Valuations shrank by a third! PINDUODUO'S KNIFE SLASHED SHEIN UNCONSCIOUS

On March 8, Reuters broke the news that cross-border e-commerce unicorn SHEIN will complete a new round of financing of $2 billion within this month and will be listed as soon as this year.

After entering 2023, the keywords of financing and listing are frequently associated with SHEIN. BUT SHEIN DIDN'T FULLY ACKNOWLEDGE THESE RUMORS. ON MARCH 9, SHEIN TOLD THE MEDIA THAT IT IS INDEED CONDUCTING A NEW ROUND OF FINANCING IN THE NEAR FUTURE, BUT THERE ARE NO PLANS TO GO PUBLIC FOR THE TIME BEING.

The outside world believes that the decline in valuation and the missed best time to go public are important reasons why SHEIN stopped its IPO plan. According to reports, SHEIN's current round of financing is valued at about $64 billion, more than a third of the $100 billion at its peak.

A few days ago, Pinduoduo's cross-border e-commerce platform Temu announced its landing in the Australian and New Zealand markets, just one month after Temu entered Canada. Temu is getting closer, and SHEIN's life is getting harder and harder. But the pot of valuation shrinking cannot be completely dumped on Pinduoduo - there is indeed a contradiction between SHEIN's own business model and the logic of capital valuation.

(Image from SHEIN's official website)

Valuation shrank by a third, why did SHEIN lose capital trust?

The decline in SHEIN's valuation may not come as a surprise: after all, the pace of its financing and valuation growth in the past few years have been too scary, and there is already a bubble.

The first time SHEIN attracted attention because of its high valuation was in the early days of the pandemic. After SHEIN completed its Series E financing in 2020, the primary market valued it at US$15 billion, which is a model for contrarian growth after the epidemic. In June 2021, Forbes revealed that its valuation had jumped three levels to $47 billion. Then there was the $100 billion myth that was exposed when preparing for a new round of $1 billion in financing last April.

In just two years, the valuation has increased by more than 5 times, and the young SHEIN has grown all the way to H&M and Zara, comparable to SpaceX and Ant Group's super unicorn. This rate of growth is quite amazing in the golden decade of the mobile Internet, not to mention the turbulent years after the outbreak of the epidemic. Therefore, some media and netizens believe that after cutting one-third of the bubble, SHEIN's valuation can be regarded as returning to rationality.

Is SHEIN's previous $100 billion valuation really a bubble? Is $64 billion a reasonable level now? The Institute of Value Research (ID: jiazhiyanjiusuo) believes that to answer this question, it is necessary to understand the logic of capital valuation.

In the early years, most Internet and new economy unicorns regarded IPOs in the United States as the final destination, and the entire market followed the old valuation formula of Wall Street: companies and financing institutions agreed on the price per share and the total share capital, and the two data were simply multiplied to obtain a valuation. In this formula, capital is happy to push up the price per share, create valuation bubbles, and create momentum for listings.

A 2019 report jointly released by Stanford University and Columbia University pointed out that according to the team's undetermined equity option pricing model, 48% of the 135 new economy unicorns in the United States had a valuation bubble at that time. The result of capital pushing up unicorn valuations in the short term is that a large number of companies bleed to go public and then the stock price plummets.

After suffering a lot of losses, capital has begun to adjust the valuation logic in recent years: fully consider the ceiling of the unicorn track, the valuation/market capitalization of competitors and market share, and set a ceiling.

The track where SHEIN is located is cross-border e-commerce and fast fashion, and there are too many opponents against the target. Much lower than ZARA, H&M, not inferior to Fast Retailing (Uniqlo's parent company), inventory turnover cycles, and skyrocketing market share have given capital the confidence to push up valuations.

Historical data shows that ZARA's inventory cycle in 2020 was around 5.01, nearly 0.4 higher than SHEIN. It should be noted that at this time, the number of SKUs in SHEIN has reached 600,000+, which is basically equivalent to four times that of Zara. Such a high SKU can also dominate the turnover rate, which is enough to show the rapid growth of SHEIN's business and the ability to control the supply chain - 2020 is also the starting point of SHEIN's valuation takeoff.

In the following two years, the climb in SHEIN's valuation mirrored the decline of ZARA and H&M in the global market. The capital market is optimistic about the potential of fast fashion and cross-border e-commerce, and SHEIN is the popular fried chicken of this track. As long as the company's market share and business growth rate can continue to outperform competitors, valuations will soar before reaching the upper limit.

So does SHEIN's decline in valuation mean that $100 billion has peaked?

