With a 10-month valuation of $200 billion, the SHEIN crisis has just begun

Recently, according to 36Kr reports, a new round of financing for cross-border e-commerce apparel company SHEIN is about to be completed.

It is worth mentioning that this financing has only passed less than 10 months since SHEIN's last round of financing, but the valuation has fallen by one-third, more than 240 billion yuan. You know, the entire A-share clothing sector companies add up to only 280 billion.

In the primary market, it is not uncommon for companies to complete two financings in a short period of time, but there are not many valuations that differ so much. Behind all this, SHEIN is facing a new test.

On the surface, the change in SHEIN's valuation is affected by the disappearance of traffic dividends and the intensification of involution in overseas e-commerce markets. But the deeper reason is that SHEIN, which rose and gained a foothold at a low price, should have gradually become high-end like Taobao a decade ago and reaped greater commercial fruits.

Now, the emergence of "TEMUs" has made the realization of all this full of uncertainty.

This article holds the following core points:

1. SHEIN GOES TO THE USER CEILING. SHEIN's existing market has limited room for user growth. In many months of 2022, the month-on-month growth rate of SHEIN's daily active users has fallen to single digits, and in July, the daily active users even showed negative month-on-month growth, and the growth rate of user value also showed a slowdown trend.

2. SHEIN'S SITUATION TODAY IS VERY SIMILAR TO TAOBAO TEN YEARS AGO. SHEIN has already built a user base through low prices and is preparing to go premium. However, the entry of TEMU and other competitors has shaken SHEIN's low-price advantage, and how to avoid losing the basic disk while upgrading high-end has become a problem for SHEIN.

3. SHEIN is forced to start a second business in an unfamiliar field, increasing the uncertainty of the future. Many countries in Europe and the United States are planning to raise tariffs, and once the policy is implemented, cross-border goods will no longer have price advantages. SHEIN began to cooperate with overseas local manufacturers to build a local supply chain. As Shein focuses on infrastructure development, cost pressures have increased dramatically.

/ 01 / Slashing 200 billion, SHEIN valuation hit a rollercoaster

ONCE UPON A TIME, WHAT SURPRISED SHEIN THE MOST WAS HOW QUICKLY VALUATIONS ROSE. AT THE TIME OF THE SERIES E ROUND IN AUGUST 2020, SHEIN'S VALUATION WAS ONLY $15 BILLION, AND BY APRIL 2022, ITS VALUATION HAD RISEN TO $100 BILLION. In less than two years, SHEIN's market capitalization has increased by 6.7 times.

With a valuation of $100 billion, SHEIN has become a super company in the global unicorn rankings after ByteDance and SpaceX.

But in just the past 10 months, SHEIN's valuation has shrunk significantly. In the latest round of funding at the end of February, SHEIN's valuation was adjusted to around $65 billion, and the valuation lost more than a third.

Of course, the decline in valuation is affected by the investment and financing recession, but more importantly, the decline in its performance. In 2022, SHEIN's revenue was $22.7 billion, up 52.8% year-over-year. In 2020 and 2021, SHEIN's revenue growth rate was 211% and 60% year-on-year. More worrying to investors than the slowdown in revenue growth is that SHEIN's net profit fell for the first time, and SHEIN's net profit in 2022 was $700 million, down 36% year-on-year.

Behind the decline in performance, SHEIN's user number and user value growth are facing challenges. According to data from China Merchants Securities, from March to August 2022, the number of daily active SHEIN only maintained single-digit month-on-month growth for many months. In July 2022, SHEIN even experienced a 4% month-on-month decline in DAU. In terms of customer unit price, the unit price of customers in the first half of 2022 increased by 7.4% year-on-year. In 2020 and 2021, the unit price of customers increased by 20% and 16% year-on-year, respectively.

The overall slowdown in operational data growth is both the result of the disappearance of the traffic dividend and the competition from competitors such as TEMU. The superposition of the two, the market's confidence in the future development of SHEIN has naturally been shaken.

/ 02 / Dividends fade and TEMU steals home

The traffic dividend is the key to SHEIN's early rise. As one of the first brands to market and promote on social media such as Facebook and Instagram, SHEIN relies on social media traffic, and SHEIN has achieved extremely low customer acquisition costs.

In recent years, as the cost of traffic has risen, the cost of SHEIN has increased quite a bit. For example, in the marketing of Internet celebrities, in the early days, SHEIN and Internet celebrities cooperated mostly with resource replacement, SHEIN sent new clothing products and issued coupons for KOLs for free, and KOLs could share planting grass through social media accounts. But today, the financial cost of a single cooperation between SHEIN and Internet celebrities is high, reaching tens of thousands of dollars.

According to the "Late" report, in the past two years, Google's promotion cost has increased by 2 times, and Facebook has increased by 3 times. The industry's customer acquisition costs increased, and SHEIN's net profit margin slipped from 7.5% in 2021 to 3.2% in 2022.

