Insider Digest 11/22/22: (Further) Details on Shein’s Operations

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Details on Shein’s Operations

TL;DR: Shein doesn’t have much room to optimize on the supply chain level, short of inventing entirely new materials and production methods. Its future cost savings and growth will have to come from broadening its customer base, category expansion, and more indirectly, upgrades in logistics, which is investment upfront for decreasing marginal returns in terms of customer experience.


Shein is the cross-border e-commerce startup valued at $100Bn that has caught everyone’s attention as of late, from politicians who are eyeing its sustainability, labor and tax impacts, to players such as Pinduoduo who have launched competing offerings. I have also written about Shein before, using publicly available research. Today’s piece builds on that and goes into much more detail. Especially as media / influencer-driven TikTok seems to teeter on the brink of being banned on a daily basis*, many investors think goods / supply chain-driven models like Shein are the much better export from China tech. It may also give you an idea of how Pinduoduo’s Temu could fare, which is the subject of our next piece.

Important – the expert interview on which this piece is based is from 2H 2021. Shein has evolved a bit since then, although not very much. I’ve pointed out where it has changed where relevant, mostly in logistics.

*For the record, I don’t think TikTok will be banned (the US government’s hands are pretty tied when it comes to restricting free speech and all that), but it can still be severely hurt short of a full ban.

Shein Topline Statistics

  • 2017: 4Bn RMB in revenues

    • US ~40%, Europe 30%, Middle East 20%, SEAsia, India & LatAm 10%

  • 2018: 10Bn RMB (similar breakdown to 2017)

  • 2019: 20Bn RMB

    • US ~40%, Europe 25% (decrease), Middle East 20%, SEAsia and India 10%, South America 5%

  • 2020: 60 Bn RMB (US ~38%, Europe & Middle East 24% each, LatAm: 9%)

    • Apparel: 77-8% (women’s 67-8%, children’s 5%, men 5%), Home: 9%, Jewelry & bags: 10%

  • 1H 2021: 40Bn RMB (+80% YoY)

    • US 36%, Europe 24%, Middle East 24%, Mexico & LatAm 11%, Southeast Asia 5%

    • Apparel: 75% (down 1-2%), Home: 10%, Jewelry: 7-8%.

    • Note: there is some seasonality – June through August is the low season, and high season is March as well as November through January

Shein Core Metrics:

  • Increasing Average Order Value (AOV) & Repeat Purchase Rates: across all regions is $50-100 USD, and repeat purchase rate is now 55%, up from 30% previously, with the average consumer making about 10 purchases a year. In terms of items per order, the Middle East is highest at 17 pieces, US is at 13, other markets at 5, for a global average of 7.

  • Improving Return Rates: In 1H 2021, return rates were 8+%, lower than in 2020.

  • Diversifying SKUs: Home furnishings such as wall art and dishes are growing, as well as cosmetics, but the latter is a challenging category due to strict shipping rules and have a higher chance of being held up at customs in the US and Europe.

  • Still Primarily Low-end: Higher-end sub-brands, such as MOFT, is only about 1% of sales.

Regional Opportunities & Challenges:

  • Europe: Actually the earliest market Shein entered in 2012. Used influencers back then but they are less effective. In addition, Europeans have a keener sense of fashion, but Shein’s designs are not highly regarded

  • Canada: Slower to grow (vs. US) because buyers like BNPL (buy now pay later), and Shein did not offer this until 2H 2020

  • Middle East: 80%+ of orders are free shipping as users order more items. Expected to break 20Bn RMB in 2021. But appropriate inventory is not as large.

  • LatAm: Higher growth than average due to improvements in infrastructure and logistics. Entered Mexico in 2017-18, and all of LatAm the year after. But still, less than 70% of items are arriving within 10 days.

  • Southeast Asia: Relatively poorer growth in this region despite lots of investment by Shein in warehouses, local designers, and advertising. This is partly due to the fact that there were already many Chinese brands in the region by the time Shein entered the market

  • Russia: Accounted for 10% of total revenues in 2020

Shein’s Superpower: Supply Chain Management

  • Shein began building out its flexible supply chain in 2016, which includes design, prototype, production, inventory management – all of which are integrated into the logistics and warehousing systems.

  • Shein’s PLM (product lifecycle management) software allows the company to confirm initial order, time and place of delivery, as well as manage production scheduling. It confirms and adjusts production time, quality, sewing, embroidery and dyeing; monitors supplier production lines, and uses algorithms to manage production capacity, and intelligently recommend suppliers based on their delivery capabilities. However, it is not fully automated – some data still needs to be manually entered.

    • Materials: Shein has a database of several million materials sourced from 1500 factories. Suppliers can use these or purchase their own.

    • Production: Buyers and designers submit designs, and after an editing and review process, these are sent to a selected supplier to make a sample, all of which takes less than 7 days. The sample is reviewed and then pricing is determined.

      • OEM vs ODM: It’s about 50/50 now but used to be more ODM. For ODMs, the suppliers recommend designs, but for OEMs, buyers come with designs and there is generally more coordination, changes and other additional requirements. As of 2H 2021, there were more than 300 OEMs for a total manufacturing output of 1.5-2mm pieces per day, increasing to 3mm per day.

      • There are 1000 suppliers, of which 40% are considered core, and 3000 backup suppliers. Monthly net growth of 10 suppliers and 3% increase in manufacturing capacity.

