risk of excess unsold inventory, saving 30 to 40% in cost of goods sold.

Environmental activists argue that Shein's cheap clothing may lead to higher overall inventory waste due to rapid consumption.

Shein has faced accusations of worker abuse and lack of transparency regarding its supply chains.

Shein's commitment to improving supplier factory conditions and worker training includes a 70 million dollar investment.

Congress is investigating Shein's labor practices and its sourcing of cotton from China's Xinjiang region.

Shein's valuation dropped from 100 billion dollars in 2022 to 66 billion dollars in a fundraising round.

Shein has moved its headquarters to Singapore and is diversifying its supply chain outside of China.

Shein is investing 150 million dollars to train 2000 Brazilian manufacturers over the next three years.

Shein has acquired a third of the fashion brand operator Spark Group and is pivoting to a marketplace model.

Transcripts

- [Narrator] Over the past few years,

one Chinese company has thrived

in the online fast fashion industry

reaching a valuation of 66 billion dollars in 2023,

and controlling 40% of the U.S. market.

It's-

- Shein. - Shein.

- I say Shein.

- It's Shein. - Shein is known for

$2 T-shirts and $7 pants

with prices even lower than its competitors.

Shein made its U.S debut in 2015,

and the brand's sales exploded

during the pandemic growing sixfold in two years.

The company generated an estimated

23 billion dollars in revenue in 2022.

And its filed to go public in the U.S.

- Shein takes fast fashion to a different level,

and they're on top of every micro trend.

- [Narrator] But there's a larger story

behind Shein's low prices.

A congressional report found that Shein uses

a tax exemption to cut costs,

and the company released a report

that cited cases of involuntary labor in its supply chain.

This is the economics of Shein.

Scrolling through Shein's website can feel endless.

- We offer thousands of new items per day.

- [Narrator] But Shein only initially produces

100 to 200 units of each new product.

- Shein's designs originate with Shein designers

and with our Shein X third-party designers.

- [Narrator] As customers browse those designs,

Shein has technology

that monitors user engagement activity.

When a customer shows interest in an item

by hovering over it, clicking on it,

or adding it to their cart, Shein takes note,

then it creates new designs

based on data from popular items.

This way, the retailer can test

how popular an item is with its customers.

If it does well, Shein starts producing more.

- This differs from traditional retail

where orders can often be placed in the 10,000

to 100,000 copies of a garment

and can be placed between three and six months in advance.

- [Narrator] And while it's fast at creating new designs,

it's also quick to go through them.

A Boston Consulting group report

found that Shein has an inventory turnover rate of 40 days.

That same report found that Shein

is twice as fast

as other competitor retailers like H&M and Zara.

- The small batch model is a matter of controlling the cost

and controlling the inventory wastage

so that they won't have a large number of clothes

that are sitting unsold in their warehouses in China

or in the U.S. or anywhere else in the world.

- [Narrator] The company calls this an on-demand model,

and to support this on-demand model

and lower prices,

Shein hires thousands of smaller manufacturers.

It took the journal to film

in one of its third-party supplier factories in Dongguan.

- Our designers will identify an item, design it,

prepare a spec for it,

and then they'll put it into our supplier management system,

which will identify a contract manufacturer.

That contract manufacturer will procure the supplies

necessary to produce that garment

from a network of suppliers that Sheen has approved.

- [Narrator] If a design is popular,

Shein's ordering platform

can automatically place another order

with its platform working in real time.

- They're able to see as demand for a particular product

is either waxing or waning in the marketplace

so they can adjust their operations accordingly.

And this concentration of information

allows our suppliers

to efficiently structure their own business

to be able to meet demand at near real time.

- [Narrator] By ordering in smaller batches.

Shein says it can reduce

the risk of excess unsold inventory.

- It means that we don't carry excess inventory waste

when we produce garments.

That saves around 30 to 40% in cost of goods sold

on the garments alone.

