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Shein Claps Back in Doc Martens Lawsuit

Popular Chinese e-tailer Shein, allegedly exploiting a series of “tax perks” to sell its clothing more cheaply than its rivals, has struck back in a trade infringement lawsuit levied by Dr. Martens’ owner.

Tax tricks

According to a recent Morgan Stanley report, tax exemptions alone have saved Shein (pronounced “she-in”) 20 percent in costs, allowing it to undercut Boohoo’s prices by 20 percent, Asos by 35 percent and H&M by nearly 50 percent. By next year, Shein’s financial targets suggest that its revenues could reach close to $20 billion, outstripping H&M, Uniqlo and Zara, it added.

Gen Z’s No. 2 favorite e-commerce site receives incentives for manufacturing in China but only marketing its goods outside the country, the investment bank said. Dispatched from the East Asian nation to destinations across the United States, Australia, Europe and the Middle East, Shein’s low-value packages are also spared from the import duties most major retailers incur when shipping goods to their distribution centers via container, Morgan Stanley said, noting that the e-tailer’s 12 percent to 15 percent “order handling fee,” which is applied to bigger deliveries, “almost exactly mirrors” the excise duty.

Ironically, a scheme designed to subvert China’s growing hegemony helped turbocharge Shein’s rapid ascendancy. In 2018, as trade tensions between Washington and Beijing reached a boiling point, China waived export taxes for companies that shipped directly to their customers. Even when the Trump administration imposed tariffs to raise the cost of Chinese products, Shein’s small-value deliveries remained off the hook, thanks to the contentious de minimis loophole.

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But attributing the success of TikTok’s buzziest brand to tax advantages alone would be a “misunderstanding” of its strategy, Morgan Stanley cautioned. Shein sources its $10 dresses and $19 shoes from hundreds of low-cost factories in and around Guangzhou, churns out nearly 5,000 new items every day and employs a “test and reorder” model to focus its resources on popular styles. Shein also mines customer behavior data from social media and its Amazon-dethroning app to pump up demand.

A Morgan Stanley report dives into the strategies that have propelled Shein, Gen Z’s No. 2 favorite e-commerce site, to its current success.
A look from Shein. Courtesy

A recent study of paid ad campaigns from the likes of Shein, Boohoo, Fashion Nova, Princess Polly and Zaful across Facebook, Instagram, YouTube, Twitter and LinkedIn found that Shein had, at 94 percent, the greatest share of sponsored impressions. In contrast, PrettyLittleThing racked up 3 percent and Princess Polly 2 percent.

“Shein is beating PrettyLittleThing and Princess Polly soundly,” Alon Leibovich, CEO co-founder of BrandTotal, a retail intelligence platform, said in a statement. “They are spending considerable dollars in this category and outpacing their rivals.”

Shein knows its audience but it’s also aware of the need to diversify, according to BrandTotal’s analysis. A little under half (44 percent) of its impressions are targeted at 18-to-24-year-olds, compared with 90 percent of Boohoo’s and 94 percent of Princess Polly’s. In terms of video ad views, Shein’s 350,400 was second only to Princess Polly’s 449,900. Most of its ad spend has been on Twitter, though Leibovich said the e-tailer is “very likely” paying influencers to do try-on hauls rather than shelling out for YouTube ad units.

“Boohoo, PrettyLittleThing and Princess Polly have very similar social ad strategies, allocating most of their social media mix on YouTube,” he added. “FashionNova has opted for a very different strategy focusing only on Facebook while Shein focused their ad strategy solely on Twitter.”

Morgan Stanley said that the ease with which Shein has been able to dominate the global fast-fashion market is the “most extraordinary aspect” of its rise, despite being “largely nonexistent” less than a decade ago. In Europe, the bank sees the greatest risk to Boohoo and H&M, which it downgraded to under-weight (UW) from equal-weight (EQ), although it also reduced its forecasts for Asos (EW), Primark owner Associated British Foods (over-weight), Zara owner Inditex (EW) and Zalando (EW). In the United States, Shein could threaten future revenue gains at Abercrombie & Fitch (UW), American Eagle (EW), Gap (EW), Revolve (EW), Stitch Fix (UW) and Urban Outfitters (OW). Among Asian nations, Uniqlo owner Fast Retailing could potentially be in jeopardy, though Shein’s presence in Japan is “limited for now.”

“We think that the recent disappointing performance of several European online retailers (such as Asos and Boohoo) could actually be partially linked to Shein’s emerging success, which has exacerbated the pre-existing competitive pressure in the industry,” Morgan Stanley said.

Dr. Martens drama

Another reason why other brands should be wary: The e-tailer has frequently been accused of cribbing designs from labels large and small. Just last year, AirWair International, the manufacturer behind the iconic Dr. Martens boot, filed a lawsuit against ZoeTop Business Co., Limited, which does business as Shein and its subsidiary Romwe, alleging that ZoeTop “marketed, distributed and sold shoes and boots that are direct and obvious copies of the distinctive AirWair Trade Dress, Jadon Trade Dress and features described in the AirWair Trademark Registrations in violation of AirWair’s rights.”

Dr. Martens x Atmos
Dr. Martens x Atmos Courtesy

ZoeTop shot back last week, filing an amended answer to the complaint that dismissed AirWair’s assertions as “invalid” because its “purported trademarks and/or trade dress, including elements such as welt stitching, cleats, single or two-tone soles, platform soles, grooved soles, and heel loops…are generic.”

“One or more of AirWair’s trademark registrations was improperly issued by the United States Patent and Trademark Office because the marks are functional, generic, and/or lack secondary meaning,” ZoeTop added. “Therefore, one or more of AirWair’s trademark registrations is invalid and unenforceable and should be canceled.”

Morgan Stanley said that Shein’s boom suggests that, at least for now, a large number of young consumers are still “significantly price-driven” when shopping for fashion products, consuming clothing in large quantities. This fast-fashion “conundrum” means large brands are under pressure to increase their environmental and social standards while remaining competitive.

“At this stage, the data shows little sign of a material shift in consumer purchasing behavior in response to ESG concerns,” the report said. ”This appears surprising, given Shein’s customer base is skewed towards Gen Z, which typically displays the highest environmental consciousness in consumer surveys.”

Copycats coming?

Still, it might not always be salad days for the e-tailer. Shein’s current price advantage, for instance, “might not be sustainable should tax policies change” or if lawmakers decide to intervene. Shein could also inspire a wave of copycats, “further increasing the competitive pressure in this market.” Just last week, Alibaba unleashed its ultra-cheap AllyLikes shopping site on the North American and European markets. With dresses selling for as little as $8.99, the new platform is set to go toe to toe with Shein and its ilk.

“Despite its strong success and unique characteristics, we do not think Shein will necessarily enjoy a long-lasting competitive advantage: over time, a similar supply chain structure could potentially be replicated, and technology evolution will lead to better usage of big data across a larger spectrum of peers,” Morgan Stanley said.