Shein Has a Serious New Competitor

Whether you love the ability to buy satin minidresses for $8.50, or loathe the environmental impact of ultra-fast fashion ending up in landfill with increasing regularity, there is no denying the impact Chinese e-tailer Shein has had on the global fashion industry, particularly when it comes to winning the hearts and minds of Gen-Z consumers in Western markets.

By now, both the origins and the business model of the company — estimated by Coresight Research to have hit around $10 billion in revenue in 2020 — have been picked apart at length. Shein’s beginnings in Nanjing, where it was founded by entrepreneur Chris Xu in 2008, were the foundation upon which it rolled out proprietary software alongside an extensive network of manufacturers in southern China using a design-by-big-data ethos that enabled it to pump out thousands of new styles a week.

Having seen the scale of sales Shein can achieve — in the US alone the figure hit around $3.1 billion last year according to Euromonitor data — it’s little surprise that other companies in China, of a variety of sizes, started focusing more on selling cheap made-in-China clothes direct to Western consumers. Companies such as Zaful, RoseGal, StyleWe, NewChic, Modlily, Cupshe and Milanoo all utilise some or most of the elements that made Shein such a runaway success.

Aside from these larger players, there are hundreds, perhaps thousands of clothing producers in China that have also pivoted from OEM (original equipment manufacturing) to ODM (original design manufacturing) before shifting further up the value chain to OBM (original brand manufacturing). But rather than take the direct route to market like Shein, most of these players reach the majority of their customers by tapping into third-party platforms, such as Amazon and Alibaba’s cross-border platform AliExpress.

One such player is Zhejiang-based Orolay, the company behind the so-called “Amazon coat” that made a splash in 2019. In the three-year period running up to Orolay’s hit, the share of China-based top sellers on Amazon Marketplace doubled.

But for fashion companies looking to emulate Shein’s particular playbook, competition is not just heating up among likeminded players; it’s also coming from Alibaba, China’s largest e-commerce player.

Why Alibaba is Encroaching on Shein’s Territory

China’s Alibaba Group, the colossal online retailer which owns Tmall, Taobao and AliExpress and more recently acquired e-commerce players like Koala Haigou which just launched a luxury channel, is approaching a growth ceiling. Last Thursday, the company reported its slowest-ever increase in quarterly revenue since its 2014 IPO, with a rise of about 10 percent to 242.6 billion yuan ($38.37 billion) in the third quarter.

“Impacts from slowing retail sales and intensifying competition [are weighing] on our China commerce business,” Alibaba Group chief executive, Daniel Zhang, said on a post-earnings call with investors last week.

“For Alibaba, there is only very little e-commerce… in China that is low hanging fruit... Whereas cross-border e-commerce is not only operationally [marginally] easier, but it has pretty significant backing from the government.”

Alibaba’s overseas customers hit 300 million for the first time last quarter. Though they are dwarfed by the 979 million people who actively use Alibaba’s platforms within China, the overseas business does represent one of the company’s best opportunities for growth. The firm, which will reach saturation point in China soon enough, has a stated goal of eventually serving two billion consumers worldwide.

“For Alibaba, there is only very little e-commerce… in China that is low hanging fruit. They are going into groceries and rural areas but those have very sharp competitors and they are expensive, whereas cross-border e-commerce is not only operationally [marginally] easier, but it has pretty significant backing from the government, which has made it clear they are interested in promoting [the sector],” explained Rui Ma, host and founder of the Tech Buzz China podcast and partner at Synaptic Ventures.

Apart from its AliExpress platform, which Zhang says “was negatively impacted by changes in the European Union’s tax exemptions” in its latest quarter, Alibaba also has overseas e-commerce interests in platforms such as Lazada (which grew 52 percent year-on-year last quarter) in Southeast Asia and Trendyol (up 49 percent over the same period) in Turkey.

Though AliExpress has long sold apparel, footwear and fashion accessories as part of its outbound cross-border product lines, they don’t represent major sales categories for the platform. Instead, mobile phones and personal electronics produced in China and sold at rock bottom prices are an easier purchase for foreign shoppers given the complications of style, fit and returns over multiple markets presented by the fashion category.

