Motley Fool Hidden Gems Investing - Fast Fashion’s Unknowns

Episode Date: November 24, 2024

Even if you don’t shop on Shein, the fast-fashion retailer may have changed online shopping for you. The site offers necklaces for under $2, hoodies under $11, and sneakers for less than $20. But, how is the company offering prices that low?  Timothy McLaughlin is a contributing writer for The Atlantic, with a story titled, “The Mysterious, Meteoric Rise of Shein”. Mary Long caught up with McLaughlin to discuss:   - The questions about how fast fashion became ultra-fast fashion. - Why Shein’s leaders may be staying quiet. - How an export and tax loophole is driving business for Shein and Temu, and why that could change.  Read Tim’s story: https://www.theatlantic.com/international/archive/2024/09/shein-ceo-chris-xu-fast-fashion/679709/  Companies discussed: PDD, AMZN OTC: HNNMY,  Host: Mary Long Guest: Timothy McLaughlin Producer: Ricky Mulvey Engineers: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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oh, like, you know, I never use that website or, you know, I'm not downloading that app. I stay off it. And I think people don't realize or maybe unaware that even if you're not using Shein or Timu, they've probably changed the way that you're shopping. I'm Ricky Mulvey, and that's Timothy McLaughlin, a contributing writer for The Atlantic, who's got a story titled The Mysterious Meteoric Rise of Shein. Shein is a fast fashion company that's taken off in the U.S., selling long sleeve T-shirts for $7 and jeans for under 20 bucks. The website is packed with flash sales and offers that almost sound too good to be true. And even if you haven't shopped there, Shein has changed the landscape for online commerce. Even Amazon has launched a competitive offering.

My colleague Mary Long caught up with McLaughlin to talk about his reporting and the questions surrounding this mysterious company. So you wrote an article that was published in The Atlantic a couple months ago about the mysterious and meteoric rise of Shein. This company started in 2012, though there are some sources that cite actually 2008 as the founding date. Today, over a decade later, little is still known about the company, especially its financials. It is privately held, but it's estimated that, okay, this is a company that brings

in over $30 billion in revenue, over $2 billion in profits. Its latest valuation said that the company was worth more than $60 billion. Tell us about this meteoric rise. is how did Sheehan get its start and how did it get to be the behemoth that it is today? Yeah, so what we do know, you know, from the reporting that, you know, I did, that many other people have done on the company,

Chinese language media, you know, about its early start is that Chris Xu, the founder, who also goes by a few other names, originally worked in search engine optimization and kind of used those skills that he had after graduating from university to start some smallish kind of e-commerce websites. Now, there was two other founders at the time.

You know, this part of the history, I think, is a bit kind of fuzzy because two of the other founders who used to speak to the media have now stopped talking to the media. So there is some of their telling of what happened out there. But in short, they said that Chris took the company that they built together that was selling products online and kind of seized the the company that they had worked uh to kind of build up and he took control of kind of the company accounts locked them out of the office and then kind of continued

on and uh ended up building the company into to what it is today i think one of the key things is that at first this was essentially kind of drop shipping sort of they were they were just selling products from from other uh companies only sort of later on did she and and chris you start making their own products under their own brand and selling them. And so there are a few still sort of spots where it's unclear kind of exactly what happened. That's because the founder has, to my knowledge, never given an interview about kind of how this started. Now they cite the company as having three other founders. We do know that the three other quote-unquote founders are the four people kind of make up the core members of the team.

that they all handle different aspects of the company. One of them has talked a little bit to the media. The other three remain a bit of a mystery. I think Chris Hsu, there are, as I pointed out in my story, photos that purport to be him out there. They're not him. They're a photo from a professor at Cornell University who told me that he regularly gets emails from people complaining about products, want to talk to him about the website. He's actually an extremely accomplished professor at Cornell. I think he works in biomechanical engineering. He's won like a heap of awards. He has nothing to do with the website. And so you can, if listeners are interested, you can look at the Wall Street Journal story that calls

him kind of like the most anonymous CEO in the world. And notice that there's no photo with that picture, with that story. It's illustrated. And I spoke to the illustrator in Brazil and he was provided photos from the newspaper of chris shu to base those drawings off of but there's no actual photo of him that ran uh that ran with the story so i think they go to great lengths to kind of keep him i guess out of the spotlight under wraps there's a there's a huge debate uh or there was a huge debate on the internet in china uh of whether he where he went to university is where he really said he went to university because there are photos of him at graduation some people think He's standing in front of buildings at a different university rather than the one that he said.

