Love it or hate it, fast fashion is here to stay. Once relegated to the budget-to-median priced stores category, fast fashion exploded in a major way thanks to online shopping. Fueled by constant trend chasing with a caveat for affordable clothing, fast fashion is a billion dollar industry, having earned $106.42 billion in 2022 alone. Experts expect it to reach $133.43 billion by 2026.
While there are plenty of valid criticisms regarding the ethical and ecological implications of this retail segment, every year more brands pop up trying to cash in on the endless demand for cheap yet stylish digs. Most people point to more budget brands like Shein or Forever21, but even Swedish staple H&M and Spanish retailer Zara are included when discussing this category.
But in the last year, an upstart by the name of Temu has taken the industry by storm and is quickly positioning itself as a potential competitor thanks to dirt cheap pricing and an endless string of available discounts. But how can this retailer offer items so low, and how are they even turning a profit?
What is Temu?
Temu is only the latest in an app-based online marketplace that positions itself as a 360-destination for fashion and home goods. Founded in 2022, it is an online-only solution that is blowing up social media thanks to well-placed ads advertising stylish clothing sometimes for as cheap as $1.
Why Is Temu So Cheap?
There are a few reasons that explain how Temu can afford to offer products at rock bottom prices. More than likely, the answer lies in a combination of the below theories.
A Marketplace Rather Than A Retailer
First, Temu is actually a marketplace, and doesn’t directly manage any of the inventory shown on its website or app. Instead, it brokers deals with manufacturers — mainly in China — and allows them to sell their products directly to consumers in China and beyond. However, the emphasis is on consumers beyond China’s borders.
This bypasses the traditional distributorship model international retailers need to use to begin selling to international markets. Without having to pay extra fees to a distributor, or waiting for wholesale orders to be placed and paid for, manufacturers can potentially increase revenues and keep costs low.
However, the flip side of this is that manufacturers need to deal with shipping products internationally — which can get expensive if a customer is shipping small packages. Temu does manage this process for manufacturers, but understandably this comes at a cost to the seller.
Deep Discounts For All
But the second reason Temu is so cheap is that this is part of a calculated strategy to rapidly increase market share. Before Temu burst onto the scene last year, Shein was one of the biggest fast fashion app-based retailers. The Singapore-based brand grew quickly thanks to a novel plan in 2012 that shifted from dropshipping (which is usually the standard for many fast fashion brands) to instead developing a rapid to-market retail plan with a fully in-house supply chain that designs goods and instantly has the garments available on their app and website for sale.
Jeanel Alvarado, founder and CEO of the retail news platform, RetailBoss, shares that “unlike traditional retailers who mark up prices to maximize profits, Temu operates differently. It connects consumers directly with manufacturers selling via its app, allowing purchases to be made at wholesale prices. The savings from this direct-to-consumer approach are then passed on to the customers, resulting in significantly lower prices.”
However, to attract consumers, the brand is willing to initially lose money by offering deep discounts especially for new users. Meanwhile, influencers and affiliates can even earn credits towards free merchandise when consumers use their affiliate codes to place orders.
So, while Temu might lose money initially, offering deep discounts increases the total value per order as shoppers add more items to their carts. Likewise, even return customers can snag discounts to lower their overall cart value — ensuring repeat business. But the drawback is that often manufacturers using Temu to promote their wares do not have the final say on pricing. Temu artificially keeps product prices low, meaning that even manufacturers might be losing money on those incoming orders.
The De Minimis Loophole
This is the most controversial and most plausible reason for why Temu chooses to slash prices and hungrily courts the international (and especially U.S.) market. The de minimis loophole is a U.S. regulation that states an importer does not have to have items inspected by customs or pay taxes, duties or fees if the total value of the incoming package is under $800 USD. Since items are not being shipped in bulk, but instead are shipped to individual consumers, it’s highly unlikely that — given how deeply discounted much of the merchandise is — one person will have a total order value over $800.
If a customer even casually browse Temu’s website or app, they will realize fairly quickly that while there is a ton of options, most likely they are brands never heard of that are being promoted. This is by design, since the marketplace is basically allowing manufacturers (that normally produce en masse for other established brands) to also sell directly to consumers.
While this does mean buyers can snag a cheaper item, it also means there is a good chance of buying knock-offs. Alternatively, given the business model, there have also been complaints of poorly made items that either are nothing like the product description or fall apart after minimal use.
Should One Shop At Temu?
Assuming there are issues with the ethical implications of fast fashion, the jury is still out on whether Temu will pivot like Shein did or remain firmly in the dropshipping category. Reviews are mixed on the brand as some people feel that the quality is fine and ship times are reasonable (usually around 10 days from placing the order) while others dislike the longer ship windows. Jeanel Alverado adds that “the excitement of a heavily discounted purchase may dwindle if shoppers have to wait weeks to receive their items. This could lead to buyer’s remorse, order cancellations, or refund requests due to shipping delays.”
Meanwhile, others note that some products are cheaply made, or orders are never delivered. It is clear that the online marketplace has potential, but still has plenty of growing pains to address before it can legitimately vie for a top spot within the fast fashion category.