Robert Siegel’s new book “The Brains and Brawn company” talks about how neither the new age all-digital company has a right to win nor is the brick and mortar incumbent hopelessly vulnerable to disruption – a successful business needs the best of both. In our fund specific newsletters, we have talked about how our portfolio companies have continuously reinvented themselves with the adoption of technology to build competitive advantage. This piece in The Economist talks about a little known company which has built a massive business starting off as a digital company. As the article puts it, Xu Yantian, the creator of Shein (founded in 2008), “the fashion world’s latest sensation was a specialist in search-engine optimisation”
“This expertise gave Mr Xu an understanding of how to draw shoppers’ attention in the digital world. He has brought to Western fashionistas a Chinese style of “social commerce”, which combines social media with online shopping. Add a revolutionary approach to manufacturing and the results have been spectacular. In 2019 Shein’s gross merchandise value (gmv), e-commerce groups’ preferred measure of total sales on their platforms, was $2.3bn, estimates Zheshang Securities, a Chinese broker. This year it is forecast to surpass $20bn (see chart). By 2022 analysts expect Shein’s gmv to overtake Zara’s revenues. In May Shein became the most downloaded shopping app in America, beating Amazon.”
Shein’s success has three threads. The first is a turbocharged version of the fast-fashion formula of offering a constantly updated range of garments at bargain-basement prices. Whereas Zara launches about 10,000 new products a year, Shein releases 6,000 fresh “stock-keeping units” (including old designs in new colours) every day. Some are quickly discontinued. Still, its permanent virtual wardrobe now numbers 600,000 individual items.
…Shein has pulled this off by combining a mastery of fashion supply chains with on-demand manufacturing originally enabled by Chinese e-commerce giants like Alibaba. It starts with design. A team trawls the web for the latest trends using algorithms to determine what is grabbing attention. One of its members told Chinese media last year that he visits thousands of websites to come up with ideas. These concepts are sent to another group that draws up designs, which are then manufactured in batches as small as 100 items, compared with a typical order of thousands.
Next, learning from Alibaba, Shein tests the new designs simultaneously on its app. With all sales happening digitally, managers have a real-time view of the performance of each item. If a new design is popular the company quickly orders more. If consumers shrug at the new style, no more orders are placed. By centralising inventory in a small number of large warehouses and then shipping directly to customers, Shein has pushed inventory turnover down to just 30 days, compared with an industry average of 150 days, according to a consultant who works with the company.
Shein has deployed digital savvy not just in its procurement but also in sales and marketing—the second thread of its success. Besides handing out products free of charge to thousands of influencers, a common practice nowadays, it has recruited hundreds of local designers in America and several other countries. As well as dreaming up new clothes, they market its products and backstories on social media. The company plans to hire another 3,000 such third-party designers in 2022.
The strategy has helped Shein amass 250m followers across Instagram, TikTok and other social-media platforms. About 70% of them shop on Shein’s mobile phone app, which boasts 24m daily active users. On any day, one in two of the world’s shoppers who buy apparel online do so using its app.
The third ingredient in Mr Xu’s winning formula is deft avoidance of geopolitical controversy. Shein wears its Chineseness lightly. Unlike other Chinese brands that have tried to conquer the world, such as Huawei, a telecoms-equipment giant, or Xiaomi, which makes smartphones, it sells next to nothing domestically. That weakens its already loose association with China in Western eyes. Western consumers assume, correctly, that like most of their clothing, including Western brands, Shein garb is made in Asia. Few realise (or care) the label is Chinese. Helpfully, most shipments to individual customers in America are small enough to dodge tariffs on Chinese exports imposed as part of a trade war between the two countries.
Shein has also evaded scrutiny from the Chinese Communist Party. In part that is because selling frocks is less contentious than making semiconductors or writing artificial-intelligence software. Its tiny presence at home has also spared it the sort of headache that has afflicted Alibaba and other internet groups with a large domestic business as President Xi Jinping intensifies his campaign to right the perceived wrongs of Chinese capitalism.”
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Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.
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