So, yeah, there's a huge amount of speculation, of intrigue, of rumors floating around about him. And I think a lot of that is because he's just exceedingly low-key and kind of under the radar. Like I said, there's not even really a good photo of him out there on the Internet at the moment. There's this obvious juxtaposition to be made because at least in the U.S., right, but elsewhere as well, we can venerate tech CEOs. And why, especially with that in mind, why is it that do you think that Xu chooses to keep such a low profile? To call it a low profile is also a bit of an understatement, like to remain so deeply anonymous. I think part of it is the political climate in China right now. You know, we've seen financiers, tech entrepreneurs, high-flying individuals in the business world in China been slapped down pretty hard by the government.

You know, Jack Ma, I think is probably the one that most people know, sort of vanished from the scene for a while during the crackdown on the tech sector in China a couple years back. You know, that's not, I guess, uncommon that these people sort of kind of go off the radar for a while. Whether, you know, what the state's involvement in that is, I think is difficult to know. But I think there is now a desire to stay pretty low key. I think, you know, the age of wanting to be the high-flying Chinese executive, wanting to be kind of on the billionaire list or things like that, I think people would much rather avoid all of that because there is a lot of attention that comes with that. We do know from other reporting on the company that the Chinese government is interested in what they're doing, that they do

keep tabs. Not only do they keep tabs, but they're certainly kind of, you know, watching, you know, what the company does, given its size, and kind of the attention that's attracted, especially, again, because of the geopolitical climate. So yeah, so I think that there are probably and there is a desire to kind of stay, stay very low key. And I think that's also that kind of leads into the reason of people might ask, like, why is the company in Singapore? You know, they go to great lengths to present themselves as a Singaporean company, even though we know most of productions in China, most of the sales are happening outside of China. You know, again, something that has become sort of a trend in the past couple of years. Probably, again,

people mostly know ByteDance, TikTok, moving their headquarters here and talking about being a Singaporean company. Singapore washing, a term that some of the more hawkish people in DC use for the practice now. I think all of that is wanting to sort of stay off the political radar, continue business as usual without, you know, stepping on the toes of the state. Sheehan is certainly sits at the intersection of lots of different geopolitical issues. And I want to touch more on those a bit down the line, but it also sits at the intersection of the conversation about fast fashion. That said, it is not the world's first fast fashion company. Before Shein came onto the scene, when did fashion first become fast?

Certainly the brands that people would be aware of that kind of get mentioned as the first generation of this would sort of be like H&M, I think would come to mind, Primark for British consumers zara you know that sort of first wave i think that people are are aware of and i think you know what what she did is is you know obviously the difference is what were one of the major differences they don't have brick and mortar operations right it's all online uh which is hugely beneficial during the pandemic right they were not shuttering places paying rent laying off employees because they were all online in that moment it was very it was very helpful to their business so i think those are sort of the the first uh or not first but maybe the you know the

ones that people are familiar with i think the argument that people will make is that that she and kind of went from fast fashion to hyper fast fashion or ultra fast fashion is something that some people use to kind of describe it i don't think people have settled on a term just quite yet but certainly something i guess new and and faster as you mentioned in the intro there the number of products that they're producing of designs that they're putting out hugely exceeds those kind of, you know, more traditional fast fashion brands that people might be aware of. And how exactly is Sheehan able to take fast fashion from fast to hyper fast and beat even Zara and H&M at this fast fashion game? Right. So I guess I touched on this a little bit of

the intro. You know, a bit of it is still unknown. They talk about and they have offered or begin to offer up their technology to other companies. They announced that a few months back. It is still, I think, a challenge to know exactly kind of what's going on, but we do know sort of the basics. And I think the basics are that they are producing much smaller batches of products than traditional fast fashion. They don't do runs of 10,000 items. They're producing a couple hundreds of items spread across dozens and dozens and dozens of really small producers, primarily in Shenzhen and in China. And what that does is it allows them to keep down their overhead and their warehousing fees. And I think those are two things that are very important in the

