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While considering the potential impact of Chinese cross-border platforms such as Temu or Shein on Western retailers, it's important to realize that the business models of the mentioned two are radically different.
Temu is focused on low-priced products from China with an average order value usually below 10 USD that are shipped via non-registered mail using the global postal infrastructure, with close to zero visibility and very unstable delivery lead times. It hardly represents any significant risk to major global retailers usually posing a threat to non-organized 1-dollar shops you would have in your neighborhood to buy some cheap stuff for an unimaginable number of necessities.
The industry itself is a heavily subsidized one as the extremely low AOV represents a big challenge to sustainable unit economics with the rising cost of acquisition and pricey cross-border shipping (especially as the costs of transportation went through the roof during the COVID-19 times).
Typical representatives of this segment had either to shut down their operations (as once unicorn Jollychic which has collapsed after raising several significant investment rounds and surpassing 1 billion USD of GMV) or are struggling a big time with making things work from the UE standpoint (Wish.com which was trading at almost 18 billion USD valuation at the end of December 2020 has lost 99.26% of its value since its successful IPO and now is trading at approx 125 million USD value). The list could be continued with dozens of smaller players experiencing the same unpleasant reality of the financial and operational challenged cross-border e-commerce model represents for this low-price segment.
However, Shein is an entirely different case. First of all, Shein has developed a unique business model of ultra-fast fashion that represents a true risk to the global fashion retailers in the fast fashion industry and is extremely hard to replicate if you are not located in proximity to huge, affordable and most importantly scalable manufacturing resources in countries like China, Türkiye or India. The business model itself relies on a very flexible production philosophy allowing the platform to introduce thousands of new SKUs every week. (Some estimates show that Shein introduces jaw-dropping new 6000 SKUs daily.)
Secondly, it's important to realize that Shein has achieved tremendous growth in its AOV over the years. According to company data in 2021, its average order value (AOV) was $70, while Amazon’s AOV was $52.33 on its 2021 Prime Day. Such a high average value combined with customer loyalty allows the company to maintain a very healthy growth model at a very impressive scale.
Scale is what makes Shein a real threat to global retailers. The company has announced that it has exceeded 1 million daily parcels in 2022 and several sources estimate its sales to reach 20 billion USD with an expected valuation of the company surpassing the mark of 100 billion, making it the most valuable fashion company in the world with valuation being higher than the valuation of Zara & H&M combined.
Therefore Shein's business model proved that it could pose a real threat to the world's leading retailers despite all the challenges that cross-border e-commerce might involve (delivery in 10-14 days vs. next day delivery proposition heavily marketed by the majority of retailers these days alone could be a huge show stopper but it looks like they are able to cope).
The major question is: How can retailers respond to the threats the new generation of cross-border e-commerce players can pose to their core markets?
Well, first of all, the business concepts are not in some kind of exclusive use of the players such as Shein and there are lots of lessons that can be learned from their fast and tremendous growth and could be re-used by major retailers in their development strategy.
Moreover, the rapid growth of the labor cost in China in the past years combined with the post-COVID logistics expenses increases created an opportunity for setting up production hubs in countries like Türkiye which now cannot only compete with China technologically but also allow cost-effectiveness in mass-scale production. Even more importantly geographical proximity of Türkiye to several major markets such as Europe, MENA, Central Asia can actually help major European retailers to use their own weapon against the disrupters. By setting up operations closer to the customer they can still enjoy the cost-effectiveness and flexibility of the cross-border model: even more affordable, even faster, and in a more predictable manner.
Another avenue global retailers might consider is forging partnerships with dominant e-commerce platforms. For instance, SPARC Group recently entered a strategic partnership with SHEIN, aiming to capitalize on SHEIN's vast online user base and combined retail strengths. Such collaborations could offer retailers the dual advantage of expanding their online presence while also innovating in-store experiences.
FJX Group helped several major players globally to design and develop their cross-border e-commerce strategy and has a huge experience in the industry that covers all possible aspects of the business: production hubs setup, sourcing, supply chain management, cross-border shipping solutions, IT infrastructure, and more.