Behind The Scenes At Shein
At Retail Week Live, we got a glimpse behind the scenes at Shein, it was like nothing else I've ever witnessed at a retail conference
Over the years, I’ve probably attended hundreds of conferences and therefore thought that nothing could surprise me. However, at Retail Week Live this week, that all changed via a session with Shein Head of Strategic & Corporate Affairs, Peter Pernot-Day, there to share with the audience the inside track at the much-maligned fast fashion retailer.
I’ll leave you to make up your own mind, about Shein, however, all I’ll say is that it was one of the most captivating sessions I’ve ever attended; you could literally hear a pin drop. Here’s what he had to say…..
“From 2012 when we founded the company to today, the idea was, let's start with wedding dresses. And why did we want to start with wedding dresses? Because they were a unique garment.
Every person tends to want something unique that reflects their vision of what a wedding dress would look like. And by using small batch production and a unique tailored approach that aligned suppliers directly with consumers, we were able to.
And then the pandemic hit. In 2019, we saw our growth begin to skyrocket. And it continued into 2020 as Americans and Europeans entered lockdown. But more than just those markets, Shein continued to expand globally into a range of countries as diverse as Saudi Arabia, Brazil and throughout Latin America.
And by 2022, we were servicing over 150 countries.
Today, the company is serving millions of customers around the world. Its 16,000 employees, which grew from that original four founders, are committed totally to providing safe, affordable and trendy clothes so that everyone can participate in the beauty of fashion.
And that was driven from those original wedding dresses, that original vision of finding unique garments that people want to wear. And we've been committed to that since then.
There are a lot of questions about our company though, and we're aware of that. People want to know, how are you able to achieve the price points that you are able to achieve? How are you able to offer so much variety in so many different markets? How are you able to enter those markets and compete?
And the answer goes back to something that we call the on demand business model. And we think that this is a unique and innovative approach to reorienting the mindset of traditional fashion forecasting and traditional merchant management systems.
So let me tell you a little bit about how it works.
We have teams of designers around the world in countries as diverse as South Korea, to a large team in Manchester in the United Kingdom that are focused on understanding trends and surfacing what we think trends will be in the ready to wear retail space.
What are customers looking at?
For example, the widely popular blue sweater among the male population in the room. Or they could be micro trends. For example, my 13 year old daughter is really into Goblincore.
That micro trend and that macro trend both have customers who are looking for affordable and trendy clothes. So how do we get those to them?
If the designer can surface that trend, they produce a technical pack and a diagram that is then fed into our digital merchant management system, which orchestrates relationships between cut, make and trim suppliers, raw material suppliers, fabric vendors, and any type of embellishment necessary.
And because it is fully digitised, it's able to achieve economies of scale that have most often been associated with vertical integration. We can negotiate bulk fabric purchases and then route them to the CMT producers. We can negotiate bulk zipper purchases, you name it.
The idea is to achieve, through technical integration and a digital management system, the benefits of vertical integration without having to own any of these particular suppliers.
That system also allows us to produce small batches.
Unlike the past, where you had to place an order of maybe 10,000 units or 100,000 units in an initial run, we're able, through this system and the partnerships we've developed with our CMT producers, to produce only 100 or 200 copies of an item for the entire world in that initial run.
So if we're going to test the market to see if blue sweaters are really as popular as we think they are, or if we want to understand if there's a niche market for Goblincore in the UK, we can test both premises and the designer is free to experiment and to engage our customers in conversation.
For those of you who are familiar with online digital marketing, this is a strategy akin to a giant a B test.
We're putting out lots and lots of SKUs, but behind each individual SKU is a very small number of markets. This allows us to test the market and measure actual demand for a product.
And if there is demand, our digital merchant management system allows us to go back to our supply chain and quickly produce additional runs.
The inventory levels we have are very low and we can clear them across the entire platform, which includes customers in over 150 markets. These advantages allow us to avoid having to include inventory risk in our cost of goods sold.
They also allow us to achieve a level of operational efficiency in our physical operations that allow us to further reduce the cost of goods sold.
We estimate that that reduction is between 15 and 20% per item. So not only are we able to profitably produce clothing, we're able to produce it at high quality and at velocity without having to take on excess inventory risk.
Some people say that we focused on the demand side of the business rather than the supply. And we think that orienting the supply chain so that it is equipped to communicate with customers and put designers directly into contact with those customers, giving them the freedom to experiment, is an innovation that we hope will help reduce waste in the overall fashion space.
Now, there are a lot of other inputs that go into that, and I will talk about our circularity strategy at the end of my presentation.
But we think that reducing waste and saving money is a way to engage customers both in the experience of picking out what they want to wear. You can find your Goblincore, you can find your blue sweater, but it also is a way for retailers to return to profitability and to do so at scale.
So how do we engage our customers?
I'm talking about this conversational data exchange and these A B tests. What is our approach to doing that? And I think that's the second innovation that we bring to the table.
E-commerce as it exists today is overly focused on high intention search. A customer will come to an e-commerce website and they need to have some idea of what they're looking for. I think, and we at SHEIN believe that the answer involves a much more engaging shopping experience.
Whether this is exciting imagery on a landing page, whether these are games, whether these are coupons, whether there's just a degree of silliness to it. Our idea is to get customers to engage and stay on our mobile application or our mobile website.
And we've optimised it to mirror certain aspects of social media platforms and certain aspects of video recommend, excuse me, video recommender systems.
What do I mean by that?
So if you go on our mobile app, and I hope you all do, after this talk, you can scroll through products. There's no loading, there's no category sorting, you don't have to search. It will automatically generate particular items that we believe you might be interested in.