By the standards of the fast fashion industry, it seems to make some sense, and the peak market value of Uniqlo and Zara's parent companies in recent years has fluctuated around $100 billion. But don't forget, SHEIN has another important attribute: cross-border e-commerce. If you take giants such as Amazon, Shopify, and Alibaba as a reference, $100 billion is still far from the ceiling.

In the opinion of the Value Research Institute (ID: jiazhiyanjiusuo), SHEIN's real trouble is that there is an opponent on the field who runs faster than himself - yes, it is Pinduoduo's Temu.

This pricing logic should actually be viewed from two angles: first, Termu is indeed fast enough, allowing capital to see greater potential; The second is that SHEIN runs slowly and cannot keep up with the ambition of capital.

BEING SLASHED BY PINDUODUO IS NOT SHEIN'S ONLY TROUBLE

In terms of scale, Temu is nowhere near on par with SHEIN. But just as SHEIN fought back against ZARA and H&M, you can never imagine how scary the soaring rate of market share, GMV, and valuation can be.

The Value Research Institute (ID: jiazhiyanjiusuo) introduced Temu's terrifying growth rate in its previous report "Pinduoduo's knife, slashed hard at SHEIN": As of the end of January this year, Temu had nearly 20 million downloads worldwide, ranking first on the iOS free software download list for nearly two months; The competition between the two sides for suppliers, users and outstanding talents has also entered the heat of the day, and Pinduoduo has even entered SHEIN's base camp Guangzhou.

Thanks to Pinduoduo's deep pockets, Temu has expanded much faster in the global market than SHEIN in its early days: it entered Canada in mid-February, and announced its entry into Australia and New Zealand in early March. SHEIN originally thought that North America was the battlefield to fight Temu head-on, who knew that the latter had blossomed everywhere and quietly infiltrated his back garden.

The same low-price, high-SKU small profit and high-speed sales route, also for low- and middle-income, Generation Z young consumers, SHEIN and Temu are a pair of mortal enemies from any point of view, and capital will of course compare them. The market space is so large, one develops, and the other naturally has to give back part of the valuation dividend. THE KNIFE OF PINDUODUO GOING TO SEA REALLY INJURED SHEIN.

Of course, the market's pricing of SHEIN is not just a reference to the general environment and competitors - SHEIN's own development model, business growth rate can not keep up with expectations, or the competitive advantage is weakened, which will also dampen the confidence of the capital market.

As mentioned above, SHEIN's advantage lies in supply chain management, which can ensure its rapid up-to-date, accelerate inventory turnover, and give full play to the word "fast" in fast fashion. Backed by the two textile industry meccas of Guangzhou 13 Lines and Zhongda Fabric Market, it is the magic weapon for SHEIN supply chain to win.

Although founded in Nanjing, SHEIN's rise has always relied on hugging the thighs of Guangzhou's textile industry. Domestic central warehouses and satellite warehouses are almost all distributed in the Pearl River Delta, and more than 300 processing factories and more than 100 fabric supply factories in Guangzhou are included in its supply chain system, and the importance of Guangzhou to SHEIN is self-evident.

This kind of flexible supply chain, which is mainly based on small workshops, has its own advantages: SHEIN has more voice and can achieve a high degree of control over suppliers; The high concentration of geographical location is conducive to the operation of warehousing and logistics.

However, its disadvantages are also obvious: suppliers have high mobility, product quality control, and production capacity are prone to ups and downs. The flow of small workshops is difficult to control, SHEIN's low-price strategy has also squeezed the profit margins of suppliers, and the partnership between the two parties has always been at odds.

In February this year, the Haizhu District Government of Guangzhou City clarified the plan for the transfer of Zhongda textile and garment processing industry to the Guangqing Special Economic Cooperation Zone, and mobilized nearly 7,000 enterprises in Zhongda textile business district to relocate to Qingyuan. Although there are still merchants who hesitate or decide to stay, this industrial migration will inevitably cause SHEIN, who is deeply dependent on Guangzhou's textile industry, a headache.

SHEIN, OF COURSE, IS WELL AWARE OF WHAT THE SUPPLY CHAIN MEANS TO HER, AND HAS BEEN WORKING HARD TO TRANSFORM AND UPGRADE.

In early March, SHEIN's Xiyinwan District West Smart Industrial Park project in Zhaoqing New District was officially launched. According to the official introduction, the investment scale of the project has reached 3.5 billion yuan, and the two phases of the project have started simultaneously. When completed, SHEIN will have an integrated industrial park that includes an intelligent sorting center, an order distribution center and an intelligent manufacturing plant. This smart industrial park may also be a turning point for SHEIN's supply chain to go out of Guangzhou and diversify.