fashion industry. When you have an excess of clothes, two things happen. Not only, say, you make a t-shirt, it's terrible. The style doesn't really catch on. You have 10,000 pieces of clothing. You have the issue of, one, you have to pay to store it. It takes up space where you could be storing other stuff. Two, you might end up selling that at the end of your sale at a huge discount. So what Sheen's argument is, is that they produce smaller batches and they can do this because of, again, a sort of unknown tech advances that they've made that allow them to sort of predict or guess a little bit of what people's styles or trends might be based on shopping data and things like that. And then they can make smaller runs, which saves them money, ultimately

saves the consumer money and gets the products out to the market faster. And there are certainly questions around where a lot of the artwork and designs are coming from, you know, the company is facing. I mean, I haven't checked recently, but any given time, dozens and dozens of lawsuits over copyright issues, you know, taking artists' drawings or designs, slapping them on t-shirts, on phone cases, on things like that. Generally, what happens in those situations is that the company settles them, pays out the artists, and kind of moves along. We do know from reporting from Wired magazine that I cited in my piece that this cost them quite a bit of money and that they are certainly concerned from a monetary standpoint about it. There are, again, questions on how far

they're going to regulate it. There are, like I said, a lot of cases playing out now. And I should say these are not just like independent artists. They've been involved in lawsuits with tons of brands that people probably know, Oakley, Stussy, the list kind of Doc Martin, the list kind of goes on and on and on and on. And so that is also, I think, kind of a big issue with the company that people have been looking at. I want to focus on this technology piece because it kind of sounds like that is, in some ways, Xi'an's secret sauce. The Wall Street Journal reported earlier this year that Xi'an would start selling its supply chain technology to other brands. If that is a part of Xi'an's secret sauce, why sell it out to potential competitors or existing competitors? A couple

things. We do know there are Chinese security companies and other companies kind of in China that have gotten like a better look, I think, at kind of, you know, what's going on here. And There's some interesting pieces in Chinese language media about kind of how this all works. We do know that they're hoovering up like a huge amount of data when you're on the website, right? What you're clicking on, how long you're hovering above items. And this goes for the app as well, right? Because the app, I think, is really important to mention because that's kind of like where this all started. And I think the app is, if we're talking about the tech, not the production side, but the consumer side.

I do think the app is an interesting one to look at because it has really sort of gamified the shopping experience. There is a lot of interactive stuff. It is kind of keeping you on the app for a while. And it's like part social media, part shopping, part kind of community discussion on fashion. So it is, I think, a very interesting product that they have there on the phone. In terms of the production side, yes, the technology and kind of the design center and how they go about kind of producing this stuff. They have started, according to the journal report that you mentioned, though we haven't seen any, I guess, more news on who's taking them up on that. You know, I think there are looking for ways to diversify and they're looking for ways, new ways to kind of make money off of what they have besides just selling the clothes.

I think that offers a good opportunity to them. You know, I think that story, and I ask questions about this, again, sort of murky on the extent of what it would be, what exactly it would look like, what companies would have access to, if any of the companies have taken them up on that. I think it's an interesting story. I'm interested to see if there's, you know, follow-up or further reporting on kind of like what this all means, you know, because that story was out there. And then we haven't seen much about it kind of since then. When we think about these hyper fast fashion retailers, Shein kind of plays in the same space as Taimou and now Amazon is breaking into this space as well. They recently launched Amazon Haul.

All three of these sites kind of offer the same idea. Anything you want for what's effectively pennies or something close to it, right? Interestingly, like the site-wide strategy also seems pretty similar. You bombard people with options, emojis, offerings, like all these glittery sparkly things so they can't really process what's going on. Obviously, price is something that brings a person to any of these sites. But what if all three of these are kind of playing the same game and trying to beat each other out in a game of pennies, and there's so much stuff to choose from, why is one consumer going to one site over another? Do any of these actually have a moat

or a differentiator that distinguishes them from the others in the game? Yeah, so I think you pointed out something good there with you're very interesting with you know, amazon the halls People when I was writing this story, you know, there's certainly people who say oh like I you know I never use that website or you know, i'm not downloading that app I stay off it and I think people don't realize or maybe unaware that even if you're not using uh, sheen or timu They've probably changed the way that you're shopping because they are forcing competitors like amazon to change the way that they're presenting products and bringing them

