How Shein and Temu are disrupting the US e-commerce

In his seminal work The Wealth of Nations, Adam Smith laid down a timeless principle: when businesses are left to operate freely, they naturally innovate, cut costs, and deliver better value to consumers.

This free market philosophy, where competition thrives and efficiency is rewarded, became the backbone of modern capitalism. And if there's one country that has truly embraced this idea, it's the United States. The free market fueled the American dream, empowering ordinary Americans to build extraordinary businesses that have stood the test of time.

But here’s the twist: today, two companies with roots in Communist China — Shein and Temu — are using that very same free market playbook to disrupt the U.S. e-commerce landscape.

But how did they do it??

When Amazon launched same-day delivery, it felt like the future had arrived. Speed soon became the obsession of every e-commerce player in the United States. All businesses — small and large — scrambled to outpace each other, promising faster and faster shipping, believing that speed was the ultimate key to winning over shoppers.

But in the middle of this frenzy, Shein and Temu saw an opportunity that American brands missed. They didn’t care about delivering packages at record speed. Instead, they focused on something far more powerful: price.

For them, it wasn’t about how fast they could get a product to your door — it was about how low they could get the price for a product, creating deals that felt almost too good to be true.

They made an offer American consumers simply couldn’t refuse. Why rush for speed when you could save more with just a little patience?

And just like that, they turned the e-commerce game on its head. While others were caught up in the race for faster deliveries, Shein and Temu quietly built their empires on unbeatable deals.

Shein’s valuation skyrocketed from $5 billion in 2019 to $63 billion by 2023, with the U.S. market playing a critical role in its growth. Similarly, Temu reached a gross merchandise value of $15.33 billion in 2023, claiming a 17% market share within the U.S. discount store category. These figures are a testament to the fact that, even in an era dominated by instant gratification, U.S. shoppers prioritize affordability over speed.

To truly grasp the meteoric rise of both these e-commerce companies, we must rewind, dive into their origins, and understand where it all began.

Made in China?

It's no understatement when we say Shein's second name is secrecy. At the heart of this fast-fashion empire is its elusive founder, Chris Xu, whose journey is as murky as the company’s operations. Xu’s story begins with an earlier venture, Nanjing Dianwei Information Technology, which he co-founded with two partners.?

As widely reported by multiple media houses, as the business started to see some success, Xu suddenly vanished, leaving his partners locked out of the company’s PayPal accounts. This dramatic exit left many questions unanswered and set the tone for the secretive nature of Shein’s rise.

By 2012, Xu had founded Sheinside.com, a small online clothing store, but he had a bigger vision in mind – to dominate the global fast-fashion market. In 2015, the company rebranded to Shein and entered the US e-commerce market.

Shein gained popularity by offering items at prices that few competitors could match. While traditional retailers were focused on faster deliveries, Shein stuck to its mantra of low-cost, high-volume production.?

New Kid in Town?

Temu’s story is closely tied to the remarkable success of its parent company, Pinduoduo. Founded in 2015 by Colin Huang, Pinduoduo quickly rose to stand alongside Chinese e-commerce giants like Alibaba and JD.com. What made Pinduoduo stand out was its group-buying model, where shoppers could team up to buy products at discounted prices, giving them access to deals they couldn’t get alone.?

Colin Huang’s ambitions didn’t stop at the Chinese borders; he wanted to go global. The timing was perfect — global consumers, particularly in the U.S., were hungry for affordable products as economic uncertainties and inflation loomed large. Thus, in September 2022, Temu was born, and soon, U.S. consumers jumped on the Temu bandwagon.?

Today, Shein and Temu have taken U.S. e-commerce by storm with their ultra-low prices, but their ability to offer such steep discounts stems from a few key factors that give them a significant edge over traditional retailers.

Secret of Success

Interestingly, at the core of Shein’s operations is a proprietary algorithm that constantly monitors customer behavior. From tracking browsing patterns and click-through rates to analyzing social media interactions and product reviews, Shein collects an enormous amount of real-time data. This data is then fed into their algorithm, which identifies emerging trends and forecasts which products are most likely to sell. Essentially, Shein is able to see what’s hot before it even hits mainstream fashion.

For example, if a particular style of dress starts gaining traction on Instagram or TikTok, Shein’s algorithm picks up on this early buzz. The company then quickly acts by producing small batches of that item to test the market. Within days, they gauge how well it’s selling. If the data shows high demand, Shein then scales production quickly, capitalizing on the trend while it’s still fresh.?

