Ultra-Fast Retail, Ultra-Fast Learning on SHEIN

SHEIN has been under scrutiny given its size, speed of growth, and opportunities for transparency and accountability. Can SHEIN balance sustainability and social impact with fashion and expression?

On this episode of TD Cowen’s Retail Visionaries Podcast Series, Peter Day, Global Head of Strategic Communications at SHEIN, joins Oliver Chen, TD Cowen’s Retail & Luxury Analyst. They discuss how SHEIN aims to create more accessible styles for shoppers across the globe and how they’re taking steps to operate with a more sustainable lens. They also discuss how the company is taking corrective actions to position the business for long-term growth.

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Transcript

Speaker 1:

Welcome to Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.

Oliver Chen:

The world of fashion and trend is evolving every day and speed has become a lifeline and a key point of innovation for retail companies today. Thank you for joining us. We have the privilege of hosting Peter Pernot-Day, the global head of Strategic Communications at SHEIN. He’s also a member of the company executive team. This is Oliver Chen Cowen’s retail new platform and luxury analyst, and this is part of our retail visionary series. Based on our research, SHEIN is an extremely significant and new tech enabled and innovation led retail player with broad relevance across Generation Z. Based in California, Peter helped set SHEIN’s global strategy. He leads projects across the organization focused on supply chain, market access, digital services, privacy and security, public affairs and ESG efforts. Prior to joining SHEIN, he held leadership roles at Mixpanel, a leading provider of data analytics, and at BNP Paribas, a global financial institution. He comes from Hamilton College as well as having a JD from Indiana University. Peter, thanks for joining us today.

Peter Day:

Hey, it’s good to be with you Oliver. Thanks for having us on the podcast.

Oliver Chen:

Peter, so what are SHEIN’s core competencies? What are your competitive advantages in terms of your business model as well?

Peter Day:

So when our founders set out to build SHEIN, they were very focused on solving a problem of empowerment. How do you get people to participate in the fashion industry? How do you equip them to self-express through fashion design and clothing in a way that isn’t intimidating, in a way that isn’t cost prohibitive, in a way that’s flexible and dynamic and meets their evolving needs? And many companies have wrestled with this. Perhaps it could be defined as one of the central challenges of the fashion industry, but the way that we approached it is really from a customer focused perspective. And let me explain how that works.

So in traditional fashion retail, you will produce clothing based on projected demand or where you think trends are heading. We take a slightly different approach, which is we try to measure demand using small batch production models where we will test a wide range of fashion options to see what actually sells. And then once we detect a demand signal, we’re able to go to our production suppliers and these are all third party suppliers, identify suppliers with capacity and then produce to meet that measure demand. What that does, Oliver, is dramatically reduce waste.

And because we have no inventory and such low waste, we’re able to reduce the cost of our goods to a tremendous extent. And because we’re producing to measure demand, we enable self-expression through the platform. And solving those two problems has what’s really driven our growth because we can be price competitive, but we can also allow our customers to self-express and to participate in the beauty of fashion as we call it. So to me, that’s really the secret sauce of SHEIN and it’s something that is very, very exciting about our business model.

Oliver Chen:

That’s consistent with one of our themes, magic and logic and thinking about self-expression and magic as well as logic. What about your supply chain and the logic of your supply chain and distribution model? What are some highlights in terms of how you approach this in a unique way?

Peter Day:

So one of the things that we’ve focused on is organizing our business, and supply and logistics are principally questions of organization. And a way we’ve done that is through a custom-built supplier management system, which is one of our key technological innovations. And it allows us to interact with our suppliers in a very direct and real time way where we can take these demand signals that we’re detecting from our mobile app or our website or our customer feedback, and then we can put that onto our flexible supply chain, which is made up of independent, usually small, medium size enterprises who are producing clothing. And using that sort of flexible tech driven capability, we’re really able to interact with our suppliers in a dynamic way.

