Modern Retail Rundown: The future of fast fashion, dollar stores struggling & big CPGs not letting up on price increases

0:05Hello, and welcome to the Modern Retail Rundown. I'm your host, senior reporter Gabby Barco, and I'm here with editor-in-chief Kale Guthrie-Weissman. Good morning, Kale. Good morning, Gabby. How are you doing? I'm doing great, great. Yeah, the weather's warming up, everyone's out, it's happening, summer's here. I know, I'm excited to drink on an outdoor table. It's my favorite thing to do. Okay, perfect. But before that, before you get to your weekends, everyone, let's... We have work to do. Well, let's dive into this week's news. As always, I feel like we say this every week, but there are a lot of what we have at Modern Retail as a tag called new economic realities going on around the retail industry.

0:53And this week we look into fast fashion and why the margins don't quite make sense online. And then we will be talking about a roundup of dollar stores earnings, which typically do fairly well during a down economy, but they're actually underperforming at the moment. And then finally, we are going to be talking about the incessant price increases that we cannot get away from no matter how low the demand gets for products. And yeah, let's get started. First off, let's talk about this Wall Street Journal dive into Shein and how it's now become sort of the leader in the fast fashion world, especially when it comes to e-commerce and very quick fulfillment.

1:47Of course, in this case, it's from overseas. So it's actually kind of scary how fast the orders get fulfilled, which kind of speaks to actually the maybe the fact that not only are, you know, there's a argument that this company is shopping. These clothes are not sustainable, but also the model itself is obviously a little too good to be true. So why don't we get started? uh kail do you want to give us a little bit of a breakdown um on why these uh companies like she and even now the new entrant timu are not quite set up for long-term sustainability sure so pretty much this was an you know there are there's an article that comes out every few weeks every few months about the rise of these e-commerce players she and has been the big one for a couple of years now.

2:41And I don't know, I can probably count on both of my hands how many features that have been written that are like, the fast fashion is still here because of Shein or something like that. But there is a story to be said about the model, which is pretty much like fast fashion in hyper drive. And so this Wall Street Journal story was super interesting because it went deep into the way that Sheehan makes its clothes and goes through inventory, which fast fashion has been around for decades. And pretty much the way it worked was if there was a good style, they would make it quickly. It would be shipped in a few weeks.

3:17And then ideally, they would sell it through and then they do it again. And this is, you know, the margins are not great on that, but, you know, they sell a lot of it and they're with the times. And it's not like there's a really long lag time between when something is made and when something is actually bought. And then Sheehan takes that into overdrive. So pretty much the Wall Street Journal article said it produces between 100 and 200 pieces of any given product at launch and then increases production only if demand is strong. It makes use of a digital manufacturing system where that asks its extensive supplier base to share real time capacity, tag each item based, and then finds the cheapest fabrics that it can possibly use in order to do it.

4:01It's pretty much, I'm trying to find the line right here. Oh, there it is. Ultra fast fashion, where it's able to turn over something in 40 days compared to pretty much that's never been done before. I guess H &M, it took a little over three months for inventory turnover to happen in 2000. So pretty much the idea is that a model that's been around for a while has been shrunk and put into overdrive. And that's what's going on. And then what I found, there were two things in the story that I found specifically interesting. One is that if you've read a lot of the culture pieces over the last couple of years, it said that a lot of people are turning their backs to fast fashion, specifically the younger generation.

4:47And the Wall Street Journal is saying that's true, maybe a little bit, you know, on paper, but not necessarily true in what's going on economically. and that, in fact, younger people really like the fact that they can get the new styles really quickly and that it speaks to a certain zeitgeist appeal that hasn't been in the market for a while now. And then there was another story, which we'll get into in a few minutes, which talks about just the insane model that is Timu, where you can buy a$1 pair of socks and have them delivered tomorrow, or maybe in a couple of days, and they're being shipped from China, and just how that is ultimately unsustainable and probably even more unsustainable than what Xi 'an is doing.

5:25now. There's a lot to dig into, but I just think digging into how these models work and how long they can last is very, very interesting. Anyway, I'll stop rambling now. No, that, yeah, that all makes sense. I think especially because, you know, I'm a sort of midway millennial, I would say, and I grew up shopping, you know, Forever 21, Zara, H &M, which at the time seemed to be ultra fast fashion. But of course, that's been now exceeded by Shein. But I think really the biggest contrast, at least to me, is that as opposed to going to a store and picking out a bunch of things that are then only returnable for notoriously at Forever 21 for store credit, is that in this case, you're really just clicking a bunch of buttons based on actual viral trends.

