As a representative enterprise of China's export cross-border e-commerce, SHEIN has achieved rapid development in recent years. In 2020, the company achieved revenue of about 70 billion yuan, and the compound annual growth rate (compound annual growth rate) from 2015 to 2020 was as high as 189%. According to overseas media reports, SHEIN is seeking an IPO in the United States as soon as 2024, valuing it at about $100 billion.
Through the collation of information from various parties, this case comprehensively displays the growth history of SHEIN, digital traffic and consumer management, and digital supply chain management. At the same time, through the mining of objective content, this case shows SHEIN's long-term business model and strategic choice to a certain extent.
"Fast fashion" evolves into "real-time fashion"
"SHEIN CAN REACT ALMOST INSTANTLY TO CUSTOMER PREFERENCES, A PROCESS KNOWN AS REAL-TIME FASHION."
This sentence in the relevant analysis article of Bloomberg, to a certain extent, represents the curiosity and worship of SHEIN, a Chinese cross-border e-commerce company-"fast fashion", which has been "sealed" for several years, has become old in front of SHEIN, and "real-time fashion" has redefined it, and behind this has established a milestone in the industrial Internet era.
In May 2021, the SHEIN APP reached 14 million downloads, and recently ranked first/top five in the number of shopping app downloads in more than 20/60 countries, surpassing Amazon in the number of countries to become the world's most popular online shopping app.
In January this year, mobile intelligence company Apptopia announced the 10 most downloaded mobile apps and shopping apps in the world in 2022, showing that SHEIN ranked first in the global download ranking of shopping apps, and was the world's most downloaded shopping app in 2022, with 229 million installs.
With the "hegemony" of the APP, SHEIN's transaction volume has also continued to make breakthroughs, even setting unprecedented records in the industry. According to public information, SHEIN achieved revenue of about 70 billion yuan in 2020, with a CAGR of 189% from 2015 to 2020 (the compound annual growth rate of China's export cross-border e-commerce from 2015 to 2019 was 15.6%).
Source: Zhongtai Securities, data range May 2021, Chart 1: Number of SHEIN countries in the ranking of shopping app downloads by country (left) VS number of Amazon countries (right)
Figure 2: SHEIN's annual revenue (left), SHEIN's PC traffic by country; Source: Zhongtai Securities, data range May 2021
The predecessor of SHEIN was established in 2008, and gradually expanded from selling wedding dresses to a full range of women's clothing and related products, and the domain name at that time was sheinside.com.
From 2010 to 2014, the company began to gradually expand the market, Spain, France, Russia, Germany and Italy have launched. In 2014, the company's total order volume exceeded 5 million; In 2015, the company officially changed its name to "SHEIN" and launched the Arab site.
Chart: Company executives and organizational structure, data sources: company official website, enterprise chacha, Hugo cross-border, e-commerce news, Yibang power network, Huachuang securities, Zheshang securities
SHEIN's business model: virtuous digital marketing on the demand side
Regarding business models, there are a large number of definitions in different dimensions, and there are also various understandings and practices in the business world. A more concise can be summarized as: the left side is "various resources", the right side is "value", and the connection and transformation in the middle is the collective name of the business model.
Based on this, SHEIN has spent about ten years to build its own capabilities and achievements at both ends of supply and demand with a digital system that almost represents the highest level of industrial Internet in this era, and at the same time in the export cross-border e-commerce industry, showing another victory of "corporate values".
1. Cross-border B2C dark forest
Before understanding the SHEIN model, we need to briefly review how "peers" do it to better understand why only SHEIN was able to do so.
China's cross-border export B2C industry has a long history, because it is relatively far from the perspective of domestic consumers, so compared with the protagonists of Taobao, Jingdong, Pinduoduo, the supporting roles are No.1 store, 1 Pai, Paipai.com, Vipshop, and a large number of domestic e-commerce platforms that have survived for a short time, AliExpress, Lanting Jishi, and Dunhuang.com in cross-border B2C are not familiar to current domestic consumers. However, in the same way as the ups and downs of domestic e-commerce for more than ten years, cross-border B2C has also experienced years of chasing the deer, but the process is more wild and unrestrained.
Figure 5: Ecological map of China's cross-border export B2C e-commerce industry, source: Toubao Research Institute
In many articles describing the cross-border B2C industry such as "The Dark Forest of Cross-border Circle", various tragic methods of disorderly competition in cross-border e-commerce have been listed.
A large number of merchants are either entrenched on Amazon-based cross-border e-commerce platforms, or open thousands of stores and independent websites through technical means, and capture global traffic every moment by studying Google AdWords and various platform SEO rules, and then harvest traffic through "short and fast" methods and convert it into transactions.
