Shein Update May 2023 – Part 1: Success Brings Scrutiny

Original images by OpenClipart-Vectors. Ranking based on US market share March 2022.

This is a follow-up article to our January article on Shein. If you are not familiar with Shein’s background and business model, we advise you to read that article first.

A lot has happened since, warranting an update on the Chinese platform Shein.

In 2022 Shein overtook Amazon as the most downloaded shopping app (170 million) and had 74 million users. Sensor Tower reported that Shein was the most downloaded app in Japan in 2022. In South-East Asia, it was #4, behind Shopee, Lazada, and Akulaku.

In May 2023, Sensor Tower reported that either Shein or its competitor Temu, launched in September 2022, were the number one download in half of the 50 largest economies. Shein was number one in ten of those countries (Japan, Brazil, Saudi Arabia, Mexico, Ireland, Israel, Venezuela, United Arab Emirates, Denmark, and Portugal). In another 15 countries, Shein was in the top 5.

Sales

The past three years of the pandemic have seen big shifts in online shopping behaviour (and sometimes partial shifts back). Marketplace Pulse identified Shein as the biggest winner after the Covid years, seeing the highest growth:

In March 2023, Shein, still a private company, shared its 2022 growth and targets for the coming years with investors. It made for some interesting revelations. The company had seen $30 billion in GMV (Gross Merchandise Value) and $22.7 billion in revenue.

Shein has been profitable for 4 years. But while its revenue growth remained impressive in 2022, Shein’s profit was $700 million, down from $1.1 billion in 2021, dropping the net profit margin from 7.5% in 2021 to 3.2%. The decrease was ascribed to high logistic (air freight) and production costs during the pandemic, as well as rising customer acquisition costs. Traffic from social media has also become more expensive, and influencers now ask hefty fees for cooperation.

Shein actually experienced a loss in the first quarter of 2022 because of the effects of the pandemic, but margins have since been improving, as freight and production costs declined.

Shein’s shared the following targets for 2025 with potential investors:

• $80.6 billion GMV
• $58.5 billion revenue
• $7.5 billion net profit (ten times that of 2022)

Ambitious targets, which Shein hopes to meet by increasing its sales through improving repeat purchases. In 2022 some 60% of its total 14 million customers shopped on the site for the first time. Shein hopes that 60% of an estimated 261 million customers by 2025 will be repeat purchasers. Meanwhile, the company aims to improve profitability by targeting higher-spending consumers with new premium product lines while seeking to reduce warehouse and delivery costs.

It remains to be seen if these are achievable goals; Morning Consult Brand Intelligence found that the intent to repurchase with Shein among US Gen Z women had declined from 54% in May 2022 to 39% in September 2022.

Fundraising

Shein is currently fundraising to build its global infrastructure and fight off new competitors like Temu. In late January, Financial Times reported that Shein was looking to raise $1.5-$3 billion, at a valuation of $64 billion. That was a sharp decrease from the $100 billion valuation of April 2022, which had been an incredible boost up from $15 billion in 2021. According to some analysts, Shein had been overvalued, and in October 2022, it was already reported to trade at a valuation of $65-$85 billion in the private market.

Shein’s current round of financing already raised $2 billion in May, while a second round is expected soon. These rounds of fundraising are said to be only second to the ones of OpenAI and Stripe and would set Shein’s value to $66 billion. Shein is said to be planning an IPO in the second half of this year after it shelved earlier plans in 2020 amidst unpredictable markets and rising US-China tensions.

Criticism

While Shein is getting more successful, local retailers and regulators are starting to pay attention. And as we’ve seen with TikTok, with rising popularity comes increased scrutiny …

Equal Oceans pointed to some possible reasons for Shein’s lowered valuation. The arrival of Temu came at a time Shein lacked funding support, while Temu’s user-get-user gamification quickly gained this competitor many new customers. At the same time, Shein is facing scrutiny over ESG-related issues and supposed tax evasion by shipping low-value packages to individual ‘importers’, saving it 20% in costs.

One might wonder if Shein should be faulted for this loophole in US import legislation. The US-China Economic and Security Review Commission clearly thought it should be. On April 14th, it released a report on ‘data risks, sourcing violations and trade loopholes’ related to Shein and Temu. The document largely consists of a collection of (sometimes dubious) facts from various media reports on both companies. It identified issues with labour, raw material procurement, the impact of chemical substances in products on human health, the impact of product production on the environment, product design infringement, and the aforementioned import tax avoidance.

While there is no current legislation that could easily ban Shein or Temu, the proposed RESTRICT Act of March 23 2023, which seems to have been designed as a possible way to ban TikTok, could open a door if it is passed. While it doesn’t specifically mention China, the Act allows for blocking information and communications technologies, products or services (including e-commerce platforms) of “foreign adversaries” of the United States when they pose an “undue and unacceptable risk” to the national security of the United States or its citizens.

Ban Shein?

One group that would be happy to see a Shein ban is a coalition of individuals and businesses that has started a campaign to ‘Shut Down Shein’. It criticizes its evasion of import taxes and cooperation with TikTok as a promotional channel, calling Shein ‘the drug’ and TikTok ‘the needle’. A closer look unveils that the ‘Shut Down Shein’ coalition of ‘like-minded individuals and businesses’ is run by a consultancy agency that offers services like lobbying, crisis management, and narrative development…

A country that has already banned Shein is India. Three years ago, India took down the Shein app along with many other Chinese apps in what is generally believed to be a retaliation for military border clashes. But in May, the Wall Street Journal reported that Shein was re-entering India through a partnership with Reliance Industries, one of India’s largest retail businesses. The partnership was approved by the Indian government, possibly because Shein might source some of its fabrics in India. Shein also plans to build a production hub for exports to the Middle East in India.

But not all problems will go away that easily. Last year, Shein was featured in a critical documentary by Channel 4 (which, to a certain extent, unfairly singles out Shein for more common industry practices in the apparel manufacturing sector). And in South Africa, an investigation into tax evasion by Shein was launched after complaints from the local textile union and industry association.

Shein is working hard to polish up its reputation. It has launched a re-sale platform (which to some might smell like greenwashing) and is investing $35 million into Shein X, the incubator project for independent designers. Finally, it is trying to shake off its Chinese legacy by making its Singapore office its holding company.

There are more challenges on the horizon. In April 2023, the European Parliament approved revised rules on the product safety of non-food consumer products. Besides rules on how to inform customers that have bought unsafe products, there should be an entity located in the EU that is responsible for product safety.

According to KrAsia, several Shein suppliers have already walked out after the company implemented stricter quality control to address ESG issues. It will therefore be interesting to see how Shein will meet the new EU regulations, especially now that it has opened a marketplace for third-party sellers. But more on that in part 2 of this update…

A list of sources will be published at the end of part 2 of this update.