The Current, delivered daily.
Shein is exploring opening up its platform to other brands and retailers as a third-party marketplace. Will it slow down to get bigger?
The news:The Wall Street Journal reports that Shein is exploring the introduction of marketplace sales, which would make its platform a destination where other brands and retailers can sell directly to customers. This would allow Shein to expand assortment, and offer additional shipping options, an internal memo states.
Third-party marketplaces are growing, as ecommerce platforms realize that the model offers the best of two worlds: They can add more items from more labels to their platform, while leaving order fulfillment and delivery arrangements to the brands themselves.
It comes as the retail world is marveling at Shein's fast fashion machine. It is able to quickly source new styles, largely from viral trends. It produces clothing at lightning speed and prices its items low. In the end, it is able to add thousands of new styles a day, and applies social marketing acumen to help them go viral through TikTok, Business Insider reports. Proprietary data and software is a big part of the equation.
Shein harnessed this model to reach a $100 billion valuation in its latest funding round. Shein grew sales 568% during the pandemic period of March 2020-March 2022, and came to hold 40% of the fast fashion market, according to Bloomberg Second Measure.
The Current's view
Introducing a marketplace holds out the potential for another wave of growth. The introduction of a third party marketplace was key for Amazon, as the growth in assortment brought by third-party sellers also unlocked advantages that kept prices low. Soon, Amazon provided its own fulfillment to third-party merchants, making its logistics business a massive growth area of its own. At this point, the Amazon third-party seller community is its own ecosystem.
This year, more brands and retailers are stepping up third-party marketplace activity. Macy's has a new marketplace, and Walmart's is gaining sellers. Edge by Ascential forecasts that marketplaces will account for 60% of ecommerce globally by 2027. It is also the chosen format of China's top ecommerce companies, including Alibaba, Pinduoduo and JD.com.
But for Shein, there are open questions: Would a marketplace slow down the ultrafast model that propelled its rise? Additionally, how would other brands function in what seems to be a very well-tuned system, and would Shein provide access to any part of its operations? The marketplace will require Shein to create a unified experience between its own first-party model and that of third parties. Whether other brands will be able to operate within the machine is a big test.
As it explores the marketplace and expansion more generally, Shein is facing down a number of forces:
International expansion: Shein wants to reach more of the world and deliver faster to areas where it has operations. On the first-party model, this could require more localized operations, as indicated earlier this month by the introduction of a US distribution center in Indiana. WSJ says it also wants to diversify away from Chinese manufacturing and is opening more facilities in Europe, with manufacturing in Turkey and distribution in Poland. A third-party marketplace would allow for this geographic growth through merchants that reach these areas, without requiring the company to set up massive amounts of infrastructure in every region.
Growth has also brought scrutiny of Shein's business practices. A recent UK documentary exposed low pay and long hours at the company's factories, and it faces questions about sourcing cotton from the the Xinjiang region where there are concerns about the Uyghur Muslim population, WSJ reports. It has also been ramping up environmental, social and governance (ESG) amid longstanding concerns about the environmental footprint of ever-faster fashion.
The first party model led Shein to explosive growth. The consideration of a third-party marketplace shows that it may need to change to become truly sustainable.
Trending in Operations
"Fashion ecommerce is one of the most cumbersome customer experiences that exists," said Rent the Runway CEO Jennifer Hyman.
The rise of generative AI is bringing with it a groundswell of interest and concern about how the capability to automatically synthesize information and create something new will change how we work.
Given that AI will sit within the architecture of our digital lives, it’s also worth considering how the technology will introduce new tools for other aspects of life, as well.
For two ecommerce innovators in the apparel space, it’s a time to explore how it will transform shopping. Rent the Runway is set to roll out new AI-powered search capabilities, while Stitch Fix is drawing on a long history with data science and machine learning to personalize the inventory buying process.
Here’s a look at the initiatives underway at each company, and their visions for the future:
Rent the Runway: From search to concierge
Rent the Runway is putting a focus on the customer experience this year as it seeks to retain more subscribers and continue a yearslong push toward profitability.
This is resulting in the introduction of a variety of new initiatives, from the addition of an extra item to all orders to speeding up page load times. Yet as CEO Jennifer Hyman zooms out, she sees change being necessary on an industry-wide level in fashion. Beyond adding new features, AI can play a transformational role.
“I think that fashion ecommerce is one of the most cumbersome customer experiences that exists. You are searching through pages and pages and pages of content to find the items that you like and no one likes doing this,” Hyman told analysts on the company’s earnings call this week. “As an industry that still is selling physical products, AI is going to be -- fashion is going to be a major beneficiary as an industry.”