In short, if a product sells well, they replenish it quickly; if not, they stop production altogether. This on-demand production strategy not only helps Shein stay on top of the latest trends but also avoids overproduction and cuts down on costs related to unsold inventory.

According to a Boston Consulting Group report, this model allows Shein to reduce the cost of holding excess stock. The company boasts an inventory turnover rate of just 40 days, an unsold inventory rate of less than 2%, and fewer markdowns, meaning there’s less waste compared to traditional fast fashion brands. This level of efficiency has propelled Shein to the top of the global fast-fashion market, even surpassing long-established giants like Zara and H&M.

By 2022, Shein accounted for nearly one-fifth of the global fast-fashion market, outpacing both Zara and H&M. The numbers speak for themselves: between November 2022 and November 2023, Zara introduced 40,000 new items to the U.S. market, and H&M brought in 23,000.?

In comparison, Shein launched a staggering 1.5 million products — 37 times more than Zara and 65 times more than H&M. This ability to introduce massive amounts of new items in response to consumer demand has kept Shein at the forefront of the fast fashion industry.

Optimized Supply Chain

Shein and Temu have cracked the code for optimizing their supply chains, a move that has helped fuel their rapid rise. By cutting out the middlemen and linking factories directly to consumers, both companies have created a system that not only slashes operational costs but also allows them to offer incredibly low prices — something their customers love.

Take Shein, for example. According to reports, the company works with a vast network of over 6,000 manufacturers in China (Shein has not disclosed its manufacturers’ identity), which powers its just-in-time production model. This means that Shein only makes products when there's demand, avoiding the common retail pitfall of overproducing. In comparison, most apparel companies struggle with markdowns as high as 30% due to unsold stock.

Shein primarily ships its products from its warehouses in China but has expanded its operations globally with local warehouses in the UK, Germany, and the Middle East to improve delivery times.

To further streamline its US operations, Shein introduced the SHEIN Fulfillment Service (SFS), offering US-based sellers a fulfillment model similar to Amazon’s Fulfillment by Amazon (FBA). In April 2024, Shein partnered with Flexport to manage inventory and order fulfillment for its US sellers.?

On the other hand, Temu, backed by Pinduoduo’s powerful network, takes advantage of its connections with over 12 million manufacturers across China. This gives Temu access to a mind-boggling variety of products at rock-bottom prices. By sourcing directly from manufacturers, Temu can cut costs by 15-20%. This lean supply chain allows them to keep prices competitive, giving them a distinct edge in the market.

However, a key factor behind Shein and Temu’s success in the U.S. lies in misusing a century-old trade law that enables them to offer their products at unbeatable prices. This provision allows them to bypass hefty import taxes, helping them deliver goods to American consumers at the lowest possible cost.

De Minimis

Both Shein and Temu have cleverly exploited the de minimis law, which was originally designed to simplify customs for small personal shipments. Under Section 321 of the Tariff Act of 1930, goods valued at $800 or less can be imported into the U.S. without paying any tariffs or duties. This rule has become a loophole for these companies, enabling them to flood the U.S. market with low-cost products while bypassing import tariffs.

Their strategy revolves around shipping small, individual orders directly from Chinese factories straight to U.S. consumers. By doing this, Shein and Temu avoid the costs associated with warehousing and distribution centers in America.?

Since the majority of their items are priced well below the $800 threshold, they can send thousands of shipments each day without incurring import duties. This advantage allows them to offer incredibly low prices, which helps them undercut domestic retailers, accelerating their growth in the competitive e-commerce market.

To put things into perspective, in 2023, U.S. customs processed over 1 billion packages under the de minimis rule — a significant jump from 134 million in 2015. China is by far the biggest source of these shipments, with nearly 3 million small parcels entering the U.S. every day under this provision, according to U.S. Customs and Border Protection data.

A report by the House Select Committee on the Chinese Communist Party in June 2023 found that Shein and Temu alone accounted for more than 30% of these daily shipments.

As expected, this strategy has attracted severe criticism. U.S. lawmakers and domestic retailers argue that Shein and Temu are exploiting a rule intended for small personal imports, not large-scale business operations.

The Biden administration recently took a bold step to close the de minimis loophole. The new executive order seeks to exclude products, especially textiles and apparel, from this exemption. By tightening compliance and enhancing data collection, the U.S. government aims to curb these practices and shield domestic manufacturers from unfair competition.

