Shein vs Amazon: Why Amazon Should Be Worried

The Shift Away From E-commerce Giants

Amazon currently holds a dominant position within the global e-commerce landscape. However, despite the benefits its marketplace provides to emerging businesses, many established companies are now actively seeking independence.

This movement has gained significant momentum alongside the rapid expansion of online shopping over the last five years. Several brands, including Casper (mattresses), Harry’s and Dollar Shave Club (men’s grooming), Allbirds and Zaful (footwear and apparel), Banggood (gadgets), and Anker (power banks), are prioritizing the development of their own direct-to-consumer channels.

The Rise of Direct-to-Consumer Brands

These companies are choosing to leverage their own websites, social media platforms, and supply chains to cultivate their brand identity and business growth, minimizing reliance on large marketplaces.

Shein, a digitally native apparel retailer specializing in affordable, trendy clothing, exemplifies this trend. The brand has experienced explosive growth, particularly among young, budget-conscious consumers in Europe, Asia, and the Americas.

Shein: A Case Study in Fast Fashion

Apptopia data indicates that the Shein app was downloaded 14 million times in the United States during March alone. Currently, it leads the shopping category in app stores across more than 50 countries.

Shein’s success stems from its commitment to delivering the latest fashion trends to a broad audience with speed and affordability.

Previously, brands like Zara, H&M, and Forever 21 disrupted the industry by significantly reducing lead times – the period between design conception and product availability – challenging established players like Gap and Calvin Klein.

Accelerating the Fashion Cycle

Shein elevates this “fast fashion” approach to a new level. While Zara and H&M typically require three to four weeks to bring designs to market, Shein utilizes a sophisticated system.

This system combines real-time customer data, predictive analytics, a highly responsive design team, and a streamlined supply chain based in China. This allows them to translate emerging trends from platforms like Instagram, Facebook, Reddit, and TikTok into available products within just one to two weeks.

Like its predecessors, Shein has achieved considerable success in accelerating the pace of fashion. According to Apptopia, its daily active users increased by 130% to 2.6 million in the past year.

The Future of Fashion: Personalization and Consumer Influence

Building on this momentum, Shein aims to revolutionize the fashion industry further. “Shein is building a next-generation brand that is highly personalized,” explains Min Wanli, founder of North Summit Capital and former chief scientist of Alibaba Cloud.

Wanli adds that Shein envisions a model where consumers actively participate in shaping product development, rather than simply being dictated to by traditional fashion authorities.

Shein’s “Real-Time Retail” Model

Numerous investors and e-commerce exporters have highlighted the exceptional supply chain management employed by Shein.

The core of Shein’s business relies on the swift and inexpensive production of apparel. This necessitates a supply chain that is both adaptable and remarkably fast. Richard Xu of Grand View Capital, a venture capital firm specializing in cross-border ventures, likened Shein to an evolved version of Zara.

Zara already possesses a more responsive supply chain compared to conventional apparel companies, but Shein further reduces the product development cycle from weeks to mere days.

Jacky Bai, an Amazon merchant located in Shenzhen, stated that “Shein’s objective is to surpass competitors like Zara and H&M.”

When Shein’s designers formulate a concept – often drawing inspiration from social media trends, fashion presentations, or competitor offerings – they rapidly create a design for in-house prototyping.

These designs are then quickly moved into production at Shein’s Guangzhou-based factories. Within approximately two weeks of initial design conception, the completed product is distributed globally via Shein’s logistics network, reaching customers in the U.S., Europe, and South America.

Thousands of new items, or stock-keeping units as the industry defines them, are added to Shein’s online store daily.

When a product demonstrates strong sales, Shein leverages its real-time sales data to immediately increase production, further boosting sales volume, as noted by Min.

Over the past decade, Shein has cultivated strong relationships with clothing suppliers in Guangzhou, a major manufacturing center in southern China.

These suppliers, unlike those in eastern China who cater to luxury brands, specialize in affordable clothing and offer rapid production turnaround times.

Shein secures production capacity by offering these manufacturers substantial orders and long-term agreements, which a venture capitalist focused on overseas consumer brands explained “provides significant benefits to smaller factories, making them eager to collaborate with Shein.”

The agility of Shein’s supply chain is also a result of its comprehensive integration of enterprise software across all business operations.

This includes areas such as material sourcing, production processes, inventory control, and delivery logistics.

Digital monitoring of business procedures allows Shein to optimize truck routes between factories, warehouses, and airports.

Furthermore, the company can effectively allocate shipments to minimize freight expenses and adjust logistics based on potential tariff changes and their impact on profitability.