This includes sending empty bags, collecting money and running away from the station, fake and shoddy imitations, reptilian pickpockets, explosive copycats, and deliberately using the difference in text cognition to deliberately mismatch the board and other means (a domestic platform also encountered the situation of receiving bricks and having nowhere to defend rights, buying a second-hand car and receiving a car model, which is similar).
The shortcomings of cross-border transactions in terms of policies, poor information, platform supervision, cultural cognition differences and other perspectives have been amplified, and "how to convert traffic into profits most efficiently" was the most concerned thing for cross-border e-commerce in that era - risk, benefit, cost, ethics, the balance between the four is calculated according to the order and is repeatedly tested every moment.
In a low-threshold, disorderly competitive market, it is difficult for any merchant to stand alone. Because your competitors are doing "abnormal" things in products, logistics, marketing and other links, "bad money drives out good money, fake rich and real death", we have seen a lot of such industries (such as the more familiar P2P), what is the explanation?
There is no solution, only waiting for the top-down thunder regulation or the bottom-up white knight. The main body of cross-border e-commerce supervision is complex, and it is difficult to have thunder action, so the white knight is expected by everyone, but its birth must be difficult, and its growth must also mean difficult choices.
2. SHEIN's strategic choices
In the face of such an industry, comprehensive media views and SHEIN's performance can be seen that as a member of this era, founder Xu Yangtian and the team made their own choice in "go left, go right".
In 2009, Xu Yangtian, who has also been operating traffic business for many years, led the team to start a cross-border e-commerce journey with wedding dresses as a category, imitating the representative of this era, Lanting Jizhi. In 2012, Xu Yangtian gave up the wedding dress business and officially established Sheinside (the predecessor of SHEIN), fully transforming into cross-border women's clothing.
That year, Chinese earliest report on Xu Yangtian available on the Internet, a paragraph of his remarks was recorded: "To make a brand, you must find professional people and operate in a professional way." Find a batch of cheap and best-selling goods from the market and sell them in any way, and this barbaric growth path is becoming more and more unworkable. ”
Since SHEIN does not accept any media coverage and is not a listed company, its operation and model are mostly reversed by various research institutions through externalized performance.
We synthesized the views of all parties and found that the underlying logic and spiritual core of SHEIN lies in "serious branding". On it, on the left is "marketing", on the right is "supply chain", "product" as the torso, "digital" is its bloodline. This is obviously different from the peers of the same era who "pursue profit" and transform traffic into shape.
EXHIBIT 6: SHEIN'S BUSINESS PROCESS, SOURCE: ZHEJIANG SECURITIES
Some media reviewed SHEIN's choice to distinguish it from peers and wrote: "Google and Facebook's traffic delivery mechanism is very mature, the traffic dividend is only temporary, SHEIN's CPM cost may be about 50% higher than competing products, but these investments seem to be wasted in the short term, but in the long term it is conducive to the creation of users' minds, many peers every exposure, did not leave a positive impression in the minds of consumers, which is the biggest waste of traffic."
3. SHEIN's benign digital marketing on the demand side
It is undeniable that the Internet is also a "traffic business" anyway, there is no problem with the business traffic itself, the only problem is the way the traffic is operated, and whether to choose "instant traffic" (short-term results, no precipitation in the medium and long term) or "delayed traffic" (the value of the traffic is precipitated into the brand, the short-term effect is discounted, and the medium and long-term utility is amplified).
From the perspective of marketing, the media generally believes that SHEIN has grasped the dividend period of overseas social media, carried out comprehensive coverage of media marketing, and has tens of millions of fans on mainstream platforms such as Facebook, Twitter, Instagram, and YouTube.
Chart 7: Social media performance and number of followers of fast fashion brands (10,000) (mid-May 2021), Source: Official social media accounts of each brand, Zhongtai Securities
EXHIBIT 8: SUMMARY OF THE MARKETING CHARACTERISTICS OF SHEIN, SOURCE: ZHESHANG SECURITIES
Global e-commerce market structure and consumer characteristics
From the perspective of the development of the global e-commerce market, the penetration rate of overseas e-commerce has continued to increase in recent years, and the market scale has also shown a rapid growth trend. For example, the e-commerce penetration rate in the United States increased from 6.4% in 2010 to 21.3% in 2020, and the e-commerce market is expected to have a CAGR of 15% from 2018 to 2024.
Chinese brands have become the favored object of overseas consumers due to their excellent product quality and cost performance, driving the rapid growth of domestic export cross-border e-commerce, and the proportion of Amazon Chinese sellers increased by 19 percentage points from 2017 to 2020, from 23% to 42%.