to the to the market and selling them to consumers so people could say oh i don't use that or this or that it 100 is impacting the way people shop uh and the way websites work e-commerce even if you're not using it because they have become so successful and they've done so well that they are forcing the traditional big players like amazon to adapt and change that the way that they're that they're serving customers and also the way that they're dealing with their sellers on their on their own platforms. So in terms of what's different, there isn't a huge amount of difference at this point. You know, I think we see for many shoppers, the disappearance of brand loyalty, you know, that doesn't seem to matter that much anymore, right? Is the cheapest

price, whether it's kind of like from Amazon basics or from kind of an unbranded sheen or just a sheen brand or timu brand it doesn't on certain items people simply just seem to no longer care if it's from a brand that they've heard of or you know a pair of like a pack of white t-shirts whether it's just kind of the cheapest price point possible i think that what amazon is likely going for is familiarity you know people uh obviously in the united states very very familiar with it people certainly younger generation more familiar with you know sheen and timu that's obvious it's growing. But, you know, I think that they are hoping, Amazon's certainly hoping that people who are already on the website are, that are using it for, you know, groceries or, you know,

prime deliveries or streaming that they can then, you know, reel those people in with the same sort of cheap options on clothing and other items that are, that are available on the, on the other websites already. So, yeah, I mean, I think it's an interesting space to watch to see kind of how the competition continues. You know, Sheen obviously exploded huge, but also seems to be struggling in terms of, we see its valuation that has dropped from around $100 million down to $66 down to $50, I mean, billion, not million. And so there's been a slide there, you know, there's questions over there listing, you know, when that or if that's going to happen. So yeah, I think interesting to watch how the three of them kind of compete into space going forward.

Once upon a time, Sheehan was eyeing an IPO in the U.S. That idea has kind of died. What happened to that plan? Yeah, I mean, so for the past at least, I think, three years, you know, there has been stories that have been leaked or floated that the IPO is coming really soon. It's right around the corner. You know, now we are definitely in the back half of 2024. We do know that the latest target would be in the U.K. for a London listing.

yes that the u.s was was certainly originally the the intended location from the reporting that's out there you know that didn't happen i think for for a number of reasons you know there's just a huge amount of scrutiny um on the company in the u.s and also there's scrutiny in the company from the company in china and and whether and from authorities there because the production and their most employment continues to happen there that gives the chinese government a level of control over the company and where it can go. So now, for the past year-ish or half year at least, the reporting and the talk has been of the listing in London. Like I said, you know, obviously, we're almost into December here, and that hasn't happened yet. So I think people are

watching that. There has also been floated by people in the kind of financial journalism world that they could always return closer to home and head to Hong Kong. Certainly, a city that is looking for big, you know, listings at the moment, that's looking for some good financial, you know, economic news, you know, that would kind of be a splashy get for Hong Kong. It would certainly kind of play into Hong Kong's current plan of trying to integrate itself more with the mainland and with the mainland market. That one is just sort of speculation. London seems to be the spot for now. But yeah, I think a lot of waiting and seeing if and when this thing is going to happen. The company did take on a lot of funding from some big firms who one would assume

at some point would like to see returns on the investment that they made, some of them as early as almost 10 years ago now. Definitely a lot of eyes watching kind of where they go. For London, some people have asked why there. I think the stock market there is in pretty bad shape. It would be a big boom for the UK to get a big listing like this. The IPO would probably be very, very large. It would also maybe, you know, help the current, the new government of the UK show that they are, you know, willing to kind of, you know, do business with China and be a little bit, you know, more accommodating on the geopolitical front there. We talked about how Xi'an kind of sits at the intersection of not just the fast fashion

world, but also kind of right in the middle of a lot of hot geopolitical issues. One of those issues that I didn't fully realize until reading your story is about this loophole in import taxes and import duties that Sheehan gets to pay. So maybe you can walk us through this a bit. What is the de minimis clause and how is that relevant to the Sheehan story? Yes, I should have mentioned de minimis earlier. It is a piece of legislation or law rather in the United States that I think very few people really paid attention to except sort of trade walks and maybe some people in the freight import-export business until very recently because of the connections to China. What it allows for is for packages, small packages, to come into the United States if their

value is below $800 is the threshold right now. They are subject to very little inspection entering the United States, and they are free from paying taxes and tariffs on those packages. So with a website like Shein, where many of the items, as you said earlier, cost a few cents or a couple of dollars, you can obviously order a lot of stuff and the company can ship it into the United States with very limited oversight and also avoiding paying taxes and tariffs on the items that are coming in. Critics call it a loophole. It was much lower until the Obama administration.

