Two China-based retail platforms, SHEIN and Temu, are getting a huge amount of attention in the fashion industry these days. I believe that the significance of these platforms goes way beyond the ability to give consumers trendy, low-priced fast-fashion merchandise.
Both retail websites rely on information technology to directly match consumer demand to dispersed production by a collection of factories in China. This method of reaching customers should inspire any business that provides products or services that come from many producers to reconsider their manufacturing and distribution methods.
“The success of Amazon, Shopify, and social commerce sites such as Instagram convinced consumers to move much of their purchasing power online. ”
That the model was born in China is not surprising because China has long had the problem that SHEIN and Temu were designed to solve. Ever since the late 1970s, when China ramped up its manufacturing production and began to open its economy to the world, its small and mid-sized factories struggled to gain access to the large consumer markets of the United States and Europe. American consumers bought Chinese products, but typically they did so under globally recognized brand names, including the private labels of mass merchants such as Walmart, Costco, and Target. Most of those profits accrued to the brands, rather than the Chinese suppliers.
E-commerce and the gradual supplanting of the sales and marketing roles of brands by consumer reviews gave American shoppers the courage to venture beyond the safe harbors of retail mass merchants. The success of Amazon, Shopify, and social commerce sites such as Instagram convinced consumers to move much of their purchasing power online.
More important, these channels taught Chinese businesses that they could approach the markets of the US and Europe more directly. Indeed, Amazon was the teacher. Beginning in 2013, the retail website began to recruit Chinese manufacturers to sell on Amazon Marketplace. The seeds for the birth of SHEIN were sown.
SHEIN’s two-sided platform
Selling on Amazon Marketplace was difficult for the small factories in mainland China because many knew little of fast-changing American consumer fashion tastes. SHEIN came to the rescue.
SHEIN, which had never sold products in China, began to make its presence felt among the North American teen and young women’s fashion crowd in 2019. Today, its revenues exceed $24 billion, making it the world’s biggest fashion retailer. It offers a rapidly changing assortment of affordable clothing, shoes, accessories, and beauty products for young women and, increasingly, for children and men. The company outsells H&M and Zara combined and does so with minimal reliance on brick-and-mortar stores.
“What SHEIN contributes to make the platform hum is remarkable sensitivity to the fashion tastes of its consumers.”
SHEIN is a platform. One face of the platform looks toward its consumers. It leverages deep skills in digital marketing to place stylish fast-fashion merchandise in front of target customers on social media sites such as Instagram, Facebook, and TikTok, as well as on its own website and mobile apps. Additionally, it has used email marketing, influencer marketing, and paid advertising to reach its target demographics, first in the US and later throughout much of the world.
The other face of the platform looks toward a wide network of 6,000 of those once-struggling small clothing factories in China. In this way, SHEIN acts as the go-between, linking Chinese factories to customer demand throughout the world.
But SHEIN is much more than an online marketer for these factories. What SHEIN contributes to make the platform hum is remarkable sensitivity to the fashion tastes of its consumers. It monitors what trendsetters wear on social media. When the company spots a design that looks as if it has potential, it commissions a small order from one of its factories, often just a few dozen pieces, which it floats on its channels to see if consumers are interested. If they are, the company reorders more products.
It calls the system “the large-scale automated test and reorder (LATR) model.” A business trade publication estimates that between July and December 2021, SHEIN added 2,000 to 10,000 items per day to its app. Sheng Lu, an associate professor of fashion and apparel studies at the University of Delaware, estimates that LATR generated 20 times as many new items as H&M or Zara in 2021.
SHEIN uses data and software to match consumer demand for designs to the capabilities of particular members of its manufacturing network, and it also keeps close tabs on customer outreach, order receipt, payment guarantees, and direct shipping services offered by manufacturers to customers. It monitors manufacturer performance as closely as it monitors customer preferences. This tight integration likely helps SHEIN persuade factories that it is better to work exclusively with SHEIN than to leak SHEIN’s insights about hot fashion trends to competing platforms like AliExpress and Amazon.
Temu follows suit
SHEIN’s rise to dominance in global fashion caught the eye of another Chinese data and software specialist firm, Pinduoduo. The company had begun as a platform to sell fresh produce by inviting consumers in China to combine their perishable needs with those of other consumers, and then inviting farmers in China to respond to the aggregated demand. Pinduoduo, later renamed PDD Holdings, opened an office in Boston’s Back Bay and launched Temu in September 2022.
“Temu uses the software of its parent company to match China’s manufacturing capacity to consumer demand in the US, and soon it’ll do the same kind of matching throughout much of the world.”
Temu announced its presence in a Super Bowl ad in early 2023 with two spots costing an estimated $14 million. The ads told Americans to “shop like a billionaire.” Younger Americans already knew Temu. In December 2022, it was the most downloaded app on Apple and Google, and, by January, it had been installed 19 million times.
Temu uses the software of its parent company to match China’s manufacturing capacity to consumer demand in the US, and soon it’ll do the same kind of matching throughout much of the world. It does this matching not only for fashion but for retail goods in general. Where SHEIN has 6,000 tightly integrated producers, it appears Temu has 100,000, offering a wide range of goods at startlingly cheap prices, such as an electric cooking pot for $2.14, a retractable kitchen storage rack for $6.58, and a swimsuit for $6.18 with free shipping.
The low prices may be temporary, but the integration with manufacturers is permanent. Whether that integration is tight enough in Temu’s case to discourage manufacturers from defecting to other retail sites, only time will tell.
Will this pioneering idea catch on?
The significance of SHEIN for global competitiveness is that for the first time since Chinese leader Deng Xiaoping opened the country to world trade in the 1970s, a proud Chinese retail brand bridging physical and digital domains has emerged in the Western world and is outselling Europe’s Zara and H&M combined. SHEIN is likely just the first made-in-China, sold-beyond-China retailer, as Temu’s fast follower launch suggests.
SHEIN and Temu are not just retailers. They are pioneering tech-enabled platforms that are changing the very nature of business. In the old days, a brand like General Motors leveraged its marketing and distribution power by buying up manufacturers. A brand like McDonald’s used franchising to achieve the same goal. SHEIN and Temu rely on IT to do the job.
Will other platforms follow suit? For instance, could YouTube and Spotify do a better job of matching users to artists if they played a more assertive role in artists’ production decisions while preserving their autonomy? Is there scope for Airbnb to better coach its hosts on the needs of its guests? Can platforms like Amazon Marketplace play a larger role in proposing product ideas to merchants?
Because the internet has enabled high-income consumer markets that respond to direct-to-consumer branding and low-cost producer markets that respond to data-driven coordination, more tightly coordinated models of global business have become possible and are likely to grow.
John Deighton is the Harold M. Brierley Professor of Business Administration Emeritus at Harvard Business School. Deighton studies consumer behavior and marketing, with a focus on digital and direct marketing.
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