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Decoding Shein: Growing pains and bitter splits (Part 2 of 3)

Written by LatePost Published on     8 mins read

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The second entry of this three-part series unpacks the evolution of Shein and its founder as the brand took off.

Catch up by reading Part 1 of this series on Shein.

Shein did not have its own supply chain before 2014. It bought goods directly from Guangzhou’s Shisanhang Garment Wholesale Market, uploaded photos of this clothing onto its website, then purchased goods to meet each order that came in. The company was tiny back then. In January 2013, founder Xu Yangtian posted on Facebook, “My company is growing rapidly, and I now have more than 50 employees!”

But this rudimentary process couldn’t last forever, and the company faced a bottleneck at the end of 2014. Shein reportedly received RMB 20–30 million worth of orders each month, peaking at RMB 50 million per month. “Because Shein could not fully stock so many new stock-keeping units (SKUs), customer satisfaction was low. Although return rates could be maintained, marketing costs rose, presenting a vicious cycle,” said a Shein executive to LatePost.

In 2014, Xu decided to form an in-house design team. Two years later, the company had a team of 800 people who were responsible for designs and prototypes that were meant for fast production. But that led to new problems. One of Shein’s top suppliers told LatePost that, back then, almost no factory was willing to take those orders because Shein’s business model relied on initial production of 100 pieces per SKU, a quantity too small to translate into decent profits for any factory.

Still, Shein maintained a reputation for timely payments. Duan Yongping, chairman and founder of BBK Electronics Corporation, said that this was a rarity in China. Two suppliers interviewed by LatePost said that Shein was one of the few companies that didn’t drag its feet when it came to resolving invoices. For instance, if a payment fell on a weekend, the company would issue payment on the preceding Friday instead of waiting until the following Monday. In contrast, one supplier told LatePost that another cross-border e-commerce customer still owed tens of millions of yuan. “We are all fighting for Shein’s business now,” said the same supplier. When Shein moved its supply chain operations center from Guangzhou to Panyu in 2015, almost all of the factories that it worked with moved there too.

It was a good bet. In 2015, when Shein entered markets in the Middle East, sales exploded. By 2016, some of its key suppliers were receiving orders to the tune of RMB 50 million (USD 7.7 million) or more each year. Shein’s sales revenue in 2016 stood at RMB 4 billion (USD 617 million). By 2017, it had exceeded RMB 10 billion (USD 1.5 billion).

The focus of Shein’s supply chain from 2018 to 2019 was to transform its core supply chain links in fabric production, printing, and dyeing, in order to achieve 75% direct procurement rates, according to Shein’s 2018 business plan. This would ensure quality consistency, shorten garment production cycles, boost efficiency, and, most importantly, present opportunities for cost optimization.

Shein
Instagram posts with the hastag #SheinGals. Screengrab from Instagram search results.

Tightening oversight

Shein has brought in talent with experience from Japanese and Korean companies to supervise quality control. The company assesses suppliers based on a stringent set of key performance indicators (KPIs), including timeliness of on-demand procurement, timeliness of stock delivery, and defective rates of products. Quarterly assessments are weighted based on these KPIs (40%) and purchase quantities (60%). Suppliers are ranked in five grades, with the weakest 30% eliminated from the roster.

One of Shein’s previous suppliers told LatePost that when it first partnered the brand in 2016, it was easy to be ranked within the top grade. Product specifications were general, like “produce it in XL.” In 2020, however, the manufacturer found itself struggling to meet Shein’s increasingly stringent standards. “They demand an order turnaround time of eight days (traditional factories take more than half a month), with a piece of clothing having fewer than three stray threads (each being shorter than 3 cm), with a margin for error limited to 2 cm,” said the supplier.

Shein and the hundreds of factories that work with the company have agglomerated into an industrial cluster similar to A Coruña in Spain, where Zara’s headquarters are surrounded by its upstream and downstream suppliers, with 54% of its total product volume being produced in the vicinity. Order response rates are quick, a necessity in the fast fashion industry.

China is home to thousands of factories that are part of the fashion industry’s supply chain, which gives it an edge in procurement. It is true that Southeast Asia is becoming a hotspot for manufacturing, but at the moment, Shein’s local capabilities more than suffice. Shein does not have far-flung factories abroad, and doesn’t need to use foreign trade intermediaries. A supplier told LatePost that he often walked from his factory to Shein’s Guangzhou headquarters. Tellingly, Shein’s supplier recruitment standards state directly that being located within a two-hour drive away from Guangzhou is ideal.

This was all accomplished despite Xu himself having no prior background in managing supply chain operations. More than that, suppliers hint at another reason. “If you go to the company’s Panyu headquarters at any time of the day, even 2:00 or 3:00 in the wee hours, you will always find Xu and his team there. They are always in meetings, are never lazy, and always keen to pry your best practices from you,” said a supplier interviewed by LatePost.

An intense leader

Shein’s predecessor company was founded in October 2008, at the peak of the financial crisis. At the time, the company was named Nanjing Dianwei Information Technology Co. Ltd, with business documents indicating that Xu held a 45% stake, with two other partners, Wang Xiaohu and Li Peng, holding 45% and 10%, respectively.

When LatePost interviewed Li, he did not mince his words. “Shein’s predecessor company was first founded by us, but later, Xu kicked me and Wang out.”