According to Xu, “Shein dedicated a considerable amount of time to refining and establishing what is known as an agile supply chain system, frequently referred to as a ‘real-time’ supply chain.”

The Path to Success Requires Dedication

Shein’s strategies, while not exceptionally complex, are the outcome of extensive operational experience and continuous refinement over time.

According to Xu, a significant portion of a company’s competitive edge in the e-commerce sector stems from the knowledge gained through experimentation and learning from mistakes. Numerous venture-funded companies are currently attempting to emulate Shein’s model, but replicating its achievements demands considerable time and effort. Closing the gap with Shein proves challenging, even with substantial financial resources.

The possession of a dedicated application is also crucial to Shein’s ongoing expansion and widespread appeal. Its capacity to gather customer data and directly engage with users enables the company to utilize these insights for superior product development compared to selling through platforms like Amazon or other major online marketplaces, which restrict merchant access to user information.

Customer insights are key to production decisions, as Min points out. Merchants on platforms like Amazon and China’s leading e-commerce sites essentially operate on behalf of those platforms, lacking direct access to valuable user data.

Shein’s rivals are actively attempting to attract its suppliers in Guangzhou, but the company’s established relationships with factories are proving resilient. Shein fosters supplier loyalty through prompt invoice payments and even assisted in selling their surplus inventory during the initial stages of their collaborations.

A Shenzhen-based investor, having visited several of Shein’s manufacturing facilities, notes that “the number of manufacturers in Guangzhou is insufficient to meet the current demand.” These manufacturers are already fully committed to fulfilling Shein’s existing orders.

Despite offering apparel at significantly lower prices than Zara and H&M – with summer dresses ranging from $5 to $20 – Shein doesn’t achieve this by reducing supplier margins. Instead, the company maintains low prices by accepting relatively small profit margins.

This rapid expansion and limited profitability have resulted in a capital-intensive journey for Shein. However, this approach mirrors a common strategy within the Chinese tech industry: providing products at low cost, or even for free, to rapidly build a large user base and subsequently monetize through more profitable offerings.

Initially, Shein did not prioritize immediate profitability. As repurchase rates increase and user acquisition costs decrease, the company has begun to generate a modest profit margin of approximately 5%, according to the Shenzhen-based investor.

Investors in Shein’s Series E funding round included IDG Capital, Greenwood Asset Management, Sequoia China, Tiger Global, Shunwei Capital (led by Xiaomi founder Lei Jun), and JAFCO, a long-standing Japanese venture capital firm. While the company has not disclosed the total amount raised, it confirmed a valuation “at the billion-dollar level” during its most recent funding round approximately a year ago.

The company is actively diversifying its product range beyond clothing and accessories. Its marketplace now features sections dedicated to pet supplies, personal care items, and home décor. These products may not offer high margins, but this expansion serves as a warning to marketplaces like Amazon, demonstrating the potential for companies like Shein to broaden their offerings leveraging a strong user base and a robust supply chain.

Shein’s achievements have encouraged increased investment from Chinese investors in the expansive e-commerce export market. A manager at Amazon China reports that many of these investors are focusing on the Shenzhen area, which is near Guangzhou and home to a large number of Amazon merchants.

However, the market in which Shein and its competitors operate differs significantly from the conventional internet landscape familiar to most venture capitalists. The Amazon manager notes that many Chinese sellers originate from modest backgrounds and possess only a high school education. They previously sought profitable white-label products in Shenzhen’s electronics markets and quickly transitioned to online sales upon discovering Amazon and eBay, bringing with them a pragmatic, aggressive, and sometimes questionable approach to business.

“Entrepreneurs and investors often underestimate the complexities of cross-border commerce. It requires meticulous attention to numerous minor details,” the Shenzhen-based investor stated. “Shein’s founder, Chris Xu, comes from humble beginnings, but many attempting to follow his path possess impressive credentials. Success isn’t easily replicated.”

Xu from Grand View Capital agrees, stating: “When operating on Amazon, the platform handles most aspects of the business. With an independent store, you are responsible for everything – inventory, logistics, and payments. This is why so few independent stores achieve success.”

The Significance of China in Shein's Operations

Shein currently conducts business across three continents and has achieved widespread recognition. However, despite information available through external sources, surprisingly limited details are publicly known about the company itself.

Since its establishment, Shein has maintained a deliberately low public profile. No interviews with its leadership are readily accessible, and the company has consistently refrained from publicizing its funding sources. Its website and mobile application provide no explicit indication of its Chinese origins. Furthermore, the source of product shipments remains intentionally ambiguous, with packages frequently dispatched from warehouses located near customers.

