Fast-fashion juggernaut Shein has managed to hook hordes of Gen Z shoppers in the United States despite a key business disadvantage: It has typically offered ecommerce delivery windows of 10 to 15 days that are easily bested by its competitors.

Now, the apparel company founded in China is pushing to get its ultra-low priced merchandise on doorsteps more quickly. To do so, it’s establishing distribution centers in the Midwest and California. That’s a significant shift from its practice of shipping individual orders directly to U.S. consumers from overseas.

Logistics changes

The logistics investment dials up the pressure Shein has already placed on more established rivals such as H&M and Forever 21. It also threatens the newcomer’s profit margins and introduces fresh risks into its business model.

“The time that it takes to get the products to the consumer in the fast-fashion world, where a young consumer — particularly a young female consumer — probably doesn’t want to think two weekends ahead is really important,” said Adam Cochrane, retail and luxury analyst at Deutsche Bank AG.

One Shein distribution center, located in Whitestown, Indiana, is already operational and could reduce shipping times by four days. It currently has 800 employees, with plans to have 1,000 by the end of this year. The company expects to open a second facility in Southern California by spring 2023. It’s considering a third such space in the Northeast.

These facilities won’t hold Shein’s full assortment of garments but will stock certain products, especially key basics. The inventory will be chosen based on what sells well in the U.S. It will also reflect seasonality, with gear such as tank tops claiming more space when temperatures climb. Additionally, the U.S. centers handle merchandise returns.

Shein Group Ltd. ranks No. 36 in the 2022 Asia Database, Digital Commerce 360’s rankings of the largest e-retailers in the region by web sales.

Shein is taking a similar approach in other key markets

The merchant has announced plans for a distribution center in Poland that will serve Europe. And on Tuesday, the company said it opened a 170,000 square-foot warehouse in Toronto, along with a corporate office in the same location.

Improved speed could help Shein — which was valued at $100 billion in a fundraising round earlier this year — build on a remarkably fast rise.

The brand gained traction with its website and app thanks to a consistent stream of new products, ubiquitous marketing on TikTok and extremely low prices. Shein started selling in the U.S. in 2012. It largely eschews physical stores, save for the occasional pop-up shop.

It’s the ninth-most popular apparel brand among Gen Z women in the U.S., according to survey data from Morning Consult. That puts Shein in league with classic American labels Levi’s and Calvin Klein.

“There have always been disruptors in the fast-fashion space,” said Caroline Gulliver, an analyst at Stifel Financial Corp. in London. “But what Shein brings to this is a bigger scale, coming from China. It’s a dramatic shift in the landscape in the U.S.”

Shein has emerged as a formidable challenger to U.S. chains such as Forever 21 and American Eagle Outfitters Inc. that cater to the same demographic. It also competes with international fast-fashion players with a strong presence in the U.S., including Hennes & Mauritz AB (H&M), Zara owner Inditex SA, and United Kingdom-based brands Asos Plc and Boohoo Group Plc.

Shein is expected to generate $24 billion in revenue this year, according to a person familiar with the figures who asked not to be identified. In the first quarter of this year, Shein sales in the U.S. grew 43% from a year earlier, versus a 10% decline at H&M, according to data from Bloomberg Second Measure.

Bulk inventory

Still, the development of a U.S. distribution network adds the potential for new costs. The U.S. allows up to $800 of goods from China to be imported duty-free — a limit that was mostly easy to stay clear of when shipping individual customer orders. But if Shein sends bulk inventory to distribution centers, it’ll likely need to ship in heftier bundles subject to tariffs.

Also, Shein has typically made small, almost-on-demand batches of its garments. This setup helps avoid discounting and protects profit margins.

“Once you have a distribution center in the United States, you’re not doing made-to-order anymore,” said Sucharita Kodali, principal analyst at Forrester Research. “You’re shipping big, bulk quantities of an item that may or may not sell. I don’t think that this is some home run, but it’s too early to tell.”

“The question is, can they maintain their price point with the incremental cost of the U.S. distribution center?” Cochrane said, noting that Shein’s pricing advantage over competitors may narrow.

Shein’s effort to expand its U.S. distribution network is part of a race in the apparel industry to rethink logistics to find or maintain a competitive edge.

Competitors’ tactics

Trendy online retailer Boohoo is making a move similar to Shein’s. It is opening a distribution center in Pennsylvania next year. The brand says it’ll provide three-day delivery windows to 95% of the country. That compares with a current wait time of 10 days.

American Eagle is moving in a somewhat opposite direction. It’s piloting a program where it’ll ship merchandise directly from overseas facilities to U.S. customers. This is part of an effort to “react more quickly to changing business trends.” Quiet Platforms will also offer fulfillment services to other retailers shipping merchandise from China to consumers in the U.S. Quiet Platforms is American Eagle’s logistics arm.

“By providing companies on our platform with access to upstream pools of inventory, we’re enabling them to be less inventory-heavy and more strategic in their assortment decisions,” Shekar Natarajan, American Eagle’s chief supply chain officer, said in a statement.

Meanwhile, Asos is slowing down investment in automation at its warehouse in Atlanta. That’s in line with expectations that it’ll handle a lower amount of stock as part of a broad restructuring plan. The brand is losing hope on international growth. It noted in a recent earnings statement that expansion outside of the U.K. has become “excessively capital intensive.” Shein said this has resulted in a “lack of meaningful growth.”

Longer-term peril

Shein’s operational gamble follows a spate of news reports. They call it out for high carbon emissions, unfair labor practices and low product quality. None of these appear to have significantly dented consumers’ appetite for its merchandise.

But its business model, along with that of peers like H&M, faces longer-term peril. Legislation around the environmental and labor costs associated with garment production is gaining traction globally. A recent investigation found that Shein workers in China were working 18-hour days and being paid £3 ($3.34) per garment — just the kind of situation lawmakers may seek to crack down on.

“All of these fast-fashion brands are basically going to face a reckoning in the next even 10 years,” Kodali said. “They need to figure out how to coexist when the fundamental demand for your business is going to be shrinking, either because the consumer doesn’t want it, you’re going to be legislated against, or the cost of your raw materials is just going to go up.”

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