A more direct foray into outbound cross-border fashion appeared last October with Alibaba’s launch of AllyLikes. A scroll through the official AllyLikes app or the brand’s Instagram feed throws up imagery and products familiar to those who shop Shein, Fashion Nova or Boohoo. The women are young, the clothing is often revealing and a pervasive, endless summer vibe underpins items like a $14 lace-trimmed tank top.

Whereas AliExpress is a platform on which third-party sellers can sell a wide range of manufactured goods to markets outside of China, AllyLikes is Alibaba’s attempt to sell its own brand of trendy, made-in-China fashion to customers in Europe and North America and Europe where it currently delivers.

It has also taken a leaf out of Shein’s book by launching a social media campaign of fashion influencers affiliates on Instagram using the lure of free clothes and discounts to followers.

How Concerned Should Boohoo and Fashion Nova Be?

Comparing AllyLikes’ performance since its launch in October to that of Shein, which was founded over a decade ago, is not particularly fair or revealing across most metrics but AllyLikes’ awareness and reach do seem low for a brand with the power of Alibaba behind it.

While Shein tops 10 million downloads per month over iOS and Google app stores, SensorTower data shows AllyLikes was downloaded 40,000 times last month. Shein’s Instagram accounts (it operates several across different territories in localised languages) have more than 20 million followers; AllyLikes Instagram has barely reached 130,000.

Even given the unenviable task of having to catch up with a competitor with a major head start, Ma is reticent to rule out Alibaba’s ability to take on Shein.

“I think Alibaba has a pretty good chance actually, but it depends how much they focus on this,” she said.

As Ma points out, a recent reshuffle in Alibaba’s top e-tail management saw 37-year-old Jiang Fan moved from heading the company’s main commerce engines, the Tmall and Taobao marketplaces, to heading its overseas business, which accounts for less than 10 percent of the company’s current revenue.

This was widely seen as a demotion, part of the fallout from a public scandal and internal investigation at Alibaba into Jiang’s alleged affair with Zhang Dayi, a social media influencer and co-founder of Alibaba-backed influencer incubator, Ruhnn, which first emerged in 2020.

However, there could be another reason for Jiang’s move, Ma says.

“Alibaba is pretty decently experienced in cross-border logistics because they’ve been running AliExpress for so long, so I think they could deliver.”

“You could also see it as, you know, the guy has done a good job on Tmall and Taobao which are now just engines running by themselves that don’t really need him for exploring new business… I think this move shows [Alibaba is] taking cross-border more seriously,” she said.

Alibaba itself has remained tight-lipped about specific plans for AllyLikes, and declined to offer comment on the platform or its broader cross-border fashion ambitions.

“Alibaba has a lot of experience working with the manufacturers, on their distribution. Alibaba is pretty decently experienced in cross-border logistics because they’ve been running AliExpress for so long, so I think they could deliver,” Ma said, adding that they have a lot of experience selling apparel, too, which consistently ranks among the top sales categories on Tmall and Taobao.

Even though Shein has been called the world’s largest online-only fashion company by Euromonitor, in some ways, it is closer to a technology company. With its proprietary software interconnecting manufacturing partners and thousands of designs emerging each week with the help of its big data and AI operations, it makes sense that the company’s greatest competition could come from a tech behemoth, like Alibaba, or ByteDance, for example.

The latter now seems an unlikely contender since it shuttered its Shein-like Dmonstudio platform after only three months, a fortnight ago. Though Bytedance’s low-key and short-lived foray into the space remains shrouded in mystery (the company never publicly acknowledged its link to Dmonstudio and did not respond to BoF’s requests for comment about it), one possible reason the company pulled out of the race so early is that the business of selling low-cost clothing from China to Western teens has gotten tougher as of late, and that it is set to get harder still.

New Challenges Will Restrain Cross-Border Growth

For a lot of small and medium-sized Asian fashion enterprises, Amazon has been their route to Western markets but one that has become bumpier over the past year.

In 2021, Amazon figures showed there were around 200,000 Chinese sellers on the platform (across all sectors), and 38 percent of the top-selling brands on Amazon were based in China.

