Shein 2024 update – Part 2: Sales Models and Profitability
Shein 2024 update – Part 2: Sales Models and Profitability
Original pictures: Geralt and Shein
Contents
Introduction
Both Freya and I have been busy delivering separate study tours on EVs and retail innovation, respectively. As a result, we don’t have a ‘things that caught our attention’ section for you as we’ve not had time to follow the latest news closely in the past weeks. But for those who want to get an idea of my tour with K5 - Future Retail, check out this video impression.
Two weeks ago, we examined Shein's growth in different global regions and its logistics, assortment, and product development developments. In this second of two parts of our 2024 Shein update, we examine the different sales models that have developed in Shein’s backend, the outlook for the future, and the current profitability.
The first half of this report is available for all readers, while the section on market strategy, outlook and profitability is accessible to our paid subscribers only. Please consider supporting our work and becoming a paid subscriber (and get 26 full reports per year plus access to our archive).
Note: This article was based on 15 expert interviews. At times, the experts shared (slightly) contradictory information, especially in exact numeric data. In such cases, instead of discarding the information from both sources, we decided to include both. You may, therefore, come across some mismatches in the analysis below.
Ed Sander, Research Editor
Sales Models
Shein’s sales model and product structure are mainly composed of three parts:
Shein’s brands account for 70% of its clothing products.
Home appliances, electronics, and other products sold through the managed models account for 20% of the total transaction volume.
Third-party merchants contribute the remaining sales.
Shein emphasizes its multi-platform operation to reduce dependence on a single platform and, thus, potential risks.
Let’s explore Shein’s various sales models in more detail.
Self-Operated
We have written in-depth overviews of Shein’s self-operated model in the past few years. Instead of repeating ourselves here, we would like to refer you to Rui’s earlier pieces:
5/20/22: How Shein Works - An Update
11/22/22: Details on Shein's Operations
You can also watch a summary in this video.
Shein's strategy of establishing brand differentiation on e-commerce platforms is mainly reflected in its self-operated model, which covers product development (see the first part of this series), design and the shooting of high-quality pictures. In this way, Shein can avoid direct competition with other brands, such as Temu, for the same style of products and choose to launch unique styles and designs. Such a strategy helps Shein establish brand recognition among young consumers.
Managed Models
When Shein encountered competition from cost-effective platforms such as Temu, especially in the US market, it adopted a strategy to compete on price through managed model products. In 2023, Shein's self-operated GMV accounted for about 65%, while (fully) managed GMV accounted for about 20%, and the rest was the proportion of POP GMV.
These three different models are expected to continue to coexist in the next 2 to 3 years. The proportion of self-operated products may decrease, the managed model will remain stable, and the brand-owned operation model will develop the fastest.
The company has adopted various strategies to support merchants in the managed business. The company provides two main models: fully managed services are provided for merchants without online operation experience, while semi-managed services are suitable for merchants with certain operational capabilities. In this respect, Shein resembles Temu (see our May article on Temu’s semi-managed model).
In the fully managed model, products are stored in and shipped from China, belong to the supplier before being sold, and the weight limit is less than 1 pound. In the semi-managed model, merchants have warehouses abroad where the goods are stored. These merchants are mainly companies engaged in cross-border e-commerce business, especially those who have already sold on the Amazon platform.
In the two models, the characteristics of merchants are similar, mainly Chinese traders. The number of merchants in the semi-managed model is about 13,000, about 40% of whom can perform local warehousing and distribution in the United States. There are about 7,000 merchants in the fully managed model.
Meanwhile, the proportion of local merchants in the North American market is very low, only about 2-3%, whether shipped through local warehouses, official warehouses or third-party warehouses. Moreover, local merchants usually do not sell fashion products.
