Shein is already proving to be one of the London market’s most divisive companies – and its shares haven't even listed yet. It was revealed this week that the fast fashion giant had filed for a listing with the Financial Conduct Authority (FCA) early this month, taking it one step closer to an IPO. While some City analysts and institutional investors seem enthused by the prospect of such a high-profile debut, a chorus of dissenting voices is growing louder by the day.
Misgivings about Shein tend to centre on its sustainability credentials and supply chain. Human rights groups say Uyghur people are used as forced labour in cotton fields in China’s Xinjiang region. The company denies the claims, saying it has "zero tolerance for forced labour".
There are, of course, more general concerns about the environmental impact of ultra-fast fashion businesses. But whether these issues will make investors think twice about the shares remains to be seen. “You’ve got to take into account that this is a business that didn’t exist pre-2015 and is now the largest fashion retailer in the world,” said Liberum analyst Wayne Brown. “It is clearly doing something quite fundamentally right.”
The engine of Shein’s success is its large-scale test-and-repeat business model, which sees it commission limited quantities of numerous clothing designs from its factories. It then lists all of these items on its website and manufactures larger numbers of the pieces consumers prove most interested in. In essence, the group lets its customers dictate what it produces – and it charges them far less than comparable retailers.
“There’s no reason to think you can’t do that with a host of other categories,” Brown added. “If you start replicating that model, the scope for growth is massive.” In some cases, it appears consumers are most interested in cheap copycats of existing items – and Shein has found itself in court numerous times for allegedly copying other brands’ designs.
Analysis from the Financial Times found that at least 93 different designers and retailers have filed lawsuits in the US alleging copyright infringement by Shein since 2018. One of these suits, filed in California last year, even suggested that the company utilises a secret algorithm to identify and imitate items with large commercial potential. Shein has said it will defend itself against the claim.
Many of these cases have been resolved via undisclosed settlements, meaning it’s impossible to know how they impacted Shein’s financial health. The group reportedly netted more than $2bn (£1.6bn) in profit last year on sales of circa $45bn, suggesting it has plenty of room to manoeuvre.
There has been some speculation in recent weeks that Shein is hiking prices on some of its core products to shore up its balance sheet ahead of an IPO. Data seen by Reuters suggests that the group upped the average price of women’s dresses by 28 per cent in the US in the year to 1 June. Comparable fast fashion groups such as Zara (ES:ITX) have also increased prices given rising costs – although not to the same degree.
Liberum’s Brown is hesitant to read too much into these figures at this stage. “At all costs, Shein wants to be a price disruptor and also wants to offer a better service to its customers,” he said.
Homegrown fast fashion brands, such as Boohoo (BOO), have struggled to compete with Shein on price, and this loss of market share is a significant contributor to its ongoing share price woes.
Shore Capital analyst Katie Cousins adds that the investment case for Boohoo has been undermined by repeated scandals over its treatment of workers. “Multiple investigations by the BBC, and watchdog enquiries, have damaged the share price and investor confidence,” she noted. “These don’t explain the whole valuation, but they’re definitely an element of it.”
Scrutiny over Shein’s own labour practices is inevitable, and in this context, the group faces an uphill battle to earn the trust of many investors – even as the City seeks a turnaround in fortunes for the UK market. "The notion that certain companies with particularly poor human rights practices and sustainability credentials could choose London as a listings destination will not make us more competitive in the long run," said James Alexander, head of the UK Sustainable Investment and Finance Association, a trade body for asset managers.
Shein will still need the approval of both the FCA and the China Securities Regulatory Commission before publicly announcing its intention to float. For now, would-be investors must wait and see if the furore has any impact on regulators’ decision-making.