But over the course of last year, Amazon banned 600 Chinese third-party brands and 3,000 related third-party seller accounts, suspending a further 50,000 sellers for violating its terms of service (review manipulation is the most common alleged breach) leading to losses of 100 billion yuan to Chinese Amazon sellers, according to the Shenzhen Cross Border Association.

This has led to a rush of Chinese sellers to Shopify, which now also finds itself in the awkward position of dealing with complaints about some of the nefarious tactics that sellers banned from Amazon had previously used there. Meanwhile, a new breed of online store SaaS platform companies, in the mould of Shopify but aimed more directly at Chinese sellers and backed by Chinese funds, has also proliferated. One example Ma mentions is Shoplazza, which raised $150 million in a series C1 funding round last month.

To date, these smaller sellers on Amazon, alongside giants such as Shein, selling direct from China to the West have benefited from the trade policies of multiple players. In 2018, in response to additional tariffs levied by the US on Chinese goods as part of the trade war, China began to waive export taxes for DTC (direct-to-consumer) companies.

Until July last year, packages to the European Union under €22 were exempt from paying VAT, and in the US, cross-border, direct-to-consumer sellers from China and elsewhere have been able to take advantage of Section 321, also called the de minimus exemption, which permits each person in the US the ability to import goods valued at under $800 once per day.

Unsurprisingly, the vast majority of fast fashion orders shipped from Chinese e-commerce players, either selling via their own platforms (Shein, AllyLikes) or third-party platforms (Amazon, AliExpress) easily clear this threshold, meaning they virtually all received tax and tariff exemptions.

A Morgan Stanley report released last October found that tax breaks alone have allowed Shein to sell items at prices 20 percent lower than fast-fashion rivals Boohoo and H&M. The investment bank said Shein’s current price advantage “may not be sustainable if tax policies in China, Europe or the US change.”

Currently, in the US, changes do appear to be underway with Congress passing the “America Competes Act of 2022″. If the bill becomes law in its current form, packages from China (and other non-market economies, though the focus of the legislation unabashedly focuses on China) that previously fell under this exemption would be subject to regular duties and tariffs.

A rise in taxes, tariffs and duties puts pressure on the razor thin margins involved in low-cost apparel manufacturing and cross-border selling. Though this would also hit the biggest players, it is more likely to run smaller apparel manufacturer-turned-brand operators selling ultra-fast fashion, out of the game. Their departure could, in turn, open up space for new players to enter the race.

Specialisation Could Be Key to New Players’ Success

“We’ll probably start seeing more masstige brands emerging from manufacturing hubs in China in fashion,” Humphrey Ho predicted, pointing out that the trend has already emerged in categories such as technology and homewares.

“As the [typical Shein] consumer matures and has the wherewithal to spend they’re going to demand more than $10 items.”

Some players might try to move upmarket, as Shein has tried to do with its premium Motf brand; others will broaden their product categories to better gain transaction volume (again, Shein has now entered new categories including beauty and pet accessories).

“As the [typical Shein] consumer matures and has the wherewithal to spend they’re going to demand more than $10 items,” said Ho.

One alternative opportunity in the cross-border space, according to the founder of digital media, advertising and brand strategy firm, Totem Media, Chris Baker, is to corner a more niche market that people might be willing to pay a higher price for.

Baker, who has consulted for Chinese brands looking to sell overseas, points to childrenswear player PatPat, which has raised a total of $210.5 million in funding over six rounds. The company closed its series D round from Softbank last August.

Another segment in which a Chinese player could emerge, Baker suggests, is performance wear, given China’s strength in manufacturing performance garments and the premium at which the category is currently sold by major brands.

“One of these great manufacturers who OEMs for some really innovative brands could come out of the woodwork… jump into the market and very quickly dominate because let’s say they’ve got a jacket that comes from a same or similar factory [as a famous brand],” he said.

While there are clearly some opportunities to “do a Shein”, most of the wannabes in China will never get close. Even without the challenges, it would take a mammoth effort, and investment, for anyone to take significant market share from Shein, given the infrastructure, volume and war chest it has accumulated to date.

To Rui Ma’s mind, there’s only one true contender. Because Alibaba is in a league of its own, “if they decide this is an area of expansion for them, they could devote a lot of resources [to it],” she said.