So who is Xu Yangtian? Before founding Dianwei, Xu was reportedly an employee of Alldao, a Nanjing-headquartered cross-border services consultancy, where he worked in search engine optimization (SEO) operations. Later, Xu’s SEO team invested their own money in Dianwei.

One of Xu’s partners described Dianwei’s early business as selling inferior or fake goods. “This was necessary at the beginning, in order to set up a foundation,” he said.

Dianwei experimented with a slew of different domain names, such as do-a-fashion.com, plugging in key words such as “discount,” “fashion,” and “online shopping” in search of their sweet spot. The company continuously scoured Google data to look at its search engine performance before changing its domain name in an iterative process.

Li summarized his impression of Xu in one word: extreme. On one occasion, during the initial SEO process, Xu himself processed tens of thousands of pieces of customer data “all day long.” In contrast, Li would delegate it to a marketing director. Li also said when it came to controlling expenses, Xu was the sort who would skimp ruthlessly, demanding that marketing expenditure be limited to levels at least 70% lower than their competitors’ spend.

“He was as lean as a monkey,” said Li, recounting his first impression of Xu. Xu told him over dinner about growing up in poverty, eating just plain steamed buns with soy sauce. Xu told Li he had to start working from his third year of high school onward, continuing through his university years. From what Li can recall, Xu was never lazy, rarely sought entertainment, and never left work before 11:00 p.m. Li described this as the complete opposite of his own personality.

In 2009, Dianwei had been in business for less than a year when Li and Wang arrived at the company to find Xu and his team missing. It didn’t take long before they discovered that Xu’s team had started a cross-border e-commerce business dealing in wedding dresses. At the time, wedding dresses were one of the most in-demand goods for cross-border trade, second only to electronic products. “At peak demand, one could literally just change the currency denomination of the purchase price from RMB into USD,” said Cao Guangyao, an SEO expert.

Li Peng was furious and said Xu reissued Li’s shares to others later. Subsequently, Xu invited him to visit the new company, but Li ignored these invitations.

After leaving Dianwei, Li Peng established another cross-border women’s clothing brand, Romwe, in 2009, launching it in 2011. Li contacted internet celebrities on Lookbook.nu, sending them clothes and camera equipment each week in return for publicity through their online posts. Romwe took off.

romwe shein
Influencers plugging Romwe’s clothing and accessories have a strong presence on social media. Screengrab from Romwe’s website.

This idea soon caught on elsewhere. At the beginning of 2012, Xu gave up his wedding dress business and purchased the domain Sheinside.com. He then directed his attention to the business of selling women’s clothing. But unlike Romwe, which focused on trendiness, Sheinside emphasized the fast-fashion aspect. “Basically, selling anything and everything, moving China’s entire clothing industry online,” said Li. That year, the personal net worth of Zara’s owner, Amancio Ortega, hit USD 46.6 billion, making him the third richest man in the world.

In 2015, Sheinside was renamed Shein. Du Jin, CEO of Youle, told LatePost that Shein focused on advertising overseas. Du herself thinks that Shein excels in execution, and is helmed by a leader who is not afraid to experiment with new things.

An employee at Yeahmobi, an advertising agency that worked with Shein in 2016, told LatePost that Shein had been its top e-commerce customer. At the time, the entire first floor of Shein’s office building was allegedly packed with people working on advertising optimization. Shein also hired marketing agencies to run their Facebook pages.

As of 2020, Shein’s Facebook page had 15 million followers, in addition to 11 million followers on Instagram. The company was ahead of the curve in identifying everyday influencers as marketing hot spots. Back in 2010, influencers reportedly demanded around USD 30 as remuneration for each post. But by 2016, the fee went for as much as USD 50,000.

Aside from Facebook and Instagram, Shein also formulated a presence on Pinterest. Pinterest was Shein’s foremost source of traffic between 2013 and 2014. “Similar to Xiaohongshu, Pinterest users are mainly female. This makes it more suitable [for promoting] women’s clothing,” said a Pinterest employee to LatePost.

But Sheinside didn’t just face competition from Romwe. Just as it was taking off, a company called Choies popped up too. Choies’ business model was a replica of Shein’s. According to a person familiar with the matter, Choies, Romwe, and Shein were the first Chinese companies who used overseas influencers to promote their brands, using Lookbook.nu to identify influencers who might render this service in exchange for goods. All three companies were based in Nanjing.

But Choies fell behind. According to the same person, Choies lacked Shein’s marketing acumen. “We didn’t dig deep enough or do enough research. People with SEO experience are better at this,” he said. Allegedly, Choies’ revenues were roughly distributed across 30% for procurement, 20% for logistics, 25–30% for advertising, and 5% for payment commission and refunds, leaving a 15–20% profit margin. In contrast, Shein’s advertising expenditure at the time was only about 15–20% of revenues, leaving a higher profit margin.

In 2014, Shein acquired Romwe, absorbing its brand and other capabilities. An investor, who chose to remain anonymous, told LatePost that because Shein had a solid foundation, it could expand across categories rapidly, with clear processes for marketing and branding that could be replicated efficiently. Now, Shein operates both Shein and Romwe’s websites.

According to Li Peng, Romwe was acquired by Shein because he had quarreled with his ex-girlfriend, who left Romwe and sold her shares to Xu. At the time, Romwe was in the red. Several other insiders confirmed the matter with LatePost.

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Read about Shein’s future plans in Part 3.

This entry is based on an article originally published by LatePost. It was translated by Lin Lingyi.

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