And the more you're on the site, like Netflix or other video recommender services, our recommender system will begin to surface items that we think are relevant to you, that other customers that match your segmentation or your profile data.
Those things allow us to tailor the shopping experience so it is unique to you. We change the landing page imagery so it's unique to you or to customers like you.
The whole idea is to bring a level of immersion that is still far, far away from the power of physical retail, but much more engaging and interactive and oriented towards browsing than what first generation e-commerce platforms focused on, which was high intention search.
And this allows us two things.
One, it gets customers engaged, they stay on the mobile application and they're really interested in it. We see lots of engagement with content, but more importantly, we get to get a very fine tuned sense of what customers are interested in in particular markets.
And that allows us to feed that information back to our designers so they can truly engage in that conversational exchange with their customers. It equips designers with a new data channel to be able to surface new, unique, creative, innovative, or maybe conservative designs. And that helps us ensure that our inventory levels remain at that very, very low level.
Those two technical systems, the ability to have designers interacting with small batch production via that digital merchant system and the mobile application and the data that's derived from it, are the twin pillars of Shein’s success.
And we are working every day, all 16,000 Shein employees around the world, to try to refine these systems even more, to make them more engaging, to make customers feel more involved in the shopping process, and to find and surface niche products to serve niche communities that maybe have been excluded from the fashion industry, maybe haven't been able to find sizes that fit them, or maybe haven't been able to express themselves through their unique fashion taste.
Because we can do this profitably and in these small batches, we can serve all those communities. And that's been a key driver of our growth. In addition to our price competitive point and the high quality nature of our garments for that price.
This usually raises a question, okay, that's great. You're producing all this stuff, you've got this data model, okay, maybe you're doing it more efficiently than others, you've got some benefits of vertical integration, but you're still producing so, so many garments and you're still potentially involved in challenging business practices.
How do you account for that? How do you open up and be transparent about what you're doing? And this is something that I think is a fair criticism of our business today.
We have not been as transparent in the past, but that's beginning to change. And what we've done is publish an annual ESG report for the last three years.
This, it details certain aspects of our business, it details our environmental impact, it details things about our carbon emissions and how we audit and police our supply chain. And we report out on this every year.
Some of the highlights from this year are particularly interesting to me, and one of them is something that speaks to our spirit of innovation as a company. It's the use of textile to textile recycling technology.
We've been in partnership with a university in China to develop a next generation material that's derived exclusively from recycled polyester garments. In this way, we're focused on finding feedstock material that is derived from a fully circular source.
Instead of having to rely on plastic water bottles or other feedstocks for recycled garments, we're now able to use garments themselves.
And this points to, I think, an element of Shein's vision, which is we want to share our learning, share our business processes, share our technology and our approach with the industry so that everyone can participate in these changes, be it reducing waste on the production side or finding a way to manage waste at the end of the life of a garment.
And there are serious issues with both, and we're addressing them and trying to share them with the community. I think other issues that are often asked about us are, tell us about your supply chain. You have these capabilities to do this just in time. Manufacturing, how does your supply chain work? How do you pay attention to it?
And I think, to me, I think of this as the analogue part of the business. This is where the rubber really meets the road for us.
Without our supplier partners, we would not be able to flow the business as we do today. And so working with those supplier partners is critical. We have 5,400 contract manufacturers around the world. They're located in southeastern China, in Guangzhou and the Guangdong province. They're located in Brazil and they're located in Turkey.
And these contract manufacturers are trusted and audited parties. In order to come onto the SHEIN platform and work with them, they have to go through preliminary audits.
They also have to agree to a Shein responsible sourcing policy that puts them up to scrutiny annually by third party auditors in both announced and unannounced settings.
And in 2024, we conducted over 4,000 such audits, accounting for nearly 95% of our supply chain by procurement volume. These audits are designed to look at labour practices, the physical safety of plants, wage and hour, and whether or not there are inappropriate labour practices, such as forced labour or child labour. And we report all of this in our annual ESG reports.
In this way, what we're trying to do is drive change in our supply chain to make it more responsible and safer for our customers. But there's a little bit more to it. And I think this speaks to how we are leveraging our existing tech stack to actually drive social change.
So we noticed that you can do audits, that's great, you can police, you can have policies, procedures, that's fantastic. But there needs to be some mechanism to hold suppliers to an economic incentive.
And so what we began doing is assigning social responsibility scores to our suppliers based on their audit results. You know, you get an A, you're doing great, you get a B. Okay, Get a C, you get a D. All right, we need to have a conversation.
And using our platform, the digital merchant management system I was talking about, these supplier scores are able to weight potential bids and potential jobs for suppliers.
And it channels more jobs and more lucrative jobs to suppliers who score better on those social responses, responsibility scores.
And what we're seeing is as that economic incentive is introduced across our platform and across our third party suppliers, that we're driving change that through empowering and suggesting an economic incentive that that is helping to drive change throughout our supply chain.
And we think that that is something that is another potential model for the industry of using these technologies, using an economic incentive to drive material change.
I think the final thing that we are frequently asked about is about trade and the role of trade in our business. I think there is a misperception that our pricing advantage and our speed advantage are derived from us dodging tax loopholes or avoiding duties or things of that nature.
And I'm here to tell you that we do not rely on customs policy to be successful. What we've relied on and what will continue to be our North Star as a business is customer centricity. By giving customers what they want and building a technological and production stack to do that, we're able to compete.
The way I put it to my team is we don't cheat. We compete.
And we're here to compete fairly and openly and call for a level playing field so that the entire industry can compete together to hopefully make British consumers, American consumers, consumers in the European Union, happy with the clothes that they wear.
So I'll stop there. Thank you so much”.