If low prices are one side of the coin that draws millions of users to Shein and Temu, the other side is their relentless use of digital advertising. Their aggressive, targeted ads flood social media platforms, ensuring their brands stay top-of-mind for consumers.

Digital Dominance?

Shein and Temu have leveraged digital ads and gamification to power their rapid expansion in the U.S. e-commerce market. Both brands use aggressive digital marketing strategies to drive traffic and increase user engagement.

Temu, for instance, spends as much as ￡500 million per quarter on digital advertising, saturating social media platforms like Instagram, TikTok, and YouTube with eye-catching ads.?In 2023, Temu took its advertising strategy to the next level by debuting in the Super Bowl—a move that underscored its ambition to rapidly scale in the U.S. market.

Shein also follows a similar path, focusing heavily on influencer marketing and social commerce to build its massive following, particularly among younger, trend-conscious shoppers. In fact, Shein spends more than $3 million per month on search ads in the US alone.

But it’s not just ads that are drawing people in. Both companies have transformed their apps into gamified shopping experiences that feel more like interactive entertainment than traditional online retail. On Shein's app, users can participate in fun activities like daily outfit contests, spin-the-wheel games, and challenges that reward them with points.?

These points can then be redeemed for discounts, sometimes up to 70%. Temu offers a similar approach, where users can play in-app games to win high-value coupons and discounts, encouraging frequent app use and higher spending.

In terms of user engagement, the results have been astounding. In 2023, Temu was the most downloaded shopping app in the US, with 122 million downloads. According to industry data, in Q2 2023, Temu users spent an average of 18 minutes per day on the mobile app, significantly more than even Amazon (10 minutes).?

Temu's appeal is all about product discovery. In fact, 45% of its shoppers visit the site without a specific item in mind, compared to just 23% for Amazon. This browsing behavior is critical for Temu, driving impulse buys and keeping customers engaged.

So, while Shein and Temu’s success may seem flawless, with their soaring revenues and rapidly growing sales, beneath the surface lies a troubling reality of hidden unethical approaches.

Shady Practices?

Behind Shein and Temu's ultra-cheap prices hides dark and unsettling truths — the very darkness that accelerates the growth of these companies.?

Despite their success, both companies have been criticized for supporting unethical labor practices, particularly in China. Shein, for example, has been linked to the use of forced labor in Xinjiang, a region where Uyghur Muslims are reportedly subjected to human rights abuses, including forced labor.?

A Bloomberg investigation used scientific methods to trace the cotton in Shein’s garments to Xinjiang, violating the Uyghur Forced Labor Prevention Act, which bans importing products made with forced labor.

Moreover, an undercover Channel 4 investigation found that workers in Shein-affiliated factories in Guangzhou were subjected to horrific working conditions. Workers reported earning as little as $556 a month while being forced to churn out 500 garments daily, often working 18-hour shifts with only one day off per month.

Temu, on the other hand, has been accused of doing little to ensure its suppliers comply with labor laws. A 2023 U.S. Congressional report found that Temu has almost no oversight regarding forced labor in its supply chain.

The company relies heavily on third-party sellers and provides minimal auditing, allowing suppliers that use forced labor to slip through its system. Both companies' negligent approach to labor rights raises significant ethical concerns, particularly regarding how fast fashion products are made so cheaply.

Beyond labor exploitation, Shein and Temu’s products have raised red flags regarding consumer safety. Shein, in particular, has been criticized for selling clothing with dangerous levels of toxic chemicals. Investigations by Greenpeace International and South Korean government agencies have revealed that several items sold by Shein contained hazardous substances such as lead and high levels of phthalates, which can cause severe health risks.?

For example, a children's jacket sold by Shein contained lead levels 20 times higher than what is considered safe by Health Canada. Other items tested, such as handbags, shoes, and accessories, also exceeded international safety standards for toxic chemicals. This has sparked serious concerns about how these companies can afford to sell products at such low prices while disregarding consumer safety.

In September 2024, two U.S. Consumer Product Safety Commissioners urged the Consumer Product Safety Commission (CPSC) to investigate safety concerns related to products sold on Temu and Shein. In their statement, they raised concerns about the sale of hazardous items, including banned padded crib bumpers on Temu and children's drawstring hoodies on Shein, which the CPSC flagged as a strangulation risk.

In addition to product and labor issues, both Shein and Temu have faced scrutiny over how they handle consumer data. As their apps gain millions of users, concerns have grown over the amount of personal data they collect, how that data is stored, and whether it is shared safely or sold to third parties.?

