The valuation plummeted by 36 billion. SHEIN, which was attacked by Temu, wants to create an Amazon?

Amid the economic downturn, pessimistic market expectations permeate all walks of life. Even SHEIN, which created the myth of fast fashion going overseas, could not avoid being hurt by the cold.

In April 2022, the news that SHEIN had reached a valuation of $100 billion caused a stir in the industry. At that time, it was trying to seek $1 billion in financing based on its valuation that exceeded the combined valuation of Zara's parent company and H&M.

Back in 2013, SHEIN gave up its wedding dress business and turned to the fast fashion overseas business to make money. It soon attracted capital and received a $5 million Series A financing. At that time, SHEIN's valuation was only $25 million.

In the seven years that followed, capital supporters flocked in, and SHEIN's valuation soared to US$15 billion in 2020. Under the cross-border e-commerce boom boosted by the epidemic, SHEIN, which had been dormant and growing, gradually unveiled its mysterious veil, and its valuation exploded to US$100 billion in less than two years.

However, the phenomenon of good times falling after the peak always happens. In just 8 months, SHEIN's valuation has fallen sharply.

According to the Financial Times, SHEIN is currently negotiating a £3 billion round of financing, led by Abu Dhabi sovereign wealth fund Mubadala, venture capital group Sequoia China and private equity group General Atlantic. In this new round of financing, SHEIN's valuation will be significantly reduced to $64 billion.

In fact, there were early signs of SHEIN's valuation plunge. In July last year, people familiar with the matter revealed that due to concerns about SHEIN's slowing growth, some shareholders planned to cash out before its initial public offering. The private offer made investors seeking to sell SHEIN shares re-evaluate SHEIN's market value, which means it may face a 30% valuation drop.

At the same time, on the one hand, there is a growth crisis triggered by factors such as the sluggish macro-economy and the sluggish consumer market, and on the other hand, the Fed's interest rate hike has led to a reduction in market funds. Under these two pressures, falling corporate stock prices and difficulties in financing have become common phenomena.

This can also be seen from the movements of cutting-edge science and technology companies. Due to a shortage of funds and increasing uncertainty about future development, Silicon Valley has been hit by a hurricane of layoffs. Giants such as Twitter and Meta were the first to sense the subtle changes in the macro environment and have cut costs and shrunk their businesses.

Looking at other e-commerce peers, Amazon's market value shrank by 834.06 billion in 2022, a drop of more than 50%, and Pinduoduo's market value also evaporated by half, from a peak of 240 billion US dollars in February 2021 to around 100 billion US dollars.

For this reason, the impairment of SHEIN can be said to be an inevitable result under the overall environment.

On the other hand, SHEIN, which has experienced explosive growth in the past two years, is inevitably facing a slowdown in growth. Faced with multiple challenges, the upgrade and transformation of the business model is imminent - provided that there is sufficient financial support.

Therefore, SHEIN now has to reduce its financing price and seek more capital umbrellas to support subsequent business development.

The sudden emergence of Pinduoduo Temu made SHEIN sense the danger signal.

SHEIN's valuation has expanded from the initial US$25 million to US$100 billion at its peak, which is inseparable from three winning magic weapons: low-price strategy, traffic marketing and flexible supply chain model.

Although SHEIN's fast-fashion overseas philosophy has long been thoroughly analyzed by the industry, the apprentices who have flocked in like a tide often fail to grasp the key points in the process of catching up and imitating. Pinduoduo, which emerged halfway, has obviously hit the essence of SHEIN's success.

In terms of business model, Temu and SHEIN are similar in that they both start from the US market with the greatest consumption potential, establish a low-price strategy as their foundation, focus on fast-fashion women's clothing categories, and implement a unified platform delivery operation model.

In terms of marketing strategies, both platforms focus on social media traffic generation. In the first month of its launch, Temu's public domain traffic acquisition and content delivery budget reached RMB 1 billion. Instagram and Facebook, two major social media platforms, contributed 30% of its traffic and became its most important traffic generation channels.

In terms of rear-end deployment, Temu adopted a strategy of poaching SHEIN employees. On the one hand, it poached SHEIN employees with high salaries, and on the other hand, it penetrated into Guangzhou Panyu, the heartland of SHEIN's supply chain, and extended olive branches to SHEIN's suppliers. According to industry reports, some suppliers were even fined hundreds of thousands of yuan by SHEIN for supplying Temu.

Temu, which uses similar tactics, made a strong attack when it was first launched, topping the US shopping app download list in just one month. With the support of low-price subsidies and viral marketing, its traffic has grown exponentially.

Although Temu’s current size cannot shake SHEIN’s deep-rooted foundation, the highly overlapping competition between the two makes it difficult for SHEIN not to have a sense of crisis. Not only that, Temu’s low-price strategy is more violent and effective, and more importantly, it hits the biggest weakness of SHEIN’s high-growth path - profit.

Data shows that SHEIN's net profit margin was around 6% in 2021, and its profit further declined in the first half of 2022 due to a 35% increase in procurement costs. Compared with its competitors, Zara's parent company Inditex has a net profit margin of about 11.7%, while Nike's is about 12.9%. It can be said that SHEIN's profit level is at the lower end of the industry.

At the beginning of last year, SHEIN set two core goals: to increase the average transaction value (ATV) and optimize profit margins. As of the first half of 2022, SHEIN's ATV is priced at US$75 in the global market, compared with US$50, US$60 and US$70 in the past three years. However, it turns out that price increases have not solved the fundamental problem of low profit margins.

When the epidemic dividend broke out, SHEIN's revenue growth rate soared to 250% in 2020, but it dropped sharply to 60% in the second year. When growth encountered bottlenecks, SHEIN's continuously declining profit margins also buried the hidden danger of insufficient profitability and difficulty in supporting the healthy long-term development of the business. Feedback to the capital market naturally made it difficult to match the expectation of a valuation of US$100 billion.

With a lack of profit margins and the successive attacks from rivals such as Temu and TikTok, SHEIN is also facing the challenge of defending its position in the lower-tier markets, so transformation is almost imminent.

From expanding the market and investing heavily in improving the supply chain, to expanding business and testing the third-party platform model, these are all moves SHEIN has made to solve the current predicament. However, this undoubtedly requires huge financial support. Even if the valuation shrinks, it is necessary to gain the strength to move forward from the financing channel despite the market coldness.