Another feature of our superior organization is that we’re able to have these long term consistent, respectful relationships with our suppliers. We’ve worked with many of them for years, some since our founding, and we don’t just view them as suppliers who will go off and produce garments for us and receive payment, although that’s a critically important piece. We’re also looking to empower them. We provide employee assistance programs to supplier employees. We work to help them upgrade their physical plants. We provide training on digital technologies such as digital printing, and all of these things are pushing us to build a deeper partnership and a more profound partnership with our supply chain. And we think that’s a critical piece of it.

And so if I was to describe how we differentiate ourselves from others, we’ve got the technology component which allows for this flexibility and interaction with small and medium size producers, but we also have this deep kind of personal partnership with our suppliers that’s really, really important to us and to our brand.

Oliver Chen:

Peter, we were on campus together at Warden and the average price of your product students are pretty amazed. It’s so low. It’s substantially below competitors. How are you able to do this?

Peter Day:

So as I mentioned at the outset, our on-demand model allows us to dramatically reduce waste. And because of that, we are able to offer very significant savings because our cost of good sold don’t have to account for wastage, don’t have to account for excess inventory, and that’s really what drives the principle reduction in cost. I think we also are an online only retailer, so we don’t have physical retail stores. So that also reduces some of the carrying costs and costs of good sold on a per garment basis. And I’d say those are the two principle inputs.

Oliver Chen:

So Peter, you have a really advanced background, an environmental, social and governance. There have been several critical articles about your supply chain, labor and human right topics. What actions are you taking? Where do you currently stand on these topics?

Peter Day:

Part of our brand vision is to really empower people in the communities where they live in. We also are very committed to being a global citizen, and we take that commitment seriously and our ESG commitments, our commitments to circularity, our commitments to responsible and respectful sourcing are all tied in to that broader objective of being an effective global citizen. We have done a number of things to implement this. I think it’s great to say that in general, but it’s really about what are you doing in practice? And for us, that’s meant investing in reducing our overall carbon emissions. So we’ve set a target of reducing those by 25% by 2030. We think that’s achievable, it’s science based, and we’re on our way to doing that.

We have partnered with our suppliers on factory upgrades to make sure that they’re able to use sustainable energy sources, to make sure that they’re using more sustainable products and inputs into their production. We have looked at recycled fabrics and are starting to offer recycled fabrics in our supply chain. We’ve looked at our packaging and are looking at ways to make our packaging more sustainable, more recyclable. And so I think all of these things reflect a commitment at the very top of SHEIN to be a brand that understands its need to reduce its impacts, but also sees doing so as something that is part of our vision for ourselves as a company.

Oliver Chen:

You touched upon this, Peter, but one of the issues with fashion is using virgin polyester, also oil and textiles and dyeing as well. What are some highlights about what you’re doing here as well as related as the carbon footprint actions?

Peter Day:

So one of the things that we’ve been looking at is material development, and we’re looking at the use of fabrics that can be recycled multiple times so that even though you are producing at some point from a virgin polyester, you’d be able to reduce that fabric into a recycled product to extend the lifecycle of the product. Another initiative that we’ve launched is something called the SHEIN Exchange. And the SHEIN Exchange is a platform where people can purchase garments and then they can resell them to other customers via a SHEIN sponsored reseller platform. And this is another initiative that we’ve launched to try to extend the lifecycle and circularity of our clothing. So for us, I would say to sum up, we’re very keen on a circular model where clothing can either be recycled or reused or can be resold to extend the overall lifecycle of a particular garment and the materials that were used to make that garment.

Oliver Chen:

Peter, you also have really interesting innovation programs where you’re helping enable students and designers. Could you elaborate on that factor of your business too?