6:17These aren't three-month seasonal turnarounds that you used to shop. It's very quick. A lot of it is based on social media and what's trending on TikTok because, of course, Gen Z, as much as they love sustainability and resale, they also love to recreate looks for TikTok. And so I think all of these factors are very contradictory. Anytime I talk to an analyst, I'm like, does Gen Z love sustainability or do they love fast fashion? And they're like, I think they want both. They want to pair their resale vintage Fendi with their very cheap Shein outfit. And so with that said, I do think it's also interesting that at the same time, the H &Ms and the czars of the world are actually moving away from the model and they're positioning themselves as a little bit more premium, having all these initiatives around sustainability and recycling, upcycling textile and all that.

7:13So it does seem like sort of a new, I guess, players taking the mantle. But the last thing is I want to talk about or that I want to add to that is that when you add the e-commerce and just how expensive it is to ship an item, like you're saying, that only costs a few dollars, it just, I can't imagine it ever really working long-term. And so that's why I think they're trying to continuously refine the model. Absolutely. And I think you're exactly right that there's something really interesting happening with the more legacy players where they're trying to redefine who they are and the types of clothes they're selling and what they represent.

7:55And especially with Shein, it's in an interesting spot where they're e-commerce only, although they've had a few pop-ups. So not exactly e-commerce only, but predominantly e-commerce. There's no way with the prices that they have that the margins work. And so it's clearly a scale play. But there's also something interesting happening, which you're talking about refining the model. Shein, in some ways, is trying to also do in a quieter way or in a different way. Not a quieter way. It's doing it very loudly. But in a different way, what those retailers are, it's trying to change its perception, at least by the press.

8:29So it's been trying to talk about sustainability and how it's not that, you know, it doesn't waste as much as people say. We wrote, I think, last week on Modern Retail about how Shein finally launched its third-party marketplace. That's a big initiative for it. And that's a really interesting one because that's Shein trying to court U.S. sellers. So it's saying that there are U.S. sellers who are there, which ideally would make it a lot cheaper if, A, they're not manufacturing the products. they're relying on other brands and B, they're being sold directly from the United States. So there's no, the shipping costs have been decreased.

9:05And so it seems that Shein specifically is trying to figure out a way to tweak it both on the public relations aspect so it doesn't get as much bad press about how wasteful it is, etc. But also so that it can build a model where brands, especially very, very cheap brands that are in the US can sell their products and Shein doesn't have to take those costs. Right. And yeah, I mean, I think if you scroll the website or the app, it already does. It is more prominent, you know, what products are being sold by which sellers. So Sheena is sort of taking a little bit of a back step, a step back and saying like, hey, these are not actually our products.

9:45You are getting this shipped from XYZ seller. And I can I can kind of see, you know, in the U.S., especially with how big marketplaces are here for that to maybe offset some of the losses. But then you look at something like Timu, which is now trying to compete, losing. There's this new report in Wired saying that they lose as much as$30 on an order when they acquire customers. There's a lot of couponing happening over there from what I've seen. And so there's a lot of pressure to have lower and lower prices. So I'm not sure how you make money on a$2 pair of sock in that case. Yeah, I mean, Timu is clearly trying to do, and they're owned by PDD, who does Pinduoduo in China, the scale play even more brashly than Xi 'an, it seems, where they're not even paying attention.

10:39Not that they're not paying attention, but they are trying to get as many people locked into the platform as possible and saying, profitability be damned. That's my take on it. But they're also giving people really cheap things. They're trying to have it shipped really quickly. They're losing$30 in order on$1 pair of socks or whatever. But then another really interesting and quite sad but indicative of the times piece in this Wired story is that they're really, really putting pressures on their manufacturing to lower prices as much as possible in the name of this expansion. And a company like Timu can do that because they already have such a stronghold in China with all of these manufacturers.

11:23And so there was a quote from an anonymous person who makes products saying, we're not making any money right now. This is all so Timu and PDD can expand to the US and just hope that from there, then prices will go up or they'll reach a certain scale. But right now, we're receiving pressure for these orders and we're still making no money, which I thought is really interesting. a very, you know, sort of like an Amazon move where Amazon wasn't putting pressure necessarily in the beginning on the marketplace, on the brands, but was saying, we're just going to grow as much as possible and lose money until we've reached a scale and then be able to go from there.

