Chinese e-commerce is taking over the world

In the last 4 years, Chinese e-commerce players like SHEIN and Temu have become regular household names and now they’re challenging global e-commerce leaders like Amazon, as well as traditional fast fashion giants like H&M. To do this in such a short space of time is a remarkable feat, so I dug into how they did it.?

Supply chain success?

The most obvious difference between Shein + Temu to traditional e-commerce marketplaces is their direct-to-consumer shipping, where orders are shipped from the manufacturer to the customer without intermediaries or middlemen. The traditional middlemen is your wholesalers, distributors, or land-based retailers. By removing them they’re able to retain margin, which allows them to bring products to you at (almost) cost price.

The DTC shipping provides the basis for Chinese e-commerce because:

• it reduces total overhead costs of the retailer
• they can harvest more customer data directly
• they have much more control over their customers' experiences
• they can respond quickly to trends and launch new products rapidly
• they have direct comms with customers, and can create personalized shopping experiences

Chinese e-commerce has relied on what some have called a “loop-hole” that allows for duty-free entry of shipments under $800, cutting customs costs and clearance times.?

Thier efficiency also achieves a short lead time (from order to complete product) of five to seven days and a fast inventory turnover of 40 days. To repeat that; it takes a week to launch a new product, and just over a month to sell out of that stock... Global fashion brands take 112 days (4 months), making the Chinese e-commerce stock turn 3X faster.

Chinese players also benefit from lower minimum order quantities, as they’re dealing directly with the manufacturers, instead of agents + trading companies. The industry standard MOQ is 500 per style, whereas Shein & Temu have reported MOQs of 100.

The main perk of lower MOQs is that they don’t have to hold stock, which means they can have 5X more active SKUs than their competitors. That has led to a single figure of % of unsold inventory of 7% where the industry average is closer to 20%.

What's in it for me?

The main benefit to customers is not having to pay a premium for basic garments. If you take the average woman's top at H&M you’re likely to pay R400 ($22), whereas you’ll pay half of that R200 ($10) for the same item at Shein or Temu. Not only do Shein and Temu offer a price incentive to customers, but they no longer have to deal with leaving their home to head to a mall, where there’s uncertainty about whether or not their size will be in store.?

The downsides

Shein and Temu did not create the fast fashion industry, but have become the “bad boys” of fast fashion and have built a reputation for irresponsible consumption, but let’s break down why.?

The only way to get product from a factory in China to your door the next week is using air freight. Shein & Temu’s cross-border transportation is 144 times more carbon intensive than sea freight, making the overall environmental impact of the business model much higher than traditional retail. That doesn't bode well when the fashion industry is responsible for almost 10% of global carbon emissions.?

Shein & Temu are not responsible for the increased culture of consumption (in my opinion), but they’ve been the companies that have capitalized the most on the culture shift. The average consumer now buys 60% more items of clothing and keeps them for half as long.

Can they sustain this growth?

When companies like Shein & Temu grow at 400% YOY, you begin to wonder how. A seamless supply chain and hugely varied product offering aren’t enough to grow you to a multi-billion dollar business, so what is it??

Their aggressive marketing spend has been reported to be more than 50% of revenue. Temu was Meta's top advertising spender in 2023, buying $2 billion worth of ads. That’s 13% of revenue allocated to Meta alone (excluding other paid advertising, sponsorships, affiliates etc), where businesses spend around 6%-20% of their revenue on marketing. An example of another business with a high % of marketing spend is Gymshark , with theirs being over 40%.?

Sheins profit for 2023 was $2B with a 5% net profit margin, which is better than retailers like Adidas >1%, and Gymshark 1.8%, on par with H&M (4%), but behind Zara’s ($12B @ 13.3% & Nike $5B @ 10.14%).?

This means they're here to stay.