The Year Ahead: Deconstructing Fast Fashion’s Future

In 2023, fast fashion accelerated. Following within the footsteps of e-commerce large and market chief Shein, a cohort of challengers has upended the aggressive panorama by producing trend faster and cheaper than earlier than. The primary era of fast-fashion heavyweights, like H&M and Zara, that launched the idea of stylish runway-inspired trend at reasonably priced costs has earlier than been challenged by a second era of digital-first fast-fashion gamers like Asos and Boohoo. Now, a 3rd era of firms is making its mark. Rising gamers embody Temu — a market owned by China-based PDD Holdings, which overtook Amazon because the most-downloaded purchasing app within the US and in a lot of the different 16 markets wherein it operates simply months after launching; Turkey-based Trendyol, a market backed by Chinese language web large Alibaba; and Cider, a US-based retailer concentrating on Gen-Z with a third-generation fast-fashion enterprise mannequin.

These firms, with their ultra-low costs and speedy turnover of stylish kinds, have captured the eye of shoppers in western markets. Two firms stand out on this regard: Shein and Temu (that are the main target of this evaluation). In keeping with the BoF-McKinsey State of Vogue 2024 Client Survey, 40 p.c of US shoppers have shopped at Shein or Temu up to now 12 months; within the UK, a more recent marketplace for the retailers, that determine is at 26 p.c. In the meantime, shoppers point out they want to enhance their spend with these gamers: web future buy intent for Shein and Temu is, on common, 18 proportion factors larger than that of first-generation rivals.

Extremely-low costs are integral to the success of the enterprise mannequin. Shein’s common SKU worth of $14 is considerably decrease than H&M’s $26 and Zara’s $34. Turnaround occasions from pattern seize to product availability are additionally condensed: Shein goals for 10 days, underneath half the 21-day minimal elsewhere. Nonetheless, this velocity doesn’t all the time translate to supply occasions — prospects usually wait weeks for parcels to reach for the sake of stylish designs and low costs. Buyer loyalty is constructed on extra than simply worth or velocity — the third era of gamers can also be remodeling the client expertise by means of gamification, micro-incentives and social media communities.

Updating the Mannequin

Undergirding the third era are a number of working mannequin improvements:

Agile, scalable manufacturer-to-consumer provide chains: Some third-generation firms have developed giant networks of suppliers who usually manufacture solely for them. For Shein, which was initially constructed with a first-party, owned-inventory mannequin (earlier than introducing a third-party, cross-category market in 2023), strict efficiency administration of suppliers drives reliability, whereas direct-to-consumer supply from China permits speedy scalability with low stock danger. Temu, in the meantime, operates purely as a market, discovering producers with extra capability and onboarding them to promote unbranded items on to shoppers in a low-price “B2B2C” mannequin. Whereas Temu’s costs are sometimes between 10 p.c and 40 p.c decrease than Shein’s, the retailer has confronted challenges referring to high quality management and reliability.

Knowledge-driven product design and testing: At Shein, merchandise are designed or chosen utilizing demand-driven pattern modelling, which features a vary of information inputs from present tendencies to viral merchandise to client notion. Shein provides between 2,000 and 10,000 objects to its app on daily basis and produces in small batches; to take care of a decent grip on inventories, hit charges evaluating product web page visits to gross sales are evaluated in actual time. Temu’s strategy additionally evaluates hit charges to feed again info to sellers on tendencies and demand ranges for his or her merchandise.

Loyal and rising buyer bases: Third-generation retailers have centered on constructing giant, deeply engaged, loyal communities. Shein’s multi-layered affiliate marketing online influencer programme, paired with natural social neighborhood constructing, has pushed viral consumer progress and low buyer acquisition prices. Temu is investing in advertising and marketing in a bid to scale quickly, posting greater than double the variety of Fb advertisements within the US than Shein, and greater than 4 occasions as many as Amazon. It reportedly spent $14 million for 2 30-second slots through the 2023 Tremendous Bowl, whereas market evaluation suggests its quarterly advertising and marketing investments are almost $500 million.

Excessive app adoption charges and engagement ways: Shein makes use of intensive in-app gamification, permitting prospects to earn loyalty factors by enterprise quite a lot of steps, together with establishing an account, importing evaluations, watching livestreams and taking part in outfit challenges. Temu equally gives rewards to prospects who invite associates to hitch and retains customers engaged with in-app video games. Temu’s conversion price is as excessive as 10 p.c, in contrast with an trade common of two p.c. Its retention charges rival these of Amazon, Shein and Walmart.

