One is a global fast fashion company that started with selling wedding dresses. Its labels include small-batch, fast response, flexible supply chain, and leveraging various traffic platforms. The other is a price butcher that incubated in Pinduoduo (CHINESE: 拼多多, parent company of Temu) and quickly rose to fame in the industry, causing shockwaves. Their stories were destined to be anything but placid.
Recently, the legal battle between SHEIN and Temu in the United States has escalated. In March of this year, SHEIN filed a lawsuit against Temu in the Northern District of Illinois, USA, accusing Temu of trademark counterfeiting and infringement, trademark dilution, improper source identification and unfair competition, false advertising, commercial fraud, commercial defamation, and unjust enrichment.
Outside of the courtroom, SHEIN is facing unprecedented challenges, including tax compliance, ESG, and declining valuations, each of which is a tough nut to crack. Temu, which rose rapidly, saw an opportunity and is gradually eroding SHEIN's market share.
Why Can SHEIN Establish Itself Overseas?
SHEIN is a fast fashion company that exceeds consumers' expectations with its speed, and its outrageously low prices make its competitors nervous. Even after more than a decade of development, the reasons why outsiders are optimistic about its continued commercial success are no different from the following:
Firstly, it is the relatively low prices. SHEIN's production and manufacturing are in China, and its sales are in affluent countries such as the United States, the United Kingdom, Australia, and Saudi Arabia. According to statistics, the average price of SHEIN's crop tops, bikinis, and dresses is only USD 10.7. For American girls, SHEIN is simply addictive, and shopping here can be addictive. In the UK, online retail platforms Boohoo and ASOS see it as a thorn in their side.
SHEIN's web page
Secondly, the "small batch, fast response" and flexible supply chain in the hands of Xu Yantian, the founder of SHEIN, have been used to the extreme. Usually, SHEIN produces 50-100 pieces for each new product for a trial run. If sales are good, SHEIN will order more. Otherwise, production will stop. SHEIN can create a new product within 25 days, and the shortest time to complete the entire chain is 7 days, which is twice as fast as traditional fast fashion giants like H&M and Zara. At any given time, there are 600,000 products for sale on SHEIN's online platform.
Finally, SHEIN was the first to use the independent site model to build its own traffic pool, which has been proven to be very forward-thinking by many followers. In order to maximize the early cheap traffic of the overseas internet celebrity economy, SHEIN spared no effort in promoting itself, investing heavily in Amazon, Google, and Facebook advertising, and introducing the familiar domestic live-streaming sales model to Instagram, which has users with stronger consumption attributes. According to statistics, in 2022, natural visits accounted for half of SHEIN's desktop website traffic.
Temu Rises, SHEIN Faces Trouble
Even SHEIN probably didn't expect that a price butcher even more ruthless than itself would launch a surprise attack, sounding a heavy bomb in the North American e-commerce market.
As a cross-border e-commerce platform incubated by Pinduoduo, the owner of the "one cut" patent in China, Temu has a tough-guy attribute, and its posture of not lacking money or being afraid to spend money has allowed North American consumers to try a carefree, ultra-low-priced shopping experience. Its super-popular TWS headphones priced at USD 9.9 sold out several times. Since November of last year, Temu has been ranked in the top three in iOS app downloads in the United States, and its brainwashing advertisement during the Super Bowl, which cost USD 14 million for a 30-second spot, made it even more popular in the United States.
Temu's web page
Temu's business logic is not complicated. Backed by the financial strength of its parent company Pinduoduo, it sacrificed profits in the early stages to generate user value through the scale effect of traffic. At the same time, its business logic of targeting the United States gave it experience that would make it easier to enter other developed country markets in the future. More importantly, drawing on SHEIN's experience and lessons learned, Temu effectively controls costs in its supply chain by adopting an official buy-phone system and a low-asset warehousing model.
Faced with the formidable Temu, SHEIN seems to have little defense. Although it once had a valuation of USD 100 billion in the bubble frenzy, SHEIN has to face the embarrassment that its F-round financing valuation in 2023 has fallen to around USD 65 billion (a third less).
The reasons for the large drop in valuation are complex. SHEIN's competitive advantages are extremely similar to Temu's, but when the price war came, the still-unlisted SHEIN clearly lacked funding support, while the latter's viral social network, where users can get free gifts by inviting friends, continues to attract new users. In addition, ESG issues that are highly valued in Western societies have always hung over SHEIN's head. The fast fashion model has caused a lot of controversy about environmental unfriendliness and resource waste, and the lack of transparency in the supply chain working environment has repeatedly raised social concerns. And the most fatal trouble at present is that SHEIN's use of small package splitting to enter multiple overseas countries to avoid value-added tax has been investigated by many governments, which research institutions have identified as an important reason why SHEIN can save up to 20% of its costs.
SHEIN: What's Next?
EqualOcean believes that SHEIN must realize that Temu's goal is not just to grab a piece of the cake, but rather to reshape the overseas e-commerce landscape and business model. The industry consensus on Pinduoduo and Temu is that they target the clearance market, where seller profits have already bottomed out. Therefore, in the future, when faced with traffic bottlenecks and declining product quality, Temu will inevitably use its "cash power" to compete for brand merchants.
Therefore, in order to quickly advance its IPO and alleviate financial pressure, as well as to respond to the fierce competition from its rivals, SHEIN has ultimately decided to lower its valuation for fundraising, which is actually part of SHEIN's reluctant self-rescue.
In terms of business, SHEIN has built multiple warehouse logistics projects in North America and is accelerating its shift towards third-party platforms, opening up to brands for entry. It may officially announce this move in April and May this year. This is a signal of SHEIN's active pursuit of revenue growth through transformation.
SHEIN, which used to not pay much attention to public relations and brand management, is now trying to salvage its public image. EqualOcean learned from the Singapore government recruitment website MyCareersFuture that SHEIN's headquarters public relations team has been recruiting recently, requiring applicants to have at least five years of experience. In order to quickly get rid of the hat of design plagiarism, SHEIN recently announced that it will invest USD 55 million in its incubator project SHEIN X to support independent designers.
It is worth mentioning that against the background of rising trade protectionism and the US government's seeking to exclude Chinese internet companies such as TikTok from its domestic market, SHEIN, which has recently been rumored to be shut down, actually needs to consider how to make critical choices for its market focus.
At this critical stage, the ESG2023 "the US Sub-Forum" will be held in Shenzhen on June 2, 2023. EqualOcean will invite the representatives of academic institutions and investment institutions, as well as company leaders, from the International Studies Institute of Fudan University, Sun Yat-sen University, Jinan University School of International Relations, Gaorong Capital, Vision Plus Capital, FreeS Fund, ZWC Partners, Source Code Capital, Niu Technologies, TikTok, SHEIN, NEIWAI, miHoYo, Tuya, MINISO, Dreame, Ecovacs, WYBOTICS, Lifen, and UniUni.EqualOcean analysts will also release the US Report 2023 at the US Sub-Forum, summarizing business opportunities and best practices for expanding into the US market in the new stage. Click the link to apply and scan the QR code below to learn more about ESG2023.