Even the details surrounding its founding are somewhat unclear. A Shein representative informed TechCrunch that the founder, Chris Xu, conceived of Shein’s business model in 2015 while residing in Los Angeles.

However, six individuals possessing industry knowledge presented a contrasting account to TechCrunch. They stated that Xu actually founded the company in Nanjing, a city in eastern China celebrated for its rich historical background, in 2008. Initially, the firm concentrated on establishing its own independent online store, utilizing Amazon and Google to assess product demand. Its own brand identity only began to gain significant traction approximately five years ago. Currently, the company maintains operational teams in Nanjing, while its supply chain management is centered 1,400 kilometers away in Guangzhou.

Xu from Grand View Capital noted, “Determining Shein’s origin is challenging. It functions as a company with operations and supply networks in China, primarily focused on the global marketplace, with minimal business activity within China itself.”

The company asserts that it now has a global headquarters situated in Singapore, complemented by localized teams in key markets to provide customer support worldwide. Singapore was reportedly selected as a strategic base for global expansion – a logical choice given the city-state’s reputation for political impartiality – and business registry records confirm that Shein dissolved its Nanjing-based entity this April. The spokesperson characterized this as a “standard procedure” following an evaluation of global operational demands and a restructuring of the corporate framework.

Many observers, however, perceive this as an attempt by Shein to conceal its Chinese identity to mitigate potential overseas scrutiny. Xu explained, “Some companies intentionally establish a global presence from the outset, which is perfectly acceptable… Others actively avoid being identified as Chinese due to prevailing negative public sentiment.”

Competitive pressures may also be a contributing factor. An Amazon China manager stated, “All e-commerce exporters are highly protective of their strategies to prevent imitation by competitors.”

Regardless, the company’s connections to China may be becoming a sensitive issue as it expands amidst escalating geopolitical tensions over the last decade – exemplified by the ban of its app, along with numerous other Chinese applications, in India.

Shein has attracted considerable media attention since its rise in app store rankings, though not all coverage has been favorable. A popular Substack newsletter exposed the company’s effective use of influencer marketing. Bloomberg investigated how Shein exploited tax regulations, and The Financial Times highlighted its issues with trademark violations. The environmental impact of the platform’s inexpensive, disposable clothing also prompted scrutiny from The Atlantic.

The company undoubtedly needs to enhance its public and governmental relations efforts – it currently lacks a dedicated PR department – if it intends to sustain its current growth trajectory.

Xu suggested, “I believe that [not disclosing your Chinese affiliation] must be addressed in the long run, as you cannot indefinitely avoid identifying a geographic location. This is detrimental to future planning. Chinese companies should proactively communicate their position before the foreign media defines it for them.”

Amazon's Scrutiny of Sellers

During May, Amazon terminated the accounts of numerous prominent Chinese sellers operating on its platform. While the specific justifications weren't publicly revealed, industry understanding suggests the action was taken in response to unethical practices. These included the manipulation of product reviews and the unauthorized collection of customer data.

Amazon’s dedication to protecting its customers frequently places pressure on third-party merchants. These sellers face substantial expenses related to inventory, intense competition fueled by reviews, and increasing advertising costs.

According to one Amazon seller, identified as Bai, the financial implications can be significant. It is often more cost-effective to accept the risk of account suspension than to remain inactive and struggle to improve product visibility or gather user feedback.

A common adage within both the Amazon and broader Chinese e-commerce environments highlights this dilemma. It states that fabricating reviews carries a high risk of severe consequences, while failing to do so virtually guarantees eventual business failure.

In contrast to the challenges faced on platforms like Amazon and Alibaba, Shein presents a different model for achieving success in the global e-commerce market. This has resonated with many struggling sellers.

Bai believes that Amazon is actively monitoring Shein’s progress. The expectation is that once Shein establishes a substantial user base, it may begin to allow third-party sellers to utilize its platform, mirroring Amazon’s own strategy.

The Pressure on Third-Party Merchants

• High inventory costs create financial strain.
• Intense competition, driven by customer reviews, is a constant challenge.
• Rising marketing fees further erode profit margins.

Amazon’s policies, while aimed at consumer protection, can inadvertently disadvantage sellers. Maintaining compliance requires significant effort and resources.

The situation underscores the delicate balance between platform integrity and the viability of the businesses that rely on it. Finding a sustainable solution is crucial for the long-term health of the e-commerce ecosystem.