Pushing Again

Whereas they could have developed loyal buyer bases, these third-generation fast-fashion firms are additionally topic to public and regulatory scrutiny. Customers are more and more conscious of quick trend’s position within the wider trade’s detrimental impression on the setting, whereas coverage makers in key markets — notably the US and EU — are contemplating new legal guidelines to handle the fast-fashion trade’s alleged position in a tradition of overconsumption and make-take-waste.

Towards this backdrop, a number of the core tenets of the third-generation fast-fashion enterprise mannequin have gotten much less enticing. The usage of small-batch, reactive manufacturing has been positioned by some gamers as a part of a “zero-waste” sustainability narrative. Nonetheless, any such manufacturing can also be linked to speedy pattern cycles, which go hand in hand with ultra-cheap merchandise which are usually shortly discarded. Some third-generation gamers have tried, not all the time efficiently, to advertise a extra sustainable, moral aspect to their companies by means of advertising and marketing campaigns. Shein’s latest influencer marketing campaign to refashion the notion of its supply-chain ethics, wherein a gaggle of influencers had been invited to a Shein innovation centre, was seen as an try and gloss over the corporate’s alleged affiliation with unethical practices.

Many commerce and tax our bodies are contemplating new requirements that deal with the best way wherein some third-generation fast-fashion firms have handled “de minimis” commerce legal guidelines in jurisdictions just like the US, the place import taxes are much less for transport particular person orders on to prospects from factories overseas, slightly than in bulk — a typical apply amongst third-generation fast-fashion gamers. US legislators are presently debating two bipartisan payments associated to de minimis exceptions and customs and border scrutiny, which of their present kind might imply that exporters from international locations resembling China (together with main third-generation fast-fashion gamers) would not be eligible for de minimis exceptions and would as an alternative face enhanced customs and border scrutiny.

The long-term prospects of the third-generation enterprise mannequin might face some challenges as gamers mature. For instance, whereas Temu’s giant efficiency advertising and marketing spend and reductions have to this point helped the corporate to develop, it stays to be seen if it is going to be in a position to preserve its present technique, which requires important investments in buyer acquisition and razor-sharp logistics.

The Crucial to Adapt

The scene has been set for additional disruption within the trade. Within the face of incoming rules, growing public scrutiny and falling valuations (Shein’s $100 billion 2022 valuation reportedly dropped to $66 billion in 2023), third-generation gamers might not be capable of settle into their enterprise fashions simply but and should must adapt once more.

Shein is making an attempt to diversify its technique in a bid to take care of its main place. The corporate is experimenting with offline retail, together with pop-ups and shops-in-shops. It has shaped a three way partnership with Forever 21 to develop its US offline expertise, and has additionally not too long ago acquired the Missguided model within the UK. In response to import tax restrictions, Shein can also be increasing its supply chain past its community of producers in China, constructing warehouses in Europe, the US and Canada, in addition to factories in Brazil.

As Shein adapts its mannequin to face the brand new challenges — from a community of low-cost producers largely in China to new suppliers elsewhere on this planet, and from a direct-to-consumer on-line mannequin to offline or omnichannel retail — what has been its aggressive edge might face some dilution and the stickiness of its core buyer base could also be challenged.

The “the whole lot retailer” market mannequin would possibly maintain the important thing to potential success for gamers. Shein has piloted the mannequin within the US and Brazil and has indicated potential to develop in 2024. The retailer is even starting to enter luxury fashion, with listings from some luxurious manufacturers posted by third-party sellers making their approach onto its market (though the authenticity of this stuff is, as but, unverified).

In 2024, market disruption might collect tempo, with third-generation fast-fashion firms doubling down on marketplaces to develop throughout classes, worth factors and client segments. Buyer engagement is prone to stay a key differentiator, as third-generation gamers use their robust communities and gamification ways to extend common basket measurement, looking for to develop income and safeguard a viable enterprise mannequin for the longer term. The trade as an entire might really feel the results of those third-generation gamers: firms would possibly wish to be aware of their most profitable methods to seize the eye of the trendy client.

This text first appeared in The State of Fashion 2024, an in-depth report on the worldwide trend trade, co-published by BoF and McKinsey & Firm.