On the Shein platform, the operating model of third-party suppliers is OBM (Original Brand Manufacturer), which is similar to Pinduoduo's model. Although these suppliers can display their products on the platform, they do not have a complete store, and Shein still controls key operations such as product listing and pricing. Although consumers can see the store name of the supplier, this does not mean they have a real brand store. It is more like a managed service under the supervision of Shein, and these products are usually non-branded.
Fully managed model
Merchants may list hundreds or even thousands of SKUs at a time, greatly increasing Shein’s product offerings. Shein does not limit the number of SKUs on the shelves but pays more attention to the operation. Such a strategy has laid a solid foundation for its growth in 2024.
The growth in the number of merchants in the fully managed model mainly comes from the domestic (Chinese) market, where trade-based merchants occupy a dominant position. In contrast, the proportion of pure factory-based merchants is less than 20%.
Regarding pricing strategy, Shein does not pay special attention to whether the merchant is a factory or trader when pricing. It pays more attention to choosing the right supplier. As for profit margin, this will be adjusted according to the product. The gross profit margin can reach 13% for scarce or non-common products. For common goods, the gross profit margin of the first order may drop to 8%, and this number may drop further over time, possibly to 5% after a few months, while the net profit is between 2% and 3%.
Although Shein's fully managed service is similar to the operating strategies of other e-commerce platforms, there are certain differences in the distribution of product categories due to the different consumer groups it targets. In the fully managed model, Shein has added many new categories, and the sizes of these products are generally small due to the reliance on the time efficiency of air transportation (they need to fit in a small package and not weigh too much).
This year, Shein has introduced more preferential policies for merchants who join its fully managed model. Newly opened stores can register for free, and the required deposit is extremely low, or no deposit is required.
In the fully managed model, Shein’s gross profit margin is about 45%, of which logistics costs account for 27% and marketing costs account for 15%. Overall, income and expenditure are balanced. Shein's costs are expected to gradually decrease, especially in logistics and marketing.
For Shein, whether it is a self-operated or fully managed model, its supply chain and operation are similar to the conventional practices in the apparel industry. In the self-operated model, Shein needs to purchase goods on its own and bear inventory risks. In the (fully) managed model, the supplier keeps the goods in Shein's domestic warehouse. Shein is responsible for the packaging, delivery, after-sales and logistics processing of the goods. The supplier still owns the goods, as Shein does not purchase them. On the front end, there is no significant difference between the shopping experience provided by these two models for consumers.
The supply chain system is often connected to Shein's self-operated and managed operation models. Usually, the same system is used to manage warehousing and transportation. Both operation modes adopt a small-batch, fast-response production strategy (see the explanation video under ‘Self Operated’), mainly because fashion products require precise selection and rapid production. Suppliers must ensure that the delivery speed can match the efficiency of the factories that supply Shein's own products.
In the self-operated model, Shein is mainly responsible for product design. In contrast, in the managed model, Shein's procurement team will request suppliers, including factories, trading companies, or design studios, to bring their own samples for negotiation. Once Shein approves these samples, the goods will be accepted in its warehouse.
Its strategy is to use the fully managed model as a transitional stage to help merchants improve their own capabilities and transition to the semi-managed model. This approach can not only provide merchants with support in the early stage but also help them gradually build the ability to operate independently.
The ultimate goal of platform transformation is to enable most merchants to open stores independently. The current managed service is only an intermediate step aimed at helping domestic merchants with supply chain capabilities reduce the operational burden and prioritize expanding the variety of goods. If the platform's users and visits continue to grow in the future, it will help attract more well-known brands to set up stores here.
Despite this, the managed model will continue to exist because some suppliers are good at manufacturing products but not very skilled at managing online stores or conducting online marketing. These high-quality merchants can still get traffic support from the platform.
Differences in fully managed model approaches by cross-border e-commerce players.
Semi-managed model
Recently, Shein has made some significant adjustments. Specifically, at the end of June 2024, Shein adopted a semi-managed model in the United States and Europe. It also relaxed its product policy to allow clothing products weighing more than two kilograms to enter the warehouse (for fully managed business). As a result, the number of sellers on the Shein platform has increased significantly.
