The Sunday Times - UK (2022-04-24)

6

BUSINESS

It is backed by private equity firm Gen-

eral Atlantic and venture capital giants

Tiger Global and Sequoia Capital China.

Xu is thought to retain a large stake

and his mastery of social media market-

ing is at the heart of the company’s suc-

cess. Shein was an early adopter of mar-

keting on Pinterest, Facebook and

YouTube, but it has truly found its audi-

ence on video-sharing site TikTok, where

four million devotees post videos of

themselves trying on “Shein Hauls”.

The firm is replacing stylistic intuition

with brutally effective algorithms that

scour Google Trends, social media and

data from millions of shoppers using its

own app to spot nascent trends in real

time. That data is pumped through to

hundreds of in-house designers, who

commission local suppliers — Shein

reportedly works with well over 1,000 —

to produce small-batch orders and have

them on sale in a matter of days.

Shein is connected with core suppliers

via proprietary cloud-based software

that ensures fast-selling lines are auto-

matically re-ordered in larger quantities.

“H&M destroyed Gap’s brand position

We are

hitting

our own

fashion

brands

VAT receipt from the company, it was ini-

tially unable to provide one. A customer

service representative said Shein does

not need to apply any VAT because it is an

international firm selling products

cheaply, delivering the “good” news with

a Smiley emoji.

For Shein, that was once true, but

when the UK left the EU, new rules came

into place stipulating that VAT on goods

sold direct to consumers by overseas

firms — levied at 20 per cent of the sale

price — must be collected at the point of

sale for consignments worth less than

£135.

When asked if Shein charged VAT to

UK customers, a company spokesperson

said only that the company operated

“legally and compliantly” and declined

to provide its VAT registration number

despite multiple requests. After being

presented with details of our exchange

with customer services, Shein eventually

issued a VAT receipt.

Nearly-zero UK duties

Despite now raking in more than £1 in

every £20 spent on clothing in the UK,

Shein’s physical footprint on these shores

is almost non-existent, meaning that,

unlike its high street rivals, it does not pay

business rates. It is said to employ only

about 25 people here, responsible for

marketing and product photography,

who will generate little for the exchequer

in the form of national insurance or

income tax.

Shein’s main UK corporate entity is

Zenith Business Company, whose last set

of accounts were audited by Saffery

Champness, an accountancy firm that

prides itself on “getting the right tax and

financial structures in place” for its cli-

ents. Zenith is registered to the same

north London co-working space occu-

pied by Simply Mandarin, a consultancy

that aims to make it simpler for UK and

Chinese businesses to work together.

The murkiness in Shein’s tax affairs is

reminiscent of a recent scandal exposed

by the tax campaigner Richard Allen,

who successfully lobbied HMRC to force

online marketplaces, such as Amazon, to

collect VAT on sales made to UK consum-

ers by international sellers. HMRC had

predicted that closing the loophole

would raise £300 million a year; it raised

£1.4 billion, Allen said.

While HMRC clamped down on com-

panies selling via marketplaces, it is diffi-

and now Shein is destroying their brand

position, because they are too slow at get-

ting new products out the door,” said

Shaun Rein of China Market Research

Group.

The only kink in Shein’s slick machin-

ery is that it takes upwards of a week for

customers’ orders to arrive. They are col-

lected from a sprawling warehouse on

the outskirts of Guangzhou that spans the

size of 250 football pitches and are trans-

ported by air freight around the world,

before being dispatched by couriers to

consumers’ homes.

Tax-free in China

Perversely, President Trump’s trade war

with China helped set Shein on its way to

dominating America’s fast-fashion mar-

ket. To keep exporters competitive in the

wake of Trump’s tariffs, China scrapped

duties for online retailers selling direct to

international consumers in 2018. If that

was not good enough for Shein, its orders

continued to escape US import duties

because they were worth less than $800.

Today, Earnest Research estimates

that Shein has a 31 per cent share of Amer-

ica’s fast-fashion market, making it the

largest player by some distance.

Shein’s main distribution centre sits in

a Chinese free-trade zone and the firm is

not liable for sales taxes in China because

it sells only internationally. When Shein’s

orders reach the UK, the vast majority are

exempt from import duty because they

have a value of less than £135.

The tax savings do not appear to stop

there. Roadget Business, Shein’s Singapo-

re-based parent company, is ultimately

owned by Beauty of Fashion Investment,

a holding company based in the British

Virgin Islands tax haven, according to the

Swiss investigative journalism site Public

Eye. Analysts from Morgan Stanley calcu-

late its tax advantages allow the company

to undercut the competition by between

15 and 20 per cent.

