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

(Antfer) #1

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.
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