时尚与美容

FASHION & BEAUTY

Streetwear Brand Starter Raises $40 Million in New Funding from Chinese Investors

The brand, which was originally founded in the US but has found recent success in the China market, has recently raised $40 million in series C financing, led by Chinese investor QY Capital, with other investors including existing shareholders Sequoia China, Dazzle Fashion (a local high-street fashion giant in China) and M31 Capital. Since entering the China market in 2017, Starter has previously secured two rounds of financing worth 100 million yuan ($15.82 million) in 2019 and $30 million in 2020. (BoF)

Creditors Look to Seize Lycra Business from Ruyi

Debt-ridden Chinese fashion and textiles giant Ruyi Group is facing creditor action to seize its Lycra business after reportedly defaulting on a $400 million loan it took out in May 2019 to fund the deal. The Chinese company bought control of The Lycra Company from Kansas-headquartered industrial conglomerate Koch Industries for $2.6 billion in 2019, borrowing about $1 billion to fund the deal. The Lycra business includes the elastane brand names Lycra and Coolmax. (BoF)

科技与创新

TECH & INNOVATION

Alibaba Reports Slowest Quarterly Revenue Growth Since 2014

China’s Alibaba Group last Thursday reported its slowest-ever increase in quarterly revenue since its record-breaking 2014 US public offering, as tepid growth in its core e-commerce business and intensifying competition made their presence felt. Revenue rose about 10 percent to 242.6 billion yuan ($38.37 billion) in the third quarter. Analysts on an average had expected revenue of 246.37 billion yuan, according to Refinitiv data. (BoF)

More Chinese Tech Companies Pull Out of India Following App Bans

A group of Chinese start-ups are following the lead of TikTok owner ByteDance and giving up on the India market for the time being. India was once touted as a ripe opportunity for expansion for Chinese tech players but the country has banned more than 270 Chinese apps since June 2020, when tensions heightened between the two countries after a deadly Himalayan border clash. (South China Morning Post)

消费与零售

CONSUMER & RETAIL

Puma Says China Boycott Will Continue to Have an Impact This Year

The German sportswear maker said last week it expects sales to grow at least 10 percent in 2022 but also cautioned that a consumer boycott in China would limit profit growth. Puma expects 2022 operating earnings of €600 million to €700 million ($679 million to $792 million), up from €557 million in 2021. Chief executive Bjorn Gulden said he expected sales to fall again in China in the first quarter and that he was unsure whether they would return to growth again in 2022, noting that Chinese celebrities remain cautious about working with Western brands, since controversy first erupted in March 2021 about the use (or not) of cotton sourced from China’s Xinjiang region. (BoF)

Amorepacific Closing Hera Stores in China

The South Korean beauty conglomerate has closed the last brick-and-mortar outlet of its Hera brand in China this week, and will close its WeChat mini-programme in mid-March, local media reports. The move came after the brand shut down self-operated stores on JD.com and Vipshop at the end of last year. Hera, however, will remain trading online via its Tmall official flagship store. (BoF)

政治,经济与社会

POLITICS, ECONOMY, SOCIETY

EU-China Summit Set for April 1

The rising tensions underpinning the relationship between Europe and China will be the subject of the summit, which will likely be held virtually. EU trade chief Valdis Dombrovskis said on Monday that diffusing tensions was the aim of the meeting, following the EU’s stalled investment agreement with China (held up following the imposition of sanctions by Beijing on some members of the European parliament and a dispute between China and Lithuania after the latter allowed Taiwan to open a de facto embassy in its capital). “We know we are in a complicated phase of relations with China,” Dombrovskis told the trade committee of the European Parliament. ”It is clear that some of those topics need to be addressed at the highest political level to see to what extent we can align and improve our cooperation.” (Reuters)

China Manufacturing Expands Slightly in February

The purchasing managers’ index (PMI) for China’s manufacturing sector came in at 50.2 in February, up from 50.1 in January, data from the National Bureau of Statistics (NBS) showed Tuesday. A reading above 50 indicates expansion, while a reading below reflects contraction. Tuesday’s data also showed that the PMI for China’s services sector came in at 51.6 in February, up from 51.1 in January. (Xinhua)

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