Questions over VAT

Amid all the excitement of trying on its

new outfits, many customers, one sus-

pects, will not bother to check the

receipt. If they did, however, they might

notice something is amiss.

Unlike other retailers, Shein does not

itemise VAT or display its UK corporate

registration number on its website, a

breach of the rules.

When The Sunday Times requested a

Paying tax is out

of fashion at Shein

The fast-growing Chinese clothing giant has UK sales of £350m

but pays barely any taxes here and employs hardly any people.

No wonder it beats rivals on price, Sam Chambers writes

achieved by dint of deliberate tax avoid-

ance on a global scale.

Fast fashion on steroids

Its reclusive founder, Chris Xu, has pio-

neered a business model akin to fast-

fashion on steroids. Each day, Shein —

pronounced “She-in” — pumps out about

6,000 new designs at prices that not

even the likes of Boohoo can match. It

takes less than a week to design, produce

and offer new styles to its millions of Gen

Z followers. Orders are flown from China

and couriered to consumers’ homes,

adding to fast fashion’s already huge

environmental impact.

The mastermind behind Shein’s rise

learnt his trade as a specialist in search

engine optimisation — the art of custom-

ising websites so they appear as high in a

search engine’s rankings as possible.

Xu, who according to conflicting

reports was born in either China or

America, set up SheInside in 2008 as an

online retailer selling wedding dresses

made in China. In 2012, SheInside started

designing its own products, and three

years later, shortened its name to Shein.

I

t has become a well-worn fad on

social media. A young woman lifts a

large cardboard box to head height,

tips it forward and pours out a mini-

avalanche of plastic zip-lock bags in

front of the camera. Each contains

a garment made by Chinese fast-

fashion powerhouse Shein, whose

speed of production and absurdly

low prices are causing havoc in the

global fashion industry.

Shein is selling enough £2 T-shirts and

£4 dresses to have recently obtained a

mind boggling $100 billion (£78 billion)

valuation. The firm’s global sales hit

$10 billion in 2020 and are rumoured to

have doubled since then. The problem is,

though, the taxman is not sharing in the

spoils.

Credit Suisse analyst Simon Irwin esti-

mates that Shein is raking in annual UK

sales of about £350 million, a figure that is

growing rapidly. Yet filings at Companies

House show Shein has paid just £20,756 in

corporation tax over the past two years.

That is just the tip of the iceberg,

though. In this investigation, we detail

how Shein’s rock bottom prices are

Amid soaring overheads, companies

are subtly going for the cheaper option

Businesses selling to a

cash-strapped public are in a

jam. The spiralling costs of

energy and raw materials,

from food to plastic

packaging to labour, mean

their overheads have soared.

At the same time, their

customers are struggling with

a severe and growing squeeze

as wages fail to keep up with

inflation.

This leaves companies

with a dilemma: pass on their

increased costs to consumers

through price rises and risk

losing them to rivals, absorb

the hit and cut their profit

margins, or alter the product

and services to make them

cheaper to produce.

amount of cheaper pulses

and vegetables. Retailers are

getting day staff to stack

shelves from warehouse

deliveries rather than putting

on a nightshift to do it.

Last week Netflix

announced that it lost more

subscribers than it had

gained in 2021. Rather than

raising prices and possibly

losing more viewers, the

company said that it would

consider incorporating

adverts into its service.

Classic skimpflation.

As with shrinkflation, it has

to be done subtly, experts

warn. Cost-cutting measures

will have a real impact on

customer satisfaction,

according to Paul Martin,

head of retail at KPMG. He

predicts consumers will see

30 per cent less choice in

supermarkets as companies

try to reduce warehouse costs.

Skimpflation*

*the art of cutting costs by

hoodwinking customers

Laith Al-Khalaf Increasingly they are going

for the latter. “Shrinkflation”

is a well-worn trick — witness

Cadbury cutting the weight of

chocolate bars in February.

But now companies are

getting more subtle.

Welcome to “skimpflation”

— a term coined in the US to

describe firms eroding the

quality of their goods but

keeping the quantity, hoping

consumers will either not

notice or not care as long as

the price is right.

Restaurants are carrying

out what they call “menu

engineering” — shifting to

cheaper ingredients — on top

of “portion control”, where

they reduce the amount of

pricey meat and fish on the

plate while raising the

TRICK 3 UK

With little physical

presence in the UK,

business taxes and

rates are negligible

TRICK 2 UK

Goods arrive in the UK but the

vast majority fall below the £135

threshold for import duties on

goods coming from China.