- [Narrator] But while less inventory waste in the factory

may lower prices for consumers,

environmental activists say

it might not lead to lower waste levels overall.

- [Shen Lu] Critics are saying that

because Shein's clothing is so cheap,

people are buying a lot of it.

And because fashion conscious young people

may retire some of their Shein quicker

than other more expensive clothing

that actually may cost inventory wastage

after the consumption happened.

- Oh my goodness, there's so much.

- [Narrator] A 2023 UBS report

found that the average U.S. Shein shopper

reported spending $100 per month on women's clothing.

That's about 60% more than the average U.S. female consumer

and critics argue that there's even more behind

how the brand is able to keep prices low.

- Retailer Shein is in hot water once again.

- Shein has faced accusations of worker abuse.

- The brand has recently come under fire.

- Shein's on demand business model

is not the only reason why its products are so cheap.

It's also benefiting from cheap labor in China.

- Shein has not been fully transparent

about its supply chains.

In 2022, Shein released the results

of its supplier audits,

but unlike some other retailers,

Shein didn't disclose

who its suppliers were or where they were located.

The audits reported some incidents

that involve what the company calls involuntary labor,

but didn't mention exactly how many

or where these incidents occurred.

The Wall Street Journal's calculations

found that these audits accounted for about 36%

of Shein's contracted manufacturers.

The company said in a statement to the Wall Street Journal,

"Shein is committed to providing

a safe and fair work environment

for all our suppliers employees.

We pay manufacturing suppliers competitive rates

so they can pay fair wages to their workers."

Shein says it's committed about $70 million

towards improving supplier factory conditions

and training workers.

Congress is investigating Shein's labor practices

and whether the company sources cotton

from China's Xinjiang region.

The U.S. government has accused Chinese authorities

of using forced Muslim Uyghur labor, which Beijing denies.

- Some U.S. lawmakers have pushed Shein

to be more transparent about their supply chain.

- [Narrator] In a statement to WSJ,

the company says it has zero tolerance for forced labor,

does not have contract manufacturers in Xinjiang

and doesn't source cotton from China.

Fashion Analysts say

Shein hasn't provided evidence

to back up these statements

including a list of its suppliers,

which goes against industry standard.

And in addition to its on-demand model

and low labor costs,

Shein also keeps prices low

by taking advantage of a U.S. tax exemption,

which allows low-valued packages

to enter the U.S. tariff-free.

Under the de minimis tax rule,

shipments sent to individual buyers in the U.S.

aren't subject to tariffs if they're worth less than $800.

According to a report

from the U.S. House of Representatives,

30% of all packages shipped to the United States each day

under the de minimis rule are from Shein and its rival Temu.

Between the two companies,

that adds up to millions of packages.

Shein says that it supports reforming

the de minimis exemption.

Meanwhile, the valuation has fallen.

The company's $100 billion valuation in 2022

dropped by a third in a fundraising round earlier this year,

and Temu, which launched last September,

overtook a larger share of the U.S. market last June.

Recently, Shein has tried to improve its image

through social media

amidst environmental and labor criticisms,

but with limited success.

Shein brought a group of influencers

to tour factories in China.

- [Shen Lu] The tour didn't really help address

a lot of the criticisms that people have about Shein.

- [Narrator] The company has also moved its headquarters

from Nanjing China to Singapore.

Shein is also trying to diversify its supply chain

outside of China.

With this move,

Shein is also adding new manufacturers in other countries.

Although the majority of Shein's supply chain

is still in China,

the company promised to invest $150 million

to train 2000 Brazilian manufacturers

over the next three years.

And Shein has recently partnered with Forever 21

and acquired roughly one third

of the fashion brand's operator, Spark Group.

- Shein has in recent months,

been trying to pivot to a marketplace model,

which allows third-party sellers

to sell products directly to consumers

as Shein expands globally

and is trying to capture more of market share in the U.S.

and in other countries around the world.

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