What's worse than the disappearance of the traffic dividend is that Shein's playing style has been borrowed and copied by domestic companies, facing harsher competition, Temu even targeted SHEIN's employees and offered 2-3 times the salary poaching.

Under the intensification of the trend of e-commerce going overseas, Shein's low-priced weapons are being snatched away. In the past, the core factor for Shein to beat European and American fashion brands was low price, and the price of its best-selling models could even be half that of ZARA and H&M.

But now, TEMU, which highly overlaps with SHEIN's target market and dominant categories, can achieve lower prices. According to data from Zheshang Securities, TEMU can achieve 53%-80% of SHEIN prices in various categories such as shoes and clothing.

It's not hard to understand why TEMU can do it even less. TEMU is highly replicating SHEIN's supply chain. TEMU's headquarters is only a few kilometers away from SHEIN in a straight line. In order to cooperate with the high-quality suppliers selected by SHEIN, TEMU even directly and crudely copied the same Shein's model. Moreover, TEMU does not focus on fast fashion, nor does it have to test products in the form of small orders and quick returns, and the products can be directly mass-produced to reduce costs, so the price is lower when the supply chain is highly identical.

The impact of new opponents such as TEMU not only threatens SHEIN's low-priced basic market, but also blocks SHEIN's high-end upgrade path. After setting a basic market at a low price, SHEIN executives made it clear that they would drastically change the existing sales model and sell "more expensive" clothes. To this end, SHEIN launched its high-end brand MOTF, intending to enter the mid-to-high-end consumer market.

But now, in the face of low-price competition from "TEMUs", SHEIN, which should have gradually become high-end like Taobao ten years ago, has to face the challenge of new competitors again.

/ 03 / A new battlefield that was forced to be opened

To reopen the gap with her competitors, Shein had to make bigger changes.

Supply chain is a direction Shein has changed. Leonard Lin, General Manager of SHEIN Singapore, said, "We are exploring ways to produce from closer to consumers, which may shorten the delivery time to reach consumers around the world. This means that Shein is transitioning from a predominantly domestic supply chain to a globally localized supply chain.

In addition to shortening the delivery time, SHEIN's choice to rebuild the overseas local supply chain was somewhat forced.

At present, many countries in Europe and the United States are planning to adjust tariffs, such as the United States plans to cancel the duty-free preferential treatment for cross-border small parcels under $800. Brazil will significantly increase tariffs on cross-border e-commerce products to 60%, while also imposing a turnover tax of 17%-25%. Once the relevant policies are implemented, domestic cross-border goods will no longer have price advantages.

According to the self-media "cross-border e-commerce Yiguan.com", if the Brazilian tariff is adjusted, the selling price of cross-border goods may have to increase by more than 95% to maintain operation, otherwise it is difficult to make a profit.

In anticipation of higher tariffs, SEHIN, Shopee and AliExpress are all making strides to localize. In order to attract local Latin American sellers, AliExpress lowered the transaction commission to 5%-8%, which is much lower than the 11%-19% commission of local e-commerce.

SHEIN IS NO EXCEPTION. On the one hand, the company's founders traveled to Brazil to deploy supply chain localization. On the other hand, in order to quickly expand the category, SHEIN is also building an "Amazon-like" trading platform and inviting local merchants to settle in.

FOR SHEIN, SUCH A JOB IS NOT EASY. This means investing in more factories, warehousing and logistics, and other facilities, and cost pressures increase dramatically.

In the past few months, SHEIN has begun to build warehousing, logistics and other infrastructure in the United States, Canada and Poland. Under the huge investment, the pressure on SHEIN's funds is bound to increase. This is also an important reason for the company's frequent financing. After raising $10+ billion in April last year, after 10 months, SHEIN raised another $3 billion.

But the question is, aside from the mature domestic supply chain resources, how big is SHEIN's advantage? To some extent, SHEIN's past success is based on domestic and global leading manufacturing capabilities, which can achieve a balance of cost and efficiency.

Considering the high labor costs and weak industrial base in overseas markets, there is a big question mark on whether SHEIN can maintain its cost and efficiency advantages. Even if SHEIN tries to achieve it, the cost of doing so is likely to pull the company into a quagmire of long-term losses.

Take logistics, Amazon can basically achieve next-day delivery with more than 100 self-owned distribution centers, but third-party logistics generally takes 2-8 days. At present, SHEIN has only 3 distribution centers in the United States, and if SHEIN wants to close the logistics gap by building its own facilities, it is very likely to fall into the quagmire of huge investment.

Of course, SHEIN has just reached the table of overseas e-commerce localization, and it is still too early to talk about winning or losing. BUT THERE IS NO DOUBT THAT SHEIN IS BEING FORCED OUT OF HER COMFORT ZONE TO FIGHT A BRUTAL, FIERCE NEW WAR.