Shein’s dressed for its long-awaited market debut in Hong Kong. But the party may be over

By John Liu, CNN

Hong Kong (CNN) — Shein was the ultimate disruptor in fashion. By turning online trends into $11 jeans or $3 crop tops in a matter of days, the ultrafast fashion retailer overtook established companies such as Zara and H&M, prompting it to eye an IPO that would value the company at nearly $100 billion.

But after years of delay amid failed attempts to go public in New York and London, the Chinese-founded company is staring down a starkly different reality marked by increasing struggles as it is set to list in Hong Kong on Tuesday. In an initial public offering last week, Shein sought to raise $1.7 billion, valuing the company at around $26 billion – down more than 70% from its peak valuation of $98.2 billion in 2022.

The sharply lower valuation underscores investors’ concerns about its business prospects amid increased competition, geopolitical pressure, and questions surrounding its sustainability and labor practices.

Last year, Shein saw its net income plunge 39% from a year ago, despite a growth in revenue, according to its prospectus released in July. But in the first quarter this year, its losses swelled to $99 million.

The slump followed the removal of the de minimis exemption in the US, Shein’s second largest market after Europe. The exemption had allowed the company to ship small parcels directly to its customers tariff free, a model that, combined with its Chinese supply chain, contributed to its rapid ascent.

Adding pressure to Shein’s sales and already thin margins, the European Union last month scrapped a similar exemption.

The changing market conditions, coupled with slowing growth, have weighed on the company’s valuation.

“It has absolutely missed the best timing for an IPO,” said Jin Lu, senior vice president of The Asia Group consultancy. “Everyone is watching to see whether there’s still room for growth, and how much room there is. And competition, if anything, has intensified,” he said.

Founded in China in 2012, Shein leveraged its Chinese production base and aggressive social media campaigns to build up a loyal following, particularly among teenagers and young adults.

“Shein took the fast fashion model, which is frequent release of new products, and just put it on steroids,” said Louise Deglise-Favre, lead apparel analyst at market intelligence firm GlobalData.

“The way that they’ve been really disruptive is because they’re so fast – Any small trend that popped up on social media, like TikTok or Instagram, they were able to supply a demand instantly,” she said.

Shein was the third largest global apparel brand by sales last year, behind Nike and Adidas, and was followed by Zara and H&M, according to GlobalData. It is expected to stay in that position this year.

But its rise also came with controversies, from environmental concerns to accusations of it copying designs from other fashion retailers and independent artists.

The company has also come under increasing scrutiny from Western governments over its alleged use of forced labor from China’s Xinjiang region, a huge cotton supplier. A Congressional Commission said in 2023 that there are “credible allegations of the company’s use of underpaid and forced labor” in the region, home to the Uyghur minority, violating US law.

China has rejected those claims. Shein has consistently denied the use of forced labor in its supply chain and had previously claimed it did not source cotton from Xinjiang or China. But Shein’s legal counsel repeatedly evaded questions about whether it sources cotton from Xinjiang at a UK parliamentary hearing early last year.

Its prospectus for the IPO listing in Hong Kong also avoided mention of risks linked to Xinjiang controversy. CNN has reached out to Shein for comment.

Chinese roots

On top of political pushback from the US over Shein’s alleged links to forced labor, the company also faces pressure from Beijing.

Shein had sought to play down its Chinese origin against the backdrop of escalating US-China tensions, including by moving its headquarters to Singapore in 2022 ahead of its attempted listing in the US, and opening overseas production bases.

But it still failed to secure approval from Beijing for its listings in New York and London, which led to its ultimate withdrawal from both cities. Experts said the failed bid underscores the headwinds Chinese companies – even non-tech firms – have to navigate in today’s geopolitical climate.

Challenges overseas appear to have prompted the company to embrace its roots again.

In a rare public appearance in February this year, founder Sky Xu in February affirmed Shein’s ties to China and pledged to invest more than 10 billion yuan ($1.4 billion) in the country’s southeastern manufacturing powerhouse of Guangdong.

Bumpy road ahead

Beyond political scrutiny, intensifying competition has also added to the company’s struggles in recent years. Its revenue growth has slowed from more than 40% annually to less than 8% last year.

To overcome this challenge, Shein launched its own marketplace in 2023, allowing third-party vendors to sell their products on its website.

But that has not meaningfully increased the frequency customers place orders, said Jianggan Li, CEO of research firm Momentum Works. Order frequency continued to plateau around 4 times per year over the last three years, its prospectus showed.

Competition from Temu, another Chinese ecommerce platform which emerged as a major rival of Shein in late 2022, is a “major reason” for the fashion giant’s difficulties in retaining customers, Li added.

Temu, launched by Chinese ecommerce giant PDD, exploded in popularity by adopting a similar strategy to Shein, selling ultra-cheap Chinese-made unbranded goods, from clothing items to kitchenware and home appliances.

Shein’s marketplace had also run into controversies for allowing the sale of sex dolls and illegal weapons late last year, which got them briefly suspended by the French authorities.

Sheng Lu, a professor in fashion and apparel studies at the University of Delaware, said the issue Shein faces now is how to further expand its business, particularly when its core customers already experience “fatigue of shopping.”

“The US market is already mature, it’s already saturated,” Lu said. “It’s not really easy to expand into new markets.”

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CNN’s Stephanie Yang contributed reporting.