From the perspective of industry structure, unlike the domestic market dominated by Alibaba, JD.com and Pinduoduo (CR3 was 84% in 2020), platform-based e-commerce accounted for only 62% of global online sales in 2020. (In 2019, the CR10 of the e-commerce industry in the United Kingdom, the United States and India was 67.96%, 63.3% and 83.66% respectively, and in 2020, the CR3 of the United States was 49%, and the CR4-CR10 was 12%, and the concentration of e-commerce in major countries in the world was much lower than that of China).
Figure 9: Cross-border e-commerce industry related data, data source: eMarketer, Xingyun Cross-border E-commerce Research Institute, Digital Commerce 360, Marketplace Pulse, Zhongtai Securities
From the perspective of audience groups, the main customer group of fast fashion clothing is young consumers aged 18-35 with high fashion sensitivity, which is in line with the main consumer group of cross-border e-commerce. In 2020, millennials and Gen Z accounted for 56% of global cross-border e-commerce consumers, and 62% of high-consumption groups. At the same time, 22% of millennials and 17% of Gen Z cross-border e-commerce spend more than $500 per year.
Figure 10: Age distribution of global cross-border e-commerce consumers in 2020, proportion of main consumers by age group, Source: ESW, Zhongtai Securities
SHEIN's business model: a digital organization on the supply side
1. SHEIN's products
The media concluded that the essence of fast fashion is to popularize niche fashion that leads the fashion trend, and increase the frequency of consumption by quickly satisfying the freshness of consumers. Therefore, it has the characteristics of multiple styles, fast up-to-date, and cost-effective. This is highly consistent with the cost advantage and efficient and fast response characteristics of the domestic supply chain.
At the same time, this is also the spending power and consumption stage of consumers of Generation Z, millennials and other age groups. Therefore, when it comes to SHEIN's marketing, the audience must extend to SHEIN's product system and price system.
Exhibit 11: Top factors influencing online purchases (including repeat purchases) by US consumers (general shopping on the left, repeat purchases on the right) (600 samples)
Source: China Fashion Cross-border E-commerce Development Report, 2020, Deloitte
In terms of products, SHEIN takes women's clothing as the entry point, and after forming a certain scale, it has set foot in the field of large textiles, and has formed eighteen categories. The biggest feature of SHEIN clothing is that the price is close to the people, and the core price of the product is 9-24 US dollars, which is lower than global fast fashion brands such as Zara.
EXHIBIT 12: SHEIN PRODUCT CATEGORY, SOURCE: SHEIN WEBSITE
Compared with other leading fast fashion brands, SHEIN has obvious competitive advantages in price and new quantity. As far as the US market is concerned, the lowest price of SHEIN's main women's clothing products is within $10, and the best-selling models in various categories are priced at $9-24, basically in the lowest price range of ZARA ($8-36) and H&M ($5-$18).
In terms of the number of styles, SHEIN has the advantage of crushing whether it is compared with the world's leading fast fashion brands or online competitors, and tens of thousands of items on sale can meet more consumer needs.
Chart 13: Product price bands and number of items on sale by major fast fashion companies (May 2021) Source: Official websites of each platform, Zhongtai Securities
In addition, SHEIN adopts the mode of small order fast reaction, first producing small batches of products for market testing, and then through terminal data feedback, quickly counter-orders for explosive models to maximize sales and profits and reduce inventory risks. This model has high requirements for enterprise supply chain management capabilities, information capabilities, and control of the entire industry chain, which happens to be the advantage of SHEIN.
Exhibit 14: Comparison of the last cycle of SHEIN and Zara, Source: The Wall Street Journal, Grassroots Research, Zhongtai Securities
2. Digital supply chain system
With the advent of the era of Industry 4.0, the digital economy and the most anticipated "industrial Internet" have become the hottest phenomena and research targets in recent years. C2M and flexible supply chain have become more obvious "externalized characteristics" of the industrial Internet.
For the so-called "flexible supply chain", there are currently two construction ideas in the industry, one is to reshape the supply chain. It is advocated to establish a new factory or production line, relying on advanced technologies such as AI, robots, big data, IOT, etc., as well as complex and diverse production execution software, to realize the penetration of data instructions and the arrangement and combination of production processes and processes, so as to achieve "flexibility".
One way of thinking starts from going deep into the supply chain and transforming the supply chain. Considering that a large number of small-scale workshops and factories in the existing supply chain, they cannot carry out the huge investment of automated factories such as "robotic arms", but their long-term "customer demand-centric" has written "flexibility" into the genes after countless challenges, so what the platform has to do is to make thousands of "strong" who have experienced the survival of the fittest stronger through software, hardware, organization, business, finance and other capabilities, and then cooperate together to form a new "life body". Gradually enter the world stage and win global victories.