It was part of a larger trade package that went through, you know, Congress was signed into law by Barack Obama that raised the threshold. It used to be $200. It raised it up to $800. The feeling at the time was that the countries on the U.S. border, Mexico and Canada, would also do this. It would facilitate kind of easier trade, and it would also allow Americans to travel abroad and bring back gifts and things like that without declaring that they're going through paperwork. I should also say there was a huge amount of lobbying to get the number raised to $800 and even higher in some cases by shipping companies like FedEx, who obviously benefit from the increased volume of packages that would be moving into the United States. It sat at $800

for a long time. I don't think a lot of people really, like I said, I think trade walks and some other people were kind of interested in it. It became a massive issue really kind of during the pandemic, when people were at home shopping online a lot, and we see this just huge uptick in packages that are coming into the United States using the de minimis law. And so they're coming in this year, probably over a billion packages entering the United States. And that caught the attention of a lot of lawmakers, again, given the tensions and the situation with China, asking, are these companies kind of paying their fair share? I think that bit of it has been going on for a while now. There's been a lot of legislation that's been introduced. Not a lot

of it really moved for various reasons. There are big business groups, again, express shippers who would like to see this stay. Now, I think what happened and why we're all of a sudden seeing a lot more movement on it, we saw the White House address it yesterday, the U.S. Economic and Securities on China, the commission talked about it as well. I think what has happened is lawmakers and people who are critics of this have started linking it to the fentanyl trade and saying that, hey, this is how fentanyl is getting into the United States from China. You know, they're bringing in either the product itself or the chemicals to make it is coming in through this means. When you link it to that, and then you start having victims' families come and testify

and talk to Congress and stuff, now suddenly there's a huge amount of interest in kind of what is this and how can we change it? So I think for the past couple of years, that's been sitting there. There's been a lot of talk about it. It's gotten a lot of attention. It hasn't really moved. Now, all of a sudden, I think we're going to start seeing some changes because of, again, the geopolitical climate and linking this to something that's very serious. And by the way, this is by no means saying that Timu, Sheen, that anyone of these companies are involved in any way in the drug trade. I'm just saying that this is, I think, how lawmakers who are against this and critics of it have found a much more sort of emotional and emotive way to

lobby on changing it. And that's gotten a lot more attention. And so I think that we will see, you know, we already saw Biden announce some changes to it. You know, who knows with the Trump administration how that will go, but certainly seems to be a ton of, you know, cross-party support for doing something to change this. That would be a big blow for Sheen and Timu, although they're already sort of pivoting. I would point people if they hadn't read it to the rest of the world story that came out, I think this week or last week about using family warehouses, which are essentially houses of Chinese immigrants living in the United States and kind of housing the packages there before they go out to shipment. You know, the other

issue here is that a lot of companies are shipping the products from China to Mexico or Canada, where they break the packages up into smaller pieces, then bring them into the United States. you know, we see, again, lawmakers calling for some regulation on that, you know, on other sides of the border. So certainly an issue that I don't think is going away. Again, because it's being linked to fentanyl and the drug trade with China, I think it's going to see some changes coming up at some point. Yeah, you've got this newer emotional side to it being brought up. But also in June 2023, just to put some numbers behind it, and you cite these numbers in your reporting, The House Select Committee on the CCP found that in 2022, Gap paid $700 million in import duties. H&M paid $205 million. Sheehan and Temu paid nothing. So we've already heard, you know, you mentioned, I don't know what the Trump administration is going to do. We've heard a lot about tariffs recently. I can imagine that certainly being a sticking point moving forward.

Tim McLaughlin, thanks so much for the time. Thanks so much for your reporting on this company, though I'm sure parts of it were frustrating because it is indeed so mysterious. But thanks for coming on and spending some time with us on Motley Fool Money. Really appreciate having you here. Yeah, thanks so much. I appreciate it. We've got a link to Tim's story in the show notes if you want to check it out. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers. Motley Fool only picks products

that it would personally recommend to friends like you. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.