        • QA: Quality control is achieved by random audits in the warehouse. Different suppliers are subject to different scoring systems.

      • Accounts payable is generally 30-45 days for core suppliers and 50-60 days for non-core. Suppliers are fined if they do not deliver the goods on time.

    • Photography then takes place and the product information is collected (a process of 2.5 days), and the order is sent to the supplier (0.5 days). It then takes about 10-12 days for an order to be produced (14 days for winter sweaters), 7 days for emergency orders. There is unlikely to be any further time compression in these steps.

    • Final products are sent to the Foshan main warehouse and the product is then put online.

    • Inventory: Shein typically orders 300-500 pieces, or about 1 week’s inventory, for the first order. The next repeat order is 1000, or 2-3 weeks of inventory, but it does vary depending on SKU. Some outlets have since reported the minimum order quantity as being further compressed to 1-200. Either way, these are very small orders that the supplier makes no money on.

  • The above feeds into the logistics WMS (warehouse management system) and TMS (transportation management system) software systems, but these are just for Shein internal use only, not visible to the suppliers.

A Cross-Border Must Have: Logistics

  • Shein primarily ships by air, although land freight is used for some of Southeast Asia. It uses companies such as Sinotrans for the first leg, and then a local logistics provider for the last leg.

  • Logistics is generally 25% of revenues.* Quality of service is determined by data connection, customer experience, handling of rejected packages, payment methods (whether or not COD cash on delivery, which is popular in many developing countries, is accepted) and how slight differences in weight are accounted for, i.e. a difference of 0.1 kg of a product often leads to a large price difference. *As AOV rises, this has decreased to 20% as of 2022, but these savings have been largely offset by increases in COGS to 35%. All in all, the company’s net margin was supposedly 6% last year, and slightly lower this year.

    • Shein’s systems are connected to the logistics provider’s so that tracking and delivery is synced (80-90% of packages can managed thusly)

    • Previously, US orders were delivered within 7 days, but that has extended to 10 days after COVID. 90% of European orders arrive within 9 days, and 85% of Middle Eastern orders arrive within 10 days. For LatAm, 75% within 10 days, and for Southeast Asia, that increases to 90%, with 80% arriving within 7 days.

  • Warehouses: Shein had about 30,000 workers in its warehouses by year-end 2021. It rents its 150K sqm domestic warehouse in Foshan, Guangdong province at a cost of 3-4mm RMB, with 10-20mm RMB capex. The facility is highly automated and has a 85% utilization rate, with a 7-17 day turnover rate.

    • Overseas warehouses are divided into transit warehouses (transfer only) and operating warehouses (returns, transfers and deployment). These vary widely in automation and there are opportunities for optimization here.

    • Note that as of October, Shein is now offering the option of shipping directly from the US warehouse, at least for US buyers. Certain items are available from both the “US Mall” and “Overseas Mall” and have different delivery dates as well as order minimums to qualify for free shipping.

    • The company has to charter flights about 1-2% of the time, which increases logistics costs to 40%. Unfortunately, when there is a large amount of orders, such as Black Friday (3x normal volume), there is no other choice.

  • Customs Clearance: either logistics service providers can do it, or a third party clearance company is hired. Shein is using Zongteng as service provider for the US, YunExpress for LatAm and Oceania. Note: Zongteng actually acquired YunExpress in 2018, and also operates Worldtech, which is another subsidiary. In 2021, it was rumored to be seeking a Hong Kong IPO last fall, and also received investment from ByteDance.

Final Thought

As of 2H 2021, it appears that Shein was still going the “light capex” route, with no plans to build out its own logistics. However, as of this fall, Shein is on the record with WSJ for plans to build out 3 distribution centers in the US in an effort to decrease shipping times to customers, and estimates that it will hire 3,000 staff by 2025. This, of course, is a small fraction of Amazon’s hundreds of thousands of US warehouse workers, and fittingly so, since Shein’s $10Bn+ US revenues make up a small percentage of Amazon’s $300Bn+ US GMV. Mostly, I suspect, in order to sell higher value items and increase repeat purchases, it knows that it needs to provide a better user experience which is highly tied to logistics. Shein shows us though, just how quickly the stack has developed for Chinese logistics service providers in the cross-border e-commerce business. Pinduoduo Temu (the subject of our next piece) and ByteDance TikTok will only add to the scale immensely in the next few years.

Summary Takeaways:

  • Shein is not just apparel! By 1H 2021, it was only 75% apparel by GMV, with rapid expansion into Home, Jewelry, Cosmetics, etc.

  • US remains Shein’s best market. Russia is surprisingly strong (at least before the war), and LatAm has had great growth due to improvements in infrastructure. SouthEast Asia is actually the most anemic because of competition and familiarity with Chinese brands / platforms.

  • Shein is “designing” more clothes (I use quotes because they borrow design inspiration quite liberally from the internet) vs just working with ODMs who come with their own readily designed pieces, but the split is still just 50/50

  • Shein’s superpower is very obviously not in design, or even marketing (which it does well, but is not particularly exceptional at) but in supply chain management, as it has digitized and integrated the entire production process. Unfortunately, it is so optimized currently that there is unlikely to be much improvement in efficiency in the near future

  • Logistics is the other key pillar to Shein’s business, and this can be further improved with investment, which Shein has committed to doing, at least in its US core market. Mostly, it relies on Chinese service providers to get its goods overseas and through customs, then ships through local delivery companies. Everything is connected and visible via Shein’s systems though

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