The media generally believes that at least in the field of fast fashion, SHEIN has fully interpreted the results of the second idea, and it uses the productivity advantages of China's supply chain to provide cost-effective clothing products for global consumers. Previously, the advantages of new speed, product category, price and so on, including the new speed of products, were also based on the effective organization of the supply chain.
After integrating the information of various parties, we found that compared with the establishment of brands and the benign operation of traffic, the digital organization of the supply chain is more testing the "long-term" values of enterprises. Based on the information of all parties, the characteristics and reasons behind SHEIN in each node of the supply chain can be classified as follows:
Figure 15: Supply chain management characteristics of SHEIN, Source: "SHEIN: The Triumph of Long-termism", Cheng Chunxiao, "Bottom Observer"; "SHEIN and the Flexible Supply Chain of Clothing Behind It," Chapter 42
Chart 16: Industry media believes that the "flexible supply chain" has experienced 5 attempts in China's garment industry. Source: SHEIN and the Flexible Garment Supply Chain Behind It, Chapter 42
For the FMCG industry, the media believes that the essence of the business logic of general brands is "prediction" and "intersection", and enterprises develop products according to their own predictions for the market. The general brand model is that the intersection part makes money, the non-intersecting part loses money, and the slow-selling money is all costs. And the logic of SHEIN and ZARA, not to find intersections, but to cover all popularity.
A large number of low-cost rapid updates are the first corner of the "triangle model" of the fast fashion industry, the extremely high cost performance is the second corner, and the high turnover and low inventory are the third corner. A large number of rapid updates means high investment, and high cost performance means low gross profit, in this case, if the company wants to make money, it must have high efficiency and a low inventory backlog.
Exhibit 17: Triangular model of the fast fashion industry, Source: SHEIN and the Flexible Apparel Supply Chain Behind it, Chapter 42
In China, there are many brands that have built the first two corners, because "newer and more beautiful styles + extremely high cost performance" has a strong appeal to consumers, which has been repeatedly proven, so all brands are pursuing these two corners, and the brand is easy to take off, but because the third corner cannot be achieved, it quickly falls into the inventory quagmire.
The real success of SHEIN lies in the supply chain organization capabilities developed over the years, finding the "third corner", with profitability or ultra-low altitude flight capabilities.
What other secrets?
Any business success is never due to doing all the "right things" right, and making heroes is the first basic principle of the business world.
Looking back at the development process of cross-border e-commerce and SHEIN, national policies, macro environment, and even global trade policies and US elections and policy guidance have helped SHEIN gain greater growth space at key nodes.
Among them, for example, overseas social media dividends, domestic small workshops have become flexible supply chains, informatization and mobile Internet and Industry 4.0 technology have begun to popularize... Businesses can grasp and take advantage of it, but we can't just learn these as a recipe for success.
(Space is limited, omit here the tariff system dividend, the consequences of trade frictions, the UPU "terminal fee", etc.)
The success of SHEIN is an opportunity of the times, but in the face of the same opportunity, only a very few companies such as SHEIN have made strategic choices based on long-term value. The results are obvious, but the process is not always smooth... This aspect requires a lot of focus from the team, but also huge amounts of money, as well as effective identification of what is "the right thing to do for a long time"...
SHEIN is still facing huge risks brought about by changes in foreign trade policies, and there are indications that SHEIN is trying to avoid reflecting the traces of Chinese manufacturing and Chinese brands in the global market, so until it goes public, I am afraid that it will not accept public reports and disclose real internal information.
However, one thing we can be sure of is that the digitalization of SHEIN's two paths of marketing and supply chain has shown the unique advantages of Chinese enterprises in the stage of export cross-border e-commerce. SHEIN and the Chinese industrial cluster behind it have taken advantage of the opportunities of the times and the huge dividends of technological progress to carry out exemplary global expansion. In addition to many well-known brands, this provides another typical image for Chinese enterprises to go global.
Resources:
[1]. "Overview of China's Cross-border E-commerce Export Trends and Case Analysis in 2020", Toubao Research Institute
[2]. "See how the post-80s "activists" open up the blue ocean of online clothing foreign trade", eBay's official blog
[3]."SHEIN: The Triumph of Long-termism", WeChat public account "Bottom Observer"
[4]. "The Rise of SHEIN, Why the Volkswagen Brand Learns", Zhongtai Securities
[5].What does an independent website mean for China's cross-border e-commerce industry? , Head Leopard Research Institute
Authors: Zhu Yang and Wang Xiaolong, Source: Cheung Kong Graduate School of Business Case Center (ID: ckgsbcc)
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