Peter Day:

Yeah. So Oliver, one of the things I’m really excited about SHEIN is this program called SHEINX, and I don’t know if you’ve heard of this before, but SHEINX is a program where independent designers can participate in the SHEIN platform by submitting their designs and they’re able to earn revenue for their designs if they sell on the SHEIN platform, but they’re also able to get exposure to a much broader audience than they normally would. We’ve invested $55 million in the SHEIN program. We currently have 3,000 designers globally that are participating in it. And it’s a way for us to both nurture and identify the next generation of visions and voices in the fashion industry in a way that we think is quite unique. And it’s really about, as I said at the outset, our brand vision of empowering people to participate in the broader fashion industry.

Oliver Chen:

Peter, another feature of your business model is really this newness as well as breadth. Could you brief us on what sets SHEIN apart there and how you have such rapid newness coming through your platform?

Peter Day:

As I mentioned, we are really customer driven, and so when we can detect demand and we can detect trends, both our internal design teams, some of our SHEINX product designers and other inputs into our platform are allowing us to offer a wide range of product offerings. But because we’re only producing in very small batches for each individual product, we’re able to offer such a wide range without having to massively scale up production. And that allows us to give customers tremendous amounts of choice to self-express and in many ways to help drive new trends because our clothing costs are so reasonable. You can find something that you might not normally buy, you might express it and others might like what you’re doing and also express that. And that allows us to have a tremendous velocity in our platform. But to get down to brass tax, it’s really about the on-demand model and the innovation of the on-demand model, which allows us to be so fast in bringing products to market.

Oliver Chen:

What’s the future, Peter, in terms of your physical footprints rather that be distribution centers? And also how you think about physical retail, you’ve had a number of very successful pop-ups.

Peter Day:

So we plan to continue to be online and we like our direct to consumer model. We’re very proud of that. I think we have seen great success in our pop-up model, and this is a way in which individual customers can come to a store for a period of time, interact with the brand, they can touch and feel the garments, they can see our brand vision and style, celebrate themselves in that style. And we really feel that that connects strongly with our customer base. So we’re very excited about the pop-up model and plan to continue that in 2023 and probably into 2024 as well.

We’ve also expanded pretty significantly in the United States with our distribution centers. So we’ve opened 1.5 million square foot distribution center in Whitestown, Indiana, and that is a major employer in that region. And we’re very excited about the team that we’ve built out in Indiana. We are also opening a second facility in Cherry Valley, California, which will also be a distribution center and allow us to mirror the success we’ve had in Indiana in California. But in terms of physical presence, our model is really about online only, and we want to have an immersive, exciting online experience for our customers. We think our mobile app does that. We think our website does that, and when it’s augmented with the occasional pop-up, we think we’ve found the right fit for our customer base.

Oliver Chen:

On the customer base, Peter, one question we get, who is your customer? How do you acquire this customer with the rise of new social outlets such as BeReal and TikTok?

Peter Day:

So SHEIN, as I mentioned, really focused on being as broad as possible. We want to empower everybody to participate in the beauty of fashion. We recognize that there are certain segments in which we’ve been more successful in reaching that customer base. We are definitely skew younger and we’re definitely very plugged into the Generation Z consumer, but we have customers that run the gamut. I think in terms of how we reach our customers, it’s a combination of organic advertising. You may have heard of the SHEIN halls. Those are largely organic. We do do some social media advertising and really we’re looking for the right combination to kind of triangulate our audience so that we can engage them where they’re at. Pop-ups are part of that story.

And I think another piece that goes into this is telling the story of the brand, Oliver. We care about artists, we care about social causes, we care about empowering people who may not have had a voice. And so we’ve reached out particularly in our communities to artists and other stakeholders to try to share how our brand sees the world and our values as a company and as a global citizen. And so we think that’s another avenue in which we can help our customers understand what we’re about and feel good about interacting with the brand, shopping with the brand, and wearing our clothing.

Oliver Chen:

On this topic, Peter, the innovation has been impressive. How do you source designs at such rapid speed and having so much compelling breadth as well?