As a rental service, Rent the Runway has a distinct niche in fashion that lends itself to AI’s advantages, Hyman said. As opposed to a retailer that a consumer may visit a couple of times a year, RTR is used frequently by customers. So Hyman said there are opportunities to turn Rent the Runway into a “utility” by creating a more seamless experience.
This frequent use also provides a “highly unique” dataset, Hyman said. They know what a customer is planning to do based on what they rented. They know whether she liked or disliked an item, and many customers are reviewing 10 items per month. They know her size and how an item fits. This can be put to work in tools that allow customers to ask questions, and find answers.
The first application that combines AI and these advantages will appear in the coming weeks, when Rent the Runway plans to launch a beta of AI-driven search. The tool will allow customers to search for common terms or use cases for an item. So a person will be able to write “Miami vibe,” “‘clambake in Nantucket,” or “tropical motifs,” and receive results about what to wear for such an occasion.
The goal is to help customers sift through the endless aisle, and instantly finds what's right for them.
“I think that across all fashion sites, all over the world, the way that people are searching for product is fairly vanilla, it's fairly functional, right?" Hyman said. "You can go to a site and search for a T-shirt, you can go to a site and search for a black-tie gown. The fact that we're going to be able to enable our customers to search how they actually want to use this closet in the cloud, to search for items to wear to my beach bonfire this weekend, that is a completely different way to search, and I think that it really brings out the value proposition of what a closet in the cloud is all about."
Hyman sees this as a first step in the company using AI models to improve the product experience, and expects more tools to appear in the coming months. RTR is also introducing an SMS concierge experience for onboarding that allows customers to text with a member of the customer service team. The company is already exploring ways that AI can be incorporated into that tool, as well.
In the longer term, Hyman said the company has a vision that will leverage AI to allow customers to communicate with Rent the Runway asynchronously across different modalities, and have a stylist that is constantly available to recommend items, pick out new inventory and answer questions.
“If we are utilizing AI appropriately over the next few years, I see no reason why someone even has to come to our website,” Hyman said.
Stitch Fix: Inventory buying and beyond
Stitch Fix has long married AI with human curation to provide outfits on a subscription basis.
“For years, we have utilized capabilities in generative AI, injecting scores and language into our personalization engines and, more recently, automatically generated product descriptions,” CEO Katrina Lake told analysts. “We have also developed and implemented more advanced proprietary tools such as outfit generation and personalized style recommendations that create a unique and exciting experience we believe is unmatched in the market.”
A new area where the company is applying AI is inventory buying.
“We have historically utilized a number of tools to make data-informed decisions with our inventory purchases,” Lake said. “Now, directly leveraging our personalization algorithms, we have developed a new tool that creates an exciting paradigm shift, which will utilize math scores at the client level to drive company-level buying actions. We expect the clarity of demand signals at the individual client level to drive more proactive and efficient inventory decisions as a company. And because of this, we expect to see higher success rates on fixes and drive increases in keep rates and [average order value] over time.”
Early results are promising. When compared with existing buying tools, testing showed a 10% lift in keep rate and AOV. By the end of this quarter, Stitch Fix expects 20% of all purchase orders to be algorithmically informed.
With experience using AI and a team in place to build, Stitch Fix is investing in the technology. Like Rent the Runway, it also has a unique dataset that offers an immediate advantage.
Here are Lake’s thoughts about how Stitch Fix’s AI strategy:
One of the things that I love about our experience is that we have generative AI that's really in more of a visual format. And so, the outfits that we have in our app, those are actually taking into account your preferences, what we know about you, and then in combination with what we know that you own in your closet. And to be able to kind of continue to push that technology and to be able to continue to give people more value in their experience with Stitch Fix, that's a really good example of, I think, a capability that is, firstly, really aligned with our capabilities around data and personalization and really unique to us.
And then I think it's also really compelling because I really think that pushes us as we think about what that addressable market is. I think if we can push outfits to be something that can be an asset to everybody, I think that is a universal thing that people would love to be able to have, is to have access to advice on a daily basis around what to wear and how to wear it.
While these are distinct companies, their plans lead us to a common conclusion: While the talk around generative AI might be new, many technology-forward companies already have assets sitting inside them that can be leveraged to build new tools. Uncover what’s already there, learn about the AI’s capabilities and develop a solution that's right for your organization. Then, talk to customers to determine how to improve it. It might mean commerce looks different, but that’s okay. The point is to create a better experience.