The State of Fashion 2024 report highlights that the success of both disruptive and fast fashion brands in the present may depend on their adaptability to increasing competition and other pressures within the industry.
Summary:
- Evolving models
- Pushing boundaries
- Necessity to adapt
In 2023, fast fashion accelerated its pace, following the footsteps of e-commerce giants and market leaders like Shein. A group of challengers emerged, reshaping the competitive landscape by producing faster and cheaper fashion.
The first generation of fast fashion giants, such as H&M and Zara, which introduced the concept of affordable, runway-inspired fashion, faced challenges from the second generation – digital fast fashion players like Asos and Boohoo.
Now, a third wave of companies is making its mark. Players like Temu, owned by PDD Holdings in China, surpassed Amazon to become the most downloaded shopping app in the U.S. and 16 other markets within a few months of its launch. Trendyol, based in Turkey and backed by Chinese giant Alibaba, and Cider, a U.S.-based retailer targeting Gen-Z with a third-generation fast fashion model, are also gaining prominence.
The competition among fast fashion players is expected to intensify in the coming year. These companies, with their ultra-low prices and agile trend-capturing capabilities, have captured the attention of Western consumers. Shein and Temu are particularly notable in this regard.
According to the BoF-McKinsey 2024 Fashion Consumer Survey, 40% of U.S. consumers shopped at Shein or Temu in the past 12 months, while in the U.K., a newer market for retailers, the figure is 26%. Moreover, consumers express a willingness to increase spending on these companies, with the purchase intent for Shein and Temu being 18 percentage points higher than their first-generation competitors.
Low prices are a critical factor for the success of the Fast Fashion business model. Shein’s average SKU price is $14, significantly lower than H&M’s $26 and Zara’s $34. The turnaround time from trend capture to product launch is also shortened, with Shein targeting 10 days, less than half of the minimum 21 days elsewhere.
Temu, another fast fashion shopping platform and Shein’s recent competitor, is gaining attention as well. However, its speed doesn’t always apply to delivery times, as customers often have to wait weeks to receive products. Customer loyalty is not only built on price or speed – the third-generation players are also reshaping the customer experience through gamification, micro-level incentives, and social media communities.
Evolving Model: The third-generation platforms introduce innovations in their operating models:
- Flexible and expandable supply chain from manufacturers to consumers: Some third-generation companies have developed networks of large suppliers, often exclusively producing for them. For example, Shein initially operated on an in-house inventory model before introducing a third-party multi-category marketplace in 2023. Tight performance management of suppliers will enhance reliability, while direct shipping from China to consumers allows rapid expansion with low inventory risks.
In contrast, Temu operates entirely as a marketplace, seeking manufacturers with excess capacity and enabling them to sell unbranded goods directly to consumers in a low-cost “B2B2C” model. While Temu’s prices are often 10-40% lower than Shein, this retailer faces challenges related to quality control and reliability.
- Design and product testing based on data: Shein designs or selects products using trend-demand models, incorporating diverse input data from current Fast Fashion trends to viral products and consumer perceptions. Shein adds 2,000 to 10,000 items to its app every day and produces in small batches. Temu’s approach also evaluates high demand rates to provide information to sellers about trends and the demand for their products.
- Building and expanding a loyal customer base: Third-generation retailers focus on building deep and robust loyal communities. Shein’s multi-layered influencer marketing program, combined with the organic social community, has driven user growth with a low customer acquisition cost. Temu invests heavily in marketing, doubling its Facebook ads in the U.S. compared to Shein and quadrupling those of Amazon. Reports indicate a quarterly marketing spend of nearly $500 million.
- High user acceptance of shopping apps and interactive strategies: Shein employs widespread gamification within its app, allowing customers to earn loyalty points through various steps, including account setup, posting reviews, watching live streams, and participating in fashion challenges. Similarly, Temu rewards customers for inviting friends and engages users in in-app games. Temu’s conversion rate is as high as 10%, compared to the industry average of 2%, and its retention rate competes with Amazon, Shein, and Walmart.
Pushing Boundaries: Despite developing a loyal customer base, these third-generation Fast Fashion companies face scrutiny from the public and regulatory bodies. Consumers are increasingly aware of the negative impact of fast fashion on the environment, while policymakers in key markets – especially the U.S. and EU – are considering new laws to address the industry’s accused overconsumption and “produce-consume-dispose” culture.
In this context, some core principles of the third-generation fast fashion business model are becoming less attractive. The use of small-batch production methods is seen by some as part of the “zero waste” sustainability narrative. However, this production method is also associated with rapid trend cycles, often leading to quick disposal of inexpensive products.
While some third-generation players have attempted, not always successfully, to promote a more ethical and sustainable aspect through marketing campaigns, the industry is facing new standards. Trade and tax authorities are reviewing new standards to address how some third-generation fast fashion companies handle “De minimis” trade laws (understood as negligible amounts of imported goods) in legal jurisdictions like the U.S., where lower import taxes apply when shipping individual orders directly to customers from overseas factories, instead of in bulk – a common practice for third-generation fast fashion players.
U.S. legislators are currently debating two bipartisan bills related to “de minimis” exemptions and customs and border enforcement, which, in their current form, could mean that exporters from countries like China (including large third-generation fast fashion companies) will no longer qualify for “de minimis” exemptions and will instead face strict customs and border oversight.
The long-term prospects of the third-generation business model may face challenges as these players mature. For instance, while the substantial spending and marketing discounts for Temu have helped the company grow, maintaining the current strategy may pose a challenge as it requires significant investment in customer attraction and sharp backend operations.
Necessity to Adapt: Establishing the stage for further disruption in the industry, impending regulations, increasing public scrutiny, and the reduced valuation of Shein (from a reported $100 billion in 2022 to $66 billion in 2023) indicate that third-generation players may not have fully stabilized their business models and might need to adapt.
Shein is diversifying its Fast Fashion strategy to maintain its leading position. The company is testing offline retail formats, including pop-up stores and “store-in-store” models. Shein has partnered with Forever 21 to expand its offline presence in the U.S. and recently acquired the Missguided brand in the U.K.
To cope with import tax limitations, Shein is expanding its supply chain beyond the network of low-cost manufacturers primarily in China, establishing warehouses in Europe, the U.S., and Canada, as well as factories in Brazil.