Data privacy watchdogs have raised alarms, especially given the companies’ close ties to China, a country with less stringent data privacy regulations compared to the U.S. Both platforms have been criticized for a lack of transparency regarding how they handle sensitive user information, which has fueled fears about potential misuse of data.

One of the biggest questions that may arise is whether Shein and Temu will grow bigger than Amazon in the US. Also, being a market leader in US e-commerce, how is Amazon reacting to the growth of Shein and Temu??

Fighting it Out

Can Shein and Temu outgrow Amazon in the US? The answer is no, at least not in the near future. Amazon is still the number one e-commerce company in the US, with over 40% of the market share. On the other hand, Shein and Temu both have a share of about 1 to 2%.

But both these companies are growing rapidly in the apparel and discount store market share. Since its US debut in 2015, Shein has grown from strength to strength in the online apparel market. Today, it controls 40% of the fast fashion market in the US.

All this confidence even led it to reportedly file paperwork for an initial public offering with the Securities and Exchange Commission late last year. Temu, on the other hand, is diversifying into different product categories, slowly eating into Amazon’s pie.

Now, moving on to the next question: How is Amazon reacting to Shein and Temu’s growth in the US??

To keep its third-party sellers away from these platforms, Amazon has reportedly announced that it will reduce referral fees for apparel items priced under $20. This reduction in fees is meant to encourage sellers of lower-cost fashion items to remain on the platform rather than migrating to Shein or Temu, both of which offer sellers more favorable fee structures.?

But why must Amazon keep its third-party sellers happy? Last year, Amazon made around $140 billion from the fees it charges sellers for services like fulfillment, account management, and seller services. This earning was, in fact, more than what Amazon made from its Prime subscriptions or its cloud computing business, AWS.?

Furthermore, Amazon is rolling out a new section on its U.S. website dedicated to affordable items in fashion, lifestyle, and home goods. This move is seen as a direct response to the growing popularity of Temu and Shein and is part of Amazon's strategy to stay competitive in the budget-friendly segment of the e-commerce market.?

Temu, on the other hand, is attracting U.S. sellers by offering low fees and no fulfillment or advertising charges, allowing sellers to increase their profit margin. Additionally, to compete more directly with Amazon, Temu is building local delivery capabilities in the U.S. It is also making sellers store inventory in U.S. warehouses and handle local delivery, offering both cheap products and faster delivery.?

Amazon is a giant in the e-commerce industry; it may take years, or even decades, for Shein and Temu to cause considerable damage to it. However, other players in the industry are already facing the heat.?

Let’s take the case of Etsy. For Etsy, which specializes in handmade, artisanal, and vintage goods, the impact of Temu is more indirect. While Etsy thrives on uniqueness and craftsmanship, Temu floods the market with low-cost, trendy items.?

Etsy sellers who depend on unique, small-scale production can’t compete on price, forcing the platform to double down on its brand identity. This means more money needs to be spent on advertising and marketing to compete with Temu, which has deep pockets.?

There's no question that Temu and Shein are having an impact in the market. You don't get that big that fast without taking a share from many people. The other thing that is happening is they're spending a large amount of money on marketing. I think those two players are almost single-handedly impacting the cost of advertising, particularly in some paid channels, such as Google and Meta. - Etsy CEO Josh Silverman in the Q3 2023 earnings call

However, eBay CEO Jamie Iannone downplayed concerns about the impact of competitors like Temu on eBay's profits. In a JPMorgan conference in May, he said, “When another big paid player comes into the market, it just impacts us less.”?

He added that eBay is actively shifting away from focusing on lower-priced inventory, which dominates platforms like Shein and Temu. However, it's worth noting that analysts expressed concerns over eBay’s disappointing revenue forecast for that quarter when he made the statement.

Conclusion

The U.S. e-commerce landscape is shifting as companies like Shein and Temu challenge established giants like Amazon, Walmart, and H&M. But this rivalry isn't just about grabbing market share—it's a reflection of evolving consumer preferences and changes in the retail industry. Shein and Temu have identified and exploited a key gap in the market: the rising demand for ultra-affordable products.?

Their ability to grow quickly has been impressive, but the real question is whether this growth is sustainable in the long term. Only time will tell if they can maintain their momentum while balancing costs and market expectations.

Thank you for reading. We’ll see you at the next edition!

We regularly publish our newsletter here