12:01I don't know if Timu is going to be able to do that, but that seems to be the strategy it's taking. Yeah. But all in all, I think it's probably safe to say that these types of sites or retailers are not going away anytime soon. And it'll be interesting to see just, yeah, how much they could refine in order to improve the margins. I mean, I just, I guess maybe in an ideal world, you know, they start manufacturing more sustainably, maybe raise the prices a little bit. But now that you've set the standards for, Or, you know, I don't know, buying a coat for$12.99. It's going to be really hard to take that back from customers.

12:43Yeah. And it should be noted, and this is something that I constantly try to remind myself when we're writing about it, is that we talk about Shein like it's new, but it's been around for well over a decade, right? It's a pretty old company. Not old, but it's older than one might think. Yeah. It was called YesStyle. It had a little bit of presence where you would wait weeks for a product to come in, same model. But now, you know, once they rebranded as Shein and became more, you know, kind of public facing that in the last few years, that's where, yeah, the notoriety started, I guess. next up uh we are going to be talking about dollar stores and how they are faring right now there's a few different companies chains that are not necessarily performing as well as they normally do especially during um you know tight budget economies usually dollar stores tend to do well because people trade down or at least that's what we're told usually in our reporting.

13:45But yeah, this week, Cale, do you want to run the numbers on these? Sure. So Dollar General reported this week. Dollar Tree reported last week, I believe. And they both weren't great. And I don't know, I don't really usually talk about stock, but their stocks haven't been doing too great. But a few numbers that stood out, Dollar General's revenue hit$9.3 billion, which was up 7 % year over year, but still did not meet the expectations that analysts thought of$9.5 billion. Same store sales increased 1.6%. But people thought that same store sales were going to increase 3.8%. So that bump was only half of what was expected.

14:31And probably most worrying is that the full year outlook for Dollar General is that sales will rise between 3.5 % and 5 % when originally they had thought that the net sales were going to rise 5.5 % to 6%. All in all, it shows that, yes, they're growing, they're making money, but they're not hitting the growth targets that they had set for themselves. And what's more, we've been in a real boom times for dollar stores, especially Dollar General. Dollar General has been expanding with new types of store formats, new areas, and it seems like something has hit where it's not resonating as much. them looking at dollar tree because you know we need to look at the industry as a whole they beat revenue 7.32 billion dollars uh which was above what they thought but their net income fell um so it was 299 million this past quarter compared to a little over 536 million dollars a year ago and dollar tree also lowered its profit outlook for the full year so ultimately even though there was a revenue beat it shows that the road ahead is really bumpy for both of these major dollar store players.

15:44Yeah. And both companies put the blame on a couple of different factors. So with Dollar General, it is, of course, everyone's favorite new excuse is the macroeconomic environment and how the core customer base is spending less, which I'm sure is true. But yeah, the CEO said it's been more challenging than expected, particularly for these core customers. And the company believes that they are going to continue to have these significant impacts on just how much people are spending probably through the rest of the year. And then whereas Dollar Tree, I thought this was interesting. They are talking still about supply chain headwinds, which I guess most people thought is we're kind of past that at this point.

16:34but looks like they are still dealing with that and then shrink which has been a very big topic across the industry and I think some people are even I was reading about how shrink should be the definition of shrink is really changing it's no longer just theft or damages but it is now you know, kind of anything that like lost or stolen, anything really that cannot be sold on the shelves. And so with that said, I guess, where does this put dollar stores, right? Because they were really booming, like you said, over especially the peak pandemic, despite not really having online presence, but because, you know, the price points, obviously, and then also just the traffic being really high.

17:26I mean, it's just a really interesting time because dollar stores are supposed to be recession proof, I guess you could say, or this is these are the types of retail environments where people should should be shopping and they shouldn't be hit as hard as compared to other areas. And the fact that Dollar General is saying that the macroeconomic environment is proving more challenging shows that what they were saying in the quarters below has not rung true. And like Dollar General has been trying to reach more types of shoppers. They have their, is it Pop Shop? You know what I'm talking about? Their stores that are for more affluent people where everything's $5, not$1.

18:08And it's because they thought they were going to be able to grow while other areas were shrinking. And so it just shows that, I don't know, it's a much more turbulent economy than people thought. And that even the retailers that are supposed to be really resonating with everyone, even people who are facing financial hardships, aren't doing it as well as they thought. So it's a really interesting point we're in right now. Yeah. And of course, it's happening at the same time as a lot of retailers are marking down products. So there's maybe competition at play there, whereas maybe, yeah, these retailers did not have to compete with the little bit of a higher end or mid-range markets.

