The 'secret sauce' that helps Shein predict the next hot trend has nothing to do with AI, company exec says

• Shein has become a major power player in fast fashion thanks, in part, to its technology.
• But the way Shein uses data and determines demand has been a point of contention.
• Shein exec Peter Pernot-Day explained how the company's on-demand model works.

Shein has become a major power player in fast fashion, and a large part of its success comes from the technology it uses to identify trends and capitalize on demand.

But how does it use this tech?

We sat down with Shein's global head of strategy and corporate affairs, Peter Pernot-Day, to hopefully shed light on how the company gathers and uses data and translates that data to manufacturers.

The company seems to be able to predict what customers might search for and create those garments nearly on demand. But Pernot-Day said Shein's not the AI-powered machine people may think it is.

"There is a misunderstanding of our business that assumes we are Hoovering[MOU1] up trend data from the internet," he told Insider. "We're really not."

How the company uses tech to capitalize on trends has been a point of contention among designers who have claimed some Shein items have copied their intellectual property. Most recently, a group of artists sued Shein, alleging the company sold knockoff versions of their designs and that it profits off AI and algorithms that replicate other people's work.

After the interview, the company said in an email statement it takes all claims of infringement seriously. The company said its merchandise is designed by in-house designers, including designers from Shein X, the company's emerging designer program, as well as third-party suppliers who provide their own designs.

It's important to note that copyright laws largely do not protect fashion once a product leaves the design stages and becomes a garment.

How the company works with its manufacturers has also become a source of contention. Multiple investigations into factories that supply to Shein have found that the factories violated labor rights and kept up poor working conditions.

In a statement to Insider after the interview, a spokesperson for Shein said the company is committed to respecting human rights and adhering to local laws and regulations. Its suppliers must adhere to a "strict code of conduct" that is aligned to the International Labour Organization's core conventions, the company said.

How Shein gathers data from shoppers online to identify trends

Shein uses audience-engagement technology on its site and mobile app to identify trends and determine demand, Pernot-Day told Insider. Just as TikTok or Instagram tracks what you search or how long you engage with a particular video, Shein gathers similar data from its shoppers.

When you open Shein's app, that's one data point. If you visit Shein's website from an outside link, that referring page is a data point. This is a common practice in retail — many other brands track similar data on their sites.

After opening Shein's app or visiting the website, you begin what Pernot-Day called a "session journey," where every click becomes valuable data, from the key words you type into the search bar to how you respond when the site shows you similar items to what you've been looking at.

If you log into your account on Shein, you might find an experience similar to Netflix's, wherein you get personalized suggestions for the types of clothing you typically shop for.

"All of these customer journeys, each one can be very unique or aggregated and anonymized," he said.

To measure demand, Shein's site then conducts statistical sampling to understand what sequence of steps led a customer to any given purchase. Once that sequence has occurred several times, the system projects a level of demand for a particular product.

To be sure, Shein also gathers data through advertising, as many other retailers do.

The 'secret sauce' behind Shein's on-demand fashion

The technology Shein uses to determine trends isn't new — many online retailers collect similar data to track customer behaviors. But what Pernot-Day said makes Shein's business model different is how it uses this digital model throughout its supply chain.

Once Shein determines the demand for a product, it sends the projection to suppliers using a model it calls "on-demand." Shein produces a limited run of a product — typically only 100 to 200 units of that product. If that product performs well, Shein will place a bid with its manufacturers for a larger order.

Shein's manufacturers have access to a supplier-management system where they can monitor demand and see what's coming down the pipeline, Pernot-Day said. In turn, he said, manufacturers are willing to accept the small orders because they can see what's ahead.

"This is really a marriage of audience-engagement technologies, which were developed in the early 2000s, with a digital-first supply chain," he said. "It's the marriage of those two that creates our quote-unquote 'secret sauce.'"

The company works with about 5,040 contracted manufacturers, primarily in the Guangdong province of China. Some suppliers are also located in Brazil and Turkey.

Temu, a rival e-commerce app, recently sued Shein, alleging that Shein forced clothing manufacturers to sign agreements to not work for its competitor. In a statement to Insider, a representative for Shein said the company believes the lawsuit is without merit.

Shein's ability to rapidly produce clothing has also fueled designers' claims that the company can replicate their work at breakneck speed.

In a statement to Insider, a representative for Shein said infringement claims have declined from 2021 to 2022 by a "double-digit percentage," and the company is investing in image-recognition technology to recognize cases of potential infringement.

But their on-demand manufacturing allows the company to react to trends quickly — if Hailey Bieber wears a gold ruched cut-out dress and shoppers begin searching Shein for those key words, Shein could produce a similar style in less than two weeks.

"We place orders that are filled in 10 days and are only for a hundred items," Pernot-Day said.