As Shein and Temu gain popularity, their disruptive influence on U.S. e-commerce and fast fashion has raised concerns about exploitative labor practices, tariff evasion and data collection, all in an anti-China environment continually growing.
BTIG analyzes the two activities, observing them more closely see how the explosion of fast-fashion and online marketplaces has led to meteoric growth for the two companies, and which US companies are most at risk due to their rapidly growing popularity.
Shein
Shein is the larger of the two with around $45 billion in gross merchandise value (GMV) versus Temu’s $14 billion GMV. Together, the two have generated $25 billion in GMV in the U.S. alone and are on track to reach $40 billion annually, double the amount of Macy’s (M) or Ross (ROST).
BTIG attributes this explosive growth to “subverting traditional e-commerce models and exploiting tax loopholes.” Both business models rely on extremely low prices that have led to rapid stock gains in an inflationary environment. Both are impacting incumbent US names not only in terms of market share, but also rising advertising costs in an increasingly competitive environment. And both take advantage of U.S. de minimis tariff rules that allow tariff exemptions on foreign packages with a value of less than $800, saving both companies millions of dollars in tariffs.
Who has the most to lose from Shein’s invasion?
BTIG estimates the overlap between Shein and Revolve (RVLV) and Lulus Fashion Lounge (LVLU) is about 20%, but the overlap is much greater at retailers like H&M, Forever 21, and Zara.
Does
Temu has become one of the largest e-commerce companies in the United States by acting as an intermediary between Chinese sellers and consumers. According to BTIG, Temu’s ability to source deeply discounted products directly from China is largely behind its rapid growth. And like Shein, Temu also benefits from the US and China’s advantageous trade policies and de minimis tariff rules.
Temu markets through social media, particularly TikTok, relying on influencers to appeal to a young demographic. The company also advertises heavily on Meta (META) and Google (GOOG). By gamifying its ads Temu is able to attract a higher percentage of younger shoppers. And while exact numbers can’t be confirmed, BTIG estimates that Temu had between 50 and 120 million active users in the United States in its first year of launch. Even more impressive is Temu’s permanence. The data shows that more than 28% of Temu customers made another transaction 16 months after their first purchase, nearly double that of Target (TGT) and Walmart (WMT) and “significantly” higher than that of Etsy (ETSY ) and Five Below (FIVE), although still well below Amazon (NASDAQ:AMZN) 50% retention.
Who has the most to lose from Temu’s invasion?
BTIG’s study shows that Amazon (AMZN) has the highest overlap at 25%, with companies like Etsy (ETSY), Ebay (EBAY), Wayfair (W), and Target (TGT) having a single-digit overlap . Temu also attracts high-income workers. Data from Earnest Analytics shows that approximately 44% of Temu’s sales come from individuals earning over $130,000 per year.
What could go wrong for Shein and Temu?
While the growing popularity of Shein and Temu seems to suggest exponential growth, there are some potential headwinds that could disrupt both business models.
Shein and Temu rely heavily on Chinese manufacturing, and deteriorating U.S.-China relations could cripple the fragile supply chain.
US legislation could also stifle Shein and Temu. Claims that both use forced labor and cotton harvested from exploited Uighurs in the Xinjiang region have raised US scrutiny and led to a ban on imports from the region.
Shein has been accused of intellectual property infringement by selling clothes designed by other brands. Increasing intellectual property laws could force Shein to make original designs, eroding profits.
The recent scrutiny of how TikTok collects user data is also an issue for Shein and Temu, as the latter collects a significant amount of data on US customers. A ban on TikTok could reverberate across other Chinese companies and leave both vulnerable to U.S. enforcement.
Customers are also becoming more aware of the use of unsustainable products. “Shein’s prevalent use of non-recyclable materials, often polluting to industry, has come under intense scrutiny,” BTIG says. While customers will continue to prioritize low costs over sustainability, studies show that 47% of respondents aged 25 to 49 will pay more for sustainable products.