How Shein’s fast fashion business model and ESG concerns affect its valuation


Think cheap and trendy fashion and you can think of retailers like H&M, Forever 21, Cotton On (at least in the recent past). However, one online fashion retailer has overtaken all those fast fashion retailers without a physical storefront.

Shein is a Chinese online fast fashion retailer that has taken social media by storm. The #sheinhauls hashtag is trending on YouTube, Instagram and TikTok. Although Shein’s business model is primarily online (they don’t operate physical stores), they do occasionally host pop-up retail events.

Yet as Shein moves towards a public listing, its growth story has been dampened by ESG concerns.

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Shein is the best app download in the US (not just for shopping)

As of 2Q2022, Shein took the top spot in mobile app downloads in the US with 6.8 million downloads, overtaking Amazon, according to a report by Sensor Tower. While the United States is Shein’s largest market by lifetime installs, Shein also has over 500 million downloads worldwide.

This mobile market dominance is likely the product of Shein’s effective social media marketing, or more specifically, social commerce. According to Marketplace Pulse, Shein has ten times more followers than Amazon on Instagram and TikTok. This overwhelming social media presence has translated into effective business revenue for the company.

Shein is more valuable than Zara, Uniqlo and H&M

According to Bloomberg, Shein’s latest funding valuation of $100 billion puts it ahead of established fashion retailers like Inditex (parent company of Zara), Fast Retailing (parent company of Uniqlo) and H&M.

Source: Bloomberg

The company’s sales were $16 billion in 2021, up from $10 billion in 2020. Coupled with their growing mobile app presence and social media success, it looks like it won’t. There isn’t much to derail Shein’s growth story. Investors who have backed the company include Tiger Global Management, IDG Capital and Sequoia Capital China.

Source: The Economist

Estimates from Zheshang Securities, a Chinese broker, put Shein’s GMV in 2021 at more than $20 billion, a considerable increase from $2.3 billion in 2019. They project that gross commodity value (GMV ) by Shein will exceed Zara’s revenues in 2022.

ESG concerns have caused a backlash and a drop in valuations

On the back of this rapid growth, Shein is reportedly seeking a U.S. IPO as early as 2024. However, the very nature of the fast fashion business that has given Shein its dramatic growth also threatens its chances of success. public registration.

Fast fashion is an industry that wastes the environment, with consumers encouraged (and expected) to shop new clothes frequently to keep up with ever-changing trends. Shein is one of the biggest offenders of this throwaway culture, releasing 6,000 fresh storage units (SKUs) every day. By comparison, Zara launches around 10,000 new products a year.

Moreover, the low prices are said to be the product of low-paid workers who work long hours in dangerous working conditions. A Swiss watchdog group, Public Eye, released a report accusing Shein of violating Chinese labor laws, including informal factories set up in residential buildings, some of which had barred windows and no fire escapes. Shein was also charged with copyright theft. According to WSJ, Shein has been named the defendant in at least 50 federal trademark or copyright infringement lawsuits in the past 3 years. All, these ESG concerns have clouded Shein’s future prospects

Since its $100 billion valuation in April 2022, investors looking to cash out have been considering private offerings at discounts of around 30%, implying a drop in valuation.

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Shein is actively working to improve its ESG performance

Since the publication of the Public Eye report, Shein has launched its own investigation. At the end of 2021, they hired a global head of ESG. They have since released their first 2021 Sustainability and Social Impact Report.

According to Shein’s website, Shein is a signatory to the United Nations Global Compact (UNGC) and supports the Ten Principles focusing on human rights, labor, environment and anti-corruption.

Shein has also launched the SHEIN Responsible Sourcing (SRS) rating system and conducts regular supplier audits. The lowest level of Zero Tolerance Violations (ZTV) includes forced labor, serious environmental pollution, serious health and safety violations, and child labor. Suppliers who do not remedy violations within the timeframes provided may be subject to further action, including termination. About 12% of the suppliers audited were found to be ZTV rated.

Source: Shein 2021 Sustainability and Social Impact Report

Shein has also launched programs that enhance their social impact. Their incubator program, SHEIN X, has helped nearly 1,500 independent designers launch their own brands and businesses in 2021. That number is expected to grow to another 3,000 in 2022. Their philanthropic arm, SHEIN Cares, had raised more than $1 million to important philanthropic causes through activations, cash grants and product donations.

Criticisms of Shein’s ESG efforts often focus on shifting responsibility from business to suppliers. Shein works with over 6,000 suppliers to produce their wares, of which only around 700 have been audited. An extrapolation of the ZTV rating by 12% would mean that there are several hundred factories that could operate under zero tolerance conditions.

Shein’s attempts at environmental sustainability are also vague. In the 2021 Sustainability and Social Impact Report, one of the few projects that has a clear sustainable impact includes the use of digital thermal transfer and digital direct printing technology to save water during production . However, the report says Shein plans to develop clothing recycling programs, base energy consumption and set renewable energy targets. They also plan to announce a waste target by the end of 2022.

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Only time will tell if Shein would transition to a truly sustainable business model. However, it is encouraging that public concern about ESG has prompted the company to strive to improve its ESG performance. For ESG investors, this is a positive sign that ESG investing is having an impact on corporate behavior. To have real impact, investors and the public must continue to monitor and hold companies accountable for their ESG objectives.

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