However, upgrading the supply chain is like practicing internal strength, and SHEIN also has to find new ways to exert internal strength. The upgrading of the fast fashion and cross-border e-commerce industries has never stopped, and SHEIN's playing style cannot remain unchanged.

SHEIN actively helps itself: offline, platform, globalization is the way out?

Even in the two years when capital and media were most fanatical, Xu Yangtian, the founder of SHEIN, deliberately kept a low profile and adhered to the principle of doing more and talking less. Born into poverty and completing college through part-time work, he seems to have always believed in the credo that "actions speak louder than words."

Because of this, after seeing his situation, SHEIN has reacted as soon as possible and tried to restore the trust of the market in a multi-pronged manner.

In December last year, SHEIN opened two offline stores in Japan, UNIQLO's home base. Unlike previous pop-up stores, SHEIN's Tokyo store is in operation for a long time, and the 200-square-meter store space also contracts various fashion shows and special exhibitions from time to time. In March this year, SHEIN opened a new pop-up store in Salvador, Brazil, and plans to open five new stores in Brazil this year.

According to SHEIN's plan, the Latin American market represented by Brazil is its focus in the coming year. In addition to opening offline stores, SHEIN is also testing the platform model in Brazil and opening up third-party merchants to enter the market. Prior to this, SHEIN has always adhered to the independent station model, where merchants are hidden in the upstream of the supply chain and cannot participate in C-end operations.

According to the Value Research Institute (ID: jiazhiyanjiusuo), the above move also includes three strategies for SHEIN to deal with the challenge: offline, platform, and globalization. These three strategies have similar goals – reaching more users and merchants, accelerating expansion and cannibalizing the market, which is exactly what helps SHEIN prove its potential to the capital market.

SHEIN'S CHOICE OF THESE TRANSFORMATION ROUTES CERTAINLY HAS ITS OWN CONSIDERATIONS.

On the one hand, it is the confidence brought by the scale of users and market share. Some reports pointed out that SHEIN's average DAU in the first half of last year was about 30 million, with a peak of more than 32 million, ranking in the first echelon of China's cross-border e-commerce platforms. The stable user scale has laid the foundation for SHEIN to attract traffic online and offline and access third-party merchants. Opening offline stores can also increase brand exposure, which in turn will attract more new users, forming a virtuous circle.

On the other hand, after the transformation to platform and offline, SHEIN's revenue structure will also be optimized. For example, the service fees, advertising fees and open technology interface fees charged to settled merchants have a lot of room for imagination.

However, on the road to transformation, SHEIN will inevitably face various challenges.

One of the biggest challenges lies in the platform transformation. Because the brand positioning has been limited to the field of fast fashion, SHEIN's user portrait is single, and consumers are rushing to buy cheap clothes. After the development of platform, SHEIN cannot expand to the whole category at once, and the third-party merchants introduced in the early stage will still be dominated by fast fashion, jewelry, etc. - which means that third-party merchants and SHEIN's self-operated categories will have conflicts and compete for customers.

Taking the lead in piloting platform-based investment in Brazil may be precisely because this is not the main battlefield of SHEIN. Localized investment promotion can allow it to quickly expand supply and grab consumers; The lower volume of business compared to North America and Europe also allows SHEIN to conduct trials in Brazil with confidence.

All in all, change will be the main theme of SHEIN. But it remains to be seen whether experiments such as platformization will succeed and whether they will be rolled out to other regions in the future.

Write at the end

SHEIN'S ENEMIES DON'T STOP FIGHTING.

In early March, some media reported that the old rivals of Amazon and Shopify are trying to reach a cooperation, and Shopify may allow its merchants to enter Buy With Prime, Amazon's cross-border independent website project launched in 2022. At the beginning of its launch, Shopify repeatedly warned merchants to prevent them from entering Buy With Prime on the grounds of "data security".

In the past few years, SHEIN has played a pioneering role against Amazon and Shopify until Temu joined the fray last year. Data shows that the number of new merchants added by Shopify in the first half of last year was only 71,000, far less than the results of the same period in 2020 and 2021. Now the two giants of Amazon and Shopify are driven by pressure from confrontation to cooperation, and the spearhead is naturally directed at Pinduoduo and Tik Tok and other external challengers.

Making enemies everywhere shows that SHEIN is growing rapidly and posing a threat to the giants. But from another perspective, the joint encirclement of Amazon and Shopify has also made SHEIN more pressure every step in the future.

For SHEIN at this stage, going public or not may not be the most important. After bidding farewell to the stage of rapid growth and soaring valuations, how to reconstruct the moat and seek sustainable development is the top priority.