Shein’s US expansion adds pressure on fast fashion competitors

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(Bloomberg)—Fast fashion juggernaut Shein has managed to attract hordes of Gen Z shoppers to the U.S. despite a key market disadvantage: It has typically offered 10-15-day e-commerce delivery windows which are easily overtaken by its competitors.

Today, the China-founded apparel company is working to get its goods faster at super-low prices by establishing distribution centers in the Midwest and California — a significant shift from its practice of shipping individual orders directly to US consumers from overseas.

The logistics investment increases the pressure Shein has already exerted on more established rivals such as H&M and Forever 21, while threatening the newcomer’s profit margins and introducing new risks into its business model.

“The time it takes to get products to the consumer in the world of fast fashion, where a young consumer – especially a young female consumer – probably doesn’t want to think two weekends ahead is really important” , said Adam Cochrane, retail and luxury analyst at Deutsche Bank AG.

A Shein distribution center, located in Whitestown, Indiana, is already operational and could reduce shipping times by up to four days. It currently has 800 employees and plans to have 1,000 by the end of this year. A second facility is expected to open in Southern California by spring 2023, the company said, and plans to open a third in the northeast.

Shein pop-up store as company plans US expansion

These facilities will not contain Shein’s full assortment of clothing, but will stock some products, especially basics. Inventory will be chosen based on what sells well in the United States and will also reflect seasonality, with gear such as tank tops demanding more space when temperatures rise. The American centers also manage the return of goods.

Shein is taking a similar approach in other key markets: it has announced plans for a distribution center in Poland that will serve Europe. And on Tuesday, the company announced that it had opened a 170,000 square foot warehouse in Toronto, as well as a headquarters in the same location.

Improved speed could help Shein – which was valued at $100 billion in a fundraiser earlier this year – capitalize on a remarkably rapid rise.

The company, which began selling in the United States in 2012, has gained traction with its website and app thanks to a steady stream of new products, ubiquitous marketing on TikTok, and rock-bottom prices. It largely avoids brick-and-mortar stores, except for the occasional pop-up store.

It is the ninth most popular clothing brand among Gen Z women in the United States, according to survey data from Morning Consult. This puts Shein in league with classic American labels Levi’s and Calvin Klein.

Shein is putting pressure on more established rivals such as H&M and Forever 21 as it expands in the United States.

“There have always been disruptors in the fast fashion space, but what Shein brings to this is on a larger scale, coming from China,” said Caroline Gulliver, analyst at Stifel Financial Corp. in London. “It’s a sea change in the landscape in the United States.

Shein has become a formidable challenger for US chains such as Forever 21 and American Eagle Outfitters Inc. that cater to the same demographic. It also competes with international fast fashion players with a strong US presence, including Hennes & Mauritz AB (H&M), Zara owner Inditex SA and UK brands Asos Plc and Boohoo Group Plc.

Shein is expected to generate $24 billion in revenue this year, according to a person familiar with the numbers who asked not to be identified. In the first quarter of this year, Shein’s U.S. sales were up 43% from a year earlier, compared with a 10% drop at H&M, according to Bloomberg Second Measure data.

Bulk inventory

However, the development of a distribution network in the United States adds the possibility of new costs. The United States allows up to $800 of goods from China to be imported duty-free — a limit that was usually easy to meet when shipping individual customer orders. But if Shein now sends bulk inventory to fulfillment centers, it will likely have to ship heavier lots that are subject to tariffs.

Additionally, Shein typically manufactures small batches of its garments, almost on-demand, a setup that helps avoid discounts and protect profit margins.

“Once you have a fulfillment center in the United States, you’re not doing make-to-order manufacturing anymore,” said Sucharita Kodali, principal analyst at Forrester Research. “You are shipping large quantities of an item that may or may not sell. I don’t think it’s a home run, but it’s too early to tell.

“The question is, can they maintain their price with the added cost of the US fulfillment center?” Cochrane said, noting that Shein’s price advantage over competitors could shrink.

Shein’s effort to expand its distribution network in the United States is part of a race in the apparel industry to rethink logistics in order to find or maintain a competitive advantage.

Trendy online retailer Boohoo is making a move similar to Shein’s, opening a fulfillment center in Pennsylvania next year that it says will offer three-day delivery windows to 95% of the country, up from a time current waiting period of 10 days.

American Eagle is moving in a somewhat opposite direction, piloting a program in which it will ship goods directly from overseas facilities to U.S. customers in an effort to “respond more quickly to changing business trends.” Quiet Platforms, the logistics arm of American Eagle, will also offer fulfillment services to other retailers looking to ship goods from China to consumers in the United States.

“By providing businesses on our platform with access to pools of upstream inventory, we enable them to be less inventory heavy and more strategic in their assortment decisions,” said Channel Director Shekar Natarajan. American Eagle’s supply chain, in a statement.

Meanwhile, Asos is slowing investment in automating its Atlanta warehouse, in line with expectations that it will handle a lower amount of stock as part of a broad restructuring plan. The brand is losing hope in international growth, noting in a recent press release that expansion outside the UK has become “overly capital intensive”, leading to a “lack of meaningful growth”.

Longer-term danger

Shein’s operational gamble follows a series of news reports exposing high carbon emissions, unfair labor practices and low product quality – none of which appear to have significantly dampened consumer appetite for its wares.

But its business model, along with that of its peers like H&M, faces longer-term peril. Legislation on environmental and labor costs associated with garment production is gaining traction globally. A recent investigation found that Shein workers in China worked 18-hour days and were paid £3 ($3.34) per garment – exactly the sort of situation lawmakers may seek to clamp down on.

“All of these fast fashion brands are basically going to face a toll in the next 10 years,” Forrester’s Kodali said. “They have to figure out how to co-exist when the basic demand for your business is going to go down, either because the consumer doesn’t want it, or because you’re going to be subject to laws, or because the cost of your raw materials is fair. will go up.”

–With help from Katie Linsell.

To contact the author of this story: Olivia Rockeman in New York at [email protected]

© 2022 Bloomberg L.P.

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