The Shein Effect & Why We Invested in Portless

Why Retail Is Being Turned Upside Down By the Shein Model

Last week, Shein confidentially filed to go public. We don’t know their exact financials yet, but their growth is rapid with revenue jumping almost 50% from 2021 to 2022 to a reported $23 billion ad continued to grow at 40% over the first three quarters of 2023, likely surpassing Zara. What we do know is that their model has already begun to turn the retail market upside down.

Twenty years ago, brands like J. Crew dominated the U.S.market as creative designers developed products, and consumer tastes were driven by what was stocked in stores.. Today, that couldn’t be farther from the truth. Consumers discover trends on TikTok, Youtube, and Instagram and look to retailers/brands to deliver those products (or ones that resemble them) before a trend runs its course. However, traditional retailers have not adapted to that new reality. Most still make inventory decisions 6–9 months prior to those products becoming available for sale. H&M and Zara grew to multi-billion dollar companies by reacting more quickly to trends and bringing that lag down to just a few weeks. However, those businesses are being disrupted by Shein, Temu and a host of others that have utilized direct-to-consumer shipping from factories to bring the delay down to days.

This model change has allowed consumers to get the products that they want and has freed these retailers from the burden of massive, slow-turning inventory. The result is explosive growth, better margins, and a fundamentally different model for retailing. It seems clear that retailers of all sizes will need to adopt elements of this strategy or face extinction at the hands of these more nimble competitors.

How Does Shein Work?

The heart of Shein’s model is to identify trends and quickly develop apparel and accessories that match those market trends. However, rather than making large production runs, the company utilizes a network of manufacturers to create small batches which are then tested for consumer demand. Once an order is placed, the item is shipped directly to the consumer via air freight directly from the country in which it was produced (largely China today). Consumers receive the item within 6 business days and the item never touches a US warehouse. The advantage of this model is that Shein only makes enough inventory to serve near-term demand. If demand ramps, they can quickly create more inventory. If demand wanes, they simply do not produce more and aren’t left with excess inventory. This model allows them to test more than 1 million SKUs per year with minimal inventory risk, making them 50x faster than ‘Fast Fashion” brands like H&M that only release tens of thousands SKUs per year.

The model works despite the incremental air freight costs because 1) inventory holding costs and excess inventory write-downs are minimized/removed, 2) Items no longer need to be handled multiple times as they are shipped overseas, ingested into a warehouse, and then packed for delivery to the end consumer, 3) Overseas duties can be avoided as packages under $800 are exempt from customs duties 4) Airfreight enables packages to get close to last-mile fulfillment networks in the destination geography. There is no need to ship items from a warehouse in New Jersey to a house in San Francisco.

The all-in cost of shipping a shirt or a sweater from China to San Francisco is $5–7 (depending on weight) utilizing this model. It is hard to beat those economics.

Is This Model Just For Cheap, Fast Fashion Clothing?

Absolutely not. The fact that it works for incredibly inexpensive clothing validates the potential for this model more broadly. Brands like Quince have shown that this model can be applied to high-quality, and more expensive products. In fact, most of the press around Shein seems to revolve around its “disposable clothing” — but the truly innovative part of its model is not what is made, it’s how it’s delivered — the low-batch manufacturing and the direct shipment from China.

Clearly — this model won’t work for every category. Shipping a couch from China via air freight simply won’t be economical, but the model is applicable to a very broad set of products (apparel, jewelry, cosmetics, etc.)

Why Haven’t Existing Brands/Retailers Adopted this Model?

We have talked to dozens of retailers about this model over the past 6 months. We believe that this model is absolutely viable for existing brands and retailers. However, there are a few objections we’ve uncovered that have slowed adoption to date. We expect many of these objections will be overcome as brands/retailers begin to grapple with the power of this model (and the speed at which Shein and others are speeding past them by utilizing it.)

• Unaware of the Model: Despite the growth of Shein, many brand/retailer execs simply aren’t aware of how the model works. Most associate the growth of Shein and others with the brand, rather than the underlying model
• “It’s Too Good To Be True”: Many simply can’t believe that shipping products via air freight can be profitable. The truth is — it can.
• Manufacturers Can’t Support Low Production Runs: This is a legitimate concern, but one that will be overcome over time. As this model has proliferated, the number of manufacturers across the world that can do low-runs without a significant cost penalty will increase. Even modest reductions in production runs can yield great benefits for retailers/brands, and those changes will likely be able to be made with their existing manufacturers
• Change in Mindset: Brands and merchants have been embracing large seasonal buys for decades. This isn’t easy to change. Testing a product and making production decisions weekly (like Shein does) is quite a change from that old model. However, we expect brands to dip their toes into the water for certain production lines as they become more familiar with the model. Brands don’t need to convert completely to this model to yield benefits.

Who Will Adopt This First?

• Pure Plays: The initial adopters have been the pure-play models like Shein, Temu (a marketplace version of Shein), and startups such as Quince and Cider. They have built their business models around this trend.
• Influencers/Creators: Many influencers have turned to product/merchandise to monetize their audiences. However, unlike brands with long histories of purchasers, these influencers are unlikely to be able to predict the demand for a product that they are going to promote to their audience. They also have a narrow window by which to take advantage of that promotion. Under the old model, the influencer would have had to outlay capital for a large production run and then hope that they made the right amount of product. However, it is likely they will get that wrong, either leaving them with excess inventory or quickly selling out, with no chance of replenishment while the product was still “hot” with their audience.
• Multinational Brands/Retailers: This model is even more powerful for brands that sell globally. The traditional model of warehousing goods requires that the product be stored in warehouse in each country, or that the brand incurs expensive cross-border shipping. The challenge of getting the right mix by country is an even more daunting task than single-country brands. However, with this model, every country can be fulfilled from one central repository of inventory.
• Emerging Brands/Retailers: Emerging brands and retailers are cash strapped — especially as access to VC investment for D2C brands has all but dried up. One bad season could ruin an emerging brand if they are left with unsellable inventory. Even the brands are spot on with their buys, the traditional model requires capital to be tied up in inventory for months before consumers ultimately buy the product. This model enables them to be more nimble, free up cash, and reduce the impact of poor merchandising decisions.

Why We Invested in Portless — The Shein-Model Enabler

We at Commerce Ventures invest in enabling technology, not brands or retailers. As such, our enthusiasm for this sector has been directed at the startups that would enable brands and retailers to take advantage of this model. For every Shein, Temu, Quince, or Cider, there are hundreds or thousands of brands/retailers that could utilize this model, but lack the expertise, systems or networks to take advantage of it.

We recently invested in Portless, as they have created a platform that makes it easy for a brand or retailer to get up and running with this model in a matter of weeks. Portless was created on the back of founder and CEO Izzy Rosenzweig’s experience of running a brand that utilized this model. While the model worked, he quickly realized that many of his brand friends wanted to adopt this model, but couldn’t (and were reaching out to him to help!) As a result, he quickly pivoted to solve this problem on behalf of other brands. Portless solves the shipping, pick/pack logistics, and when necessary, factory sourcing to get a brand up and running.

We couldn’t be more excited about our investment in Portless and to see many of our brand and retailer friends begin to take advantage of this exciting and compelling model.

We’ll be keeping a keen eye out for Shein’s public IPO filings — as there are likely to be some additional nuggets of information that will shed more light on the nuances of the model.