Peter Day:

So the SHEINX program is a key component of that, right? We have these 3,000 independent designers who are submitting new and exciting clothing. So that’s one aspect of it. We also have an in-house design team. That in-house design team is working on identifying trends and sharing their internal vision. That’s more of a collaborative and internal process, but that also helps drive our designers. And so I think the combination of those is something that allows us to have a unique voice and a unique vision that goes out into the market and is accessible to everyone in a very competitive price point.

Oliver Chen:

Peter, what would you say are less well understood factors about SHEIN in your opinion?

Peter Day:

I think one misconception that I hear is that SHEIN is producing a lot of clothing and therefore there must be very significant waste. I think that we have this on-demand business model that I mentioned and that allows us to produce at scale and at speed, but without waste and without inventory. And we think that production model is actually quite efficient from both a business perspective, but also from an environmental perspective, because it allows us to eliminate excess material use, excess pollution that’s caused by excess material use. So we’re very excited about that on demand model. We’d love to get that story out there more. I think another thing that is often missed is about our SHEINX program, that we are interested in empowering designers. We want to give designers a voice. We want to see their vision and bring it forward on the platform, and I’d love to be able to share more about that as the program expands. We’re very, very excited about it and we see great opportunities to expand it in 2023.

Oliver Chen:

You’re also in many countries and many categories as well. Could you brief us on your global footprint and how you’re thinking about the brand more broadly outside of apparel as well?

Peter Day:

So we sell into about 150 countries. We are a global brand and a global company. We sell in multiple categories, but our principle category is fashion. We do do some interesting stuff like pet costumes. That was a very popular item in October, and we’re very excited about our customers who are into their pets and then able to meet them where they’re at with some exciting pet costumes. We sell some home good products, and for us, because we’re looking at demand and we’re looking at demand measurement, we’re constantly in this conversation with our customers about what they want and that allows us to tailor our offering to whatever they need at that particular moment, even if it’s a relatively small group of consumers, because we can produce with this on-demand small batch model.

Oliver Chen:

That’s another great topic. As we think about the future of the consumer and Gen Z and beyond Gen Z, what are some highlights about what you think customers could be looking for next and what you’re seeing?

Peter Day:

I think that Gen Z is a fascinating group of people, and I would hate to categorize them or say that I know or fully understand them. I don’t. But what we are seeing in our data is that self-expression and unique identity are very, very important. And platforms like ours, which are built to enable that and allow that and frankly encourage it, I think will be successful as this new generation emerges alongside of other generations.

Oliver Chen:

Yeah, body positivity, thinking about gender fluidity.

Peter Day:

Yeah, absolutely.

Oliver Chen:

Self-expression. Those are all topics that we’re really focused on as well. And then last question, let’s talk about what’s next for SHEIN. What are you most excited about as you think about plans and any closing remarks that you may have?

Peter Day:

In terms of what’s next for SHEIN and what I see in 2023 is the story of empowerment and that vision that animated us from the beginning I think is going to continue in a big way. I think you’re going to see more and diversified pop-up stores across our platform. I think you’re going to see some really exciting work around SHEINX. We’re very, very excited about the designers that we’re building, and we hope to dramatically expand it from its 3,000 footprint today to maybe 4,000 by the end of ’23. That’s a major effort for us. And I think you’re going to see continued us expansion. Our US headquarters is in Los Angeles. We’re very excited to see that grow and continue to build capabilities there. Obviously, I mentioned the Whitestown facility. I think that will continue to grow, and then I’m very excited to see Cherry Valley come online as we expand in the US and deepen our commitment to this market.

Oliver Chen:

Well, Peter, it’s great spending time with you. And importantly, it was great for you to highlight the ESG focus efforts at SHEIN, what you do uniquely in terms of supply chain and how you’re enabling self-expression at this very, very important business that you’re leading. Thanks for your time, Peter.

Peter Day:

It was great to be with you, Oliver. Thank you so much for having us, and it’s always great to talk with you, and I look forward to talking to you again soon.

Oliver Chen:

Our pleasure.

Speaker 1:

Thanks for joining us. Stay tuned for the next episode of Cowen Insights.

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