18:59And then I think this is a little bit related, actually, which is continuous price increases among CPG companies. So I think around 2021, we started seeing price increases from the big companies, the Unilevers, the Pepsi Co's. And they were sort of promising like, oh, we need to do this because supply chain and just production costs and all of that. But as things have settled down, that demand is really declining in the last few months or to a year. They have been still quietly raising their prices over the last few quarters. like PepsiCo, except in this case, it's really to protect their margins.

19:43Because what we've seen a lot in earnings the last few months, that's been really interesting is that even though the revenue and the profits are up, the actual per volume sale is down, which tells us that obviously, if you're, you know, charging$5.99 for Doritos, which I saw the other day, you are obviously going to be doing it. I thought, yeah, I thought Doritos are supposed to be, you know, the every man's chips. But in that case, you're really competing with the better for you players. But that's a topic for another day. But in this case, they are basically telling their shareholders that this is essentially what they're going to probably continue to do for a little while longer in order to offset some of the loss in actual repeat purchases.

20:32But when you talk to an analyst, they're like, well, you can't just do that forever, right? It's sort of the opposite of what we were talking about with Shein. Yeah, it's very weird. And it shows it's like they drank Kool-Aid where they were like, oh, if we raise our prices, then we make more money per unit. And that did work for a while. And it seems like they're hitting a threshold where customers are going to bulk. And I'm just so interested to see what will be the tipping point for this to stop, specifically with companies like PepsiCo or Unilever, where they're products that are specifically supposed to be more value-oriented.

21:12Like, I don't know, like Doritos is a great example. How expensive is a Dorito going to get until they realize that they really should be$3? And so this seems to be a continuous march from these companies to raise prices. And even though they are reporting their sales volumes are going down, they still think that this is the best strategy, which I find super fascinating. Yeah. And this is where you get into the, you know, the, well, now they're just being greedy allegations, right? Which we've been hearing for a little while. And at this point, I think, you know, if you're not really struggling on the supply chain side, if you don't really need to, but you feel like you can continue to squeeze those margins to raise the prices on the shelf.

22:00Yeah, I think there's already a little bit of a backlash, as we've seen. But yeah, something's got to give. At some point, people are going to be trading down from the name brands. Exactly. And I think we've written about this a little bit, and I imagine there will be a few updates to this in the coming months and quarters. But this is prime time for private labels to pounce, specifically for these companies. And this is historically, whenever there's been an economic downturn or there's been, quote unquote, inflation where prices have risen, that's when the big players like Walmart, like Kroger, like Costco, they all saw huge increases in their private label business and invested heavily in them.

22:40And so I imagine that's, we're seeing this already. Like we've written some stories, I'm pretty sure you wrote some stories or one of our reporters wrote a story pretty much saying exactly this, but it's probably going to, that's going to be the type of pressure that's going to be exerted against these other companies that ideally will level the playing field a little bit. But interestingly, this has been going on for a while and we haven't seen it so much as I thought we would. Yeah, as you said, it will be interesting to see, you know, where that cap stops and when do these products that are just mainstays really in most Americans shopping carts going to be, I don't know, maybe leaving or I think it's maybe even seen as more of a luxury, right?

23:26Maybe you trade off every couple of trips for the name brand versus the store brand. But yeah, private label right now is sort of a heyday. It has been for a while, but it might be, I think maybe some of these companies are setting it up to succeed even more. Yeah. And, you know, There are private labels that already are their own quote-unquote brand labels, like Kirkland, for example, or things like that. So this is me completely hypothesizing and just shooting fast and loose. But I could see this being a moment where certain private labels that already have a certain brand cachet try to focus more on that and make them compete better with these name brands.

24:10Like, I'm not saying Kirkland is going to go up against PepsiCo, but there are people who do like those brands or there's good and gather from Target. There are all these brands that people really know and expect. And so if they did a branding play with it where they were like, we're cheaper than these, but you know and trust us, that would be a smart way to try and earn those dollars. We'll see if that actually happens, but I think that would be an interesting thing to come. But again, all just me looking into a crystal ball. Right. Yes, as usual, we cannot get through a Modern Retail Podcast without invoking Kirkland.

24:45But yeah, that's our show for this week. Please rate and review us on Apple Podcasts, Spotify, or anywhere else you're listening. Also, don't forget to subscribe to the Modern Retail Podcast to hear interviews by Kale with Industry Leaders, where it drops on Thursday. Kale, you have a preview for us for next week? Yeah, I am talking with Hannah Anderson, the premium kids apparel company, all about their storied history and what happened. It was a super fun interview. Cool. Looking forward to it. And then, of course, come back on Saturdays for the Modern Retail Rundown. And as always, thank you for listening.