Shein, the China-founded bargain fashion giant, is gearing up to extend its innovative small-batch manufacturing model to global brands and designers, marking a notable shift in its business strategy. This move comes amidst a backdrop of challenges in the U.S., Shein’s largest market.
Executive Chairman Donald Tang outlined the plan, dubbed “supply chain as a service,” in a letter to investors obtained by The Wall Street Journal. Under this initiative, Shein aims to open up its supply-chain infrastructure and technology to external brands and designers, enabling them to utilize Shein’s system for testing new fashion items in small batches and gauging consumer popularity.
Having evolved from a Chinese discount apparel seller to a global fashion powerhouse, Shein’s small-batch, on-demand manufacturing approach has been instrumental in its rapid expansion to over 150 countries. However, the company has encountered hurdles in the past year, including regulatory scrutiny and intensified competition, notably from Temu, another budget retailer with Chinese origins.
Despite filing a confidential application for a U.S. stock listing in November, Shein has encountered delays in receiving a response from the Securities and Exchange Commission (SEC), reportedly due to regulatory hesitance amid potential political sensitivities. Consequently, Shein has explored alternative listing options, including discussions with regulators and politicians in London.
Nevertheless, Tang highlighted in his investor letter that Shein achieved record-breaking annual revenue and profit in 2023, underscoring the company’s robust performance despite challenges.
Shein’s innovative manufacturing model relies on partnerships with thousands of factories in China, producing tens of thousands of new styles daily. By leveraging real-time data analytics to swiftly assess demand and replenish orders as needed, Shein minimizes storage costs and reduces inventory waste, enabling it to offer products at competitive prices.
In addition to its core fashion and beauty offerings, Shein expanded its reach last year by introducing a marketplace model in the U.S., Mexico, Europe, and Brazil. While this diversification broadens its product portfolio, it presents challenges such as reduced visibility into supplier activities on the platform, heightening competition with rivals like Temu.
In recent years, Shein has embarked on a series of strategic partnerships with global brands to enhance its market position. Notably, in the previous year, Shein made significant acquisitions, including the British fashion brand Missguided and a one-third stake in the operator of the American fast-fashion brand Forever 21, Sparc Group. Additionally, through its incubator program, Shein X, the company has provided emerging designers with access to its cutting-edge technology.
By extending its supply-chain ecosystem to external brands, Shein aims to leverage its robust capabilities in fashion manufacturing and distribution. Unlike Temu, which offers a wide range of products at discounted prices, Shein focuses specifically on the fashion segment, allowing it to differentiate its offerings in the market. Despite Temu’s rapid ascent to become the second-most popular shopping app in the U.S. after Amazon since its launch in September 2022, Shein’s distinct positioning sets it apart in the competitive landscape.
However, Shein’s growing prominence in the U.S. market has attracted scrutiny from lawmakers and attorneys general, particularly regarding its sourcing practices in China’s Xinjiang region. Allegations of human rights abuses, including forced labor, in Xinjiang have prompted calls for increased transparency from companies operating in the region. Some lawmakers have urged the SEC to halt Shein’s IPO until the company demonstrates greater transparency in its supply chain practices.
In response, Shein has reiterated its commitment to a “zero-tolerance policy” for forced labor and has implemented measures to ensure compliance with U.S. regulations. The company has also engaged lobbyists and advisers to address concerns related to forced labor, signaling its proactive approach to addressing regulatory and public scrutiny.