After Shein launched its semi-managed business, it overlapped with Temu’s semi-managed business in some aspects. Shein occupies nearly half of the U.S. cross-border e-commerce apparel market but has also begun offering daily commodities and home furnishing categories that Temu is good at.
In the fully managed model, merchants usually sell light and compact products, which cover multiple categories such as fashion goods, household daily necessities, outdoor products and pet products. However, that does not include some large commodities, such as air conditioners, refrigerators and office equipment. As we’ve seen with Temu, the semi-managed model does not have such limitations.
The semi-managed model is particularly suitable for handling more oversized products, such as sofas, outdoor tents, and fitness equipment. It is mainly aimed at merchants with experience in overseas markets. Shein is actively seeking to establish cooperation with merchants. It is expected that the semi-hosting service will also provide support similar to that described above for the fully managed model.
In the semi-managed model, Shein has two main ways to make money: profit through price difference and pure commission income. Under the price difference mechanism, the operator (Shein, in this case) raises the price after determining the base price. In the pure commission model, the operator extracts 10% of the total transaction amount as income. In contrast, Amazon's commission is about 15%.
About one-third of the fully managed merchants also engage in semi-managed business. Introducing semi-managed services has positively impacted the managed business, mainly regarding time efficiency. The delivery time from China is long, which makes it challenging to meet the demand for instant goods, but it has less impact on long-term stored goods.
In terms of order amount, the global GMV in the fully managed model is between $6 billion and $6.5 billion, down from $7 to $7.5 billion in 2023. Meanwhile, the global GMV in the semi-managed model is about $8.5 to $9 billion.
Looking forward, the average order amount of fully managed will continue to decrease, possibly falling to $4.5 to $5 billion. This downward trend is mainly due to the increase in logistics costs, so the weight of the goods must be strictly controlled, and lightweight goods are usually of lower value. In contrast, the GMV of semi-managed is expected to continue rising and may exceed $9.5-10 billion soon.
In terms of commodity types, fully managed will be responsible for handling products weighing less than 400 grams in the future, while semi-managed will handle larger commodities. Semi-managed is particularly suitable for handling large items such as high-value large furniture and garden supplies and may also involve high-value commodities in the United States, such as books, audiovisual products, and electronic products.
Third-party brands
In addition to the self-operated and managed models, Shein has also introduced some third-party brands that have adopted the POP model. In this model, brands can independently manage inventory and product pricing and need to handle matters such as customer service on their own, which is similar to the way merchants on JD.com or Amazon operate.
Since 2023, Shein has allowed these third-party sellers to enter its platform, setting up a marketplace and expanding the range of products. To improve retention and repurchase, Shein especially focuses on categories related to women’s fashion, like beauty care. The overall marketplace strategy of Shein is to focus on such complementary product categories and have a strict selection of partners. For the clothing category, the partners’ products must significantly differ from Shein’s self-operated products.
Merchant Policies
Shein attracts local merchants to sell products on its platform by offering a series of preferential policies and conditions. To compete with other e-commerce platforms such as Amazon, Shein may offer more competitive rates and more flexible operating rules. Specifically, Shein's policies include zero commissions for the first three months and free traffic, which is very attractive to merchants. In addition, Shein also provides a preferential payment policy, which can effectively reduce merchants' financial burden and help them grow and develop better on the platform.
However, to increase profits and compensate for investments in the fully managed model, Shein has reduced the preferential period for independently operating merchants (those not using a managed model). The original three-month commission-free period has been shortened to one month.
Shein’s managed merchants usually achieve a gross profit margin of 10% to 15%, while the corresponding merchants cooperating with Temu have a gross profit margin between 8% and 13%.
The second part of this article, which includes information on Shein’s market strategy, outlook, and profitability, is accessible to paid subscribers only.