Cettire: US De Minimis implications
Reflexivity as a service
After market close on Friday the White House announced they were making changes to the de minimis rules - from which at the very minimum we can say Cettire has gained a pricing advantage in the US, and from which we can make a case has been the entire basis of their business.
Excluding apparel from de minimis
Whilst the statement is clearly targeted at Chinese companies, some points sweep up Cettire’s business model regardless.
The Administration stands ready to work with Congress to pass comprehensive de minimis reform legislation by the end of the year. Key reforms Congress should advance include:
Exclusion from de minimis eligibility of import-sensitive products. Congress should act to exclude import-sensitive products, including textile and apparel products, from the de minimis exemption.
This brings to bear every worst case scenario for Cettire. Once enacted, this would not only wipe out their pricing advantage in the US, but if they continued to employ a drop-shipping model and ship DDP (as they claim!) then every single shipment would cost them a $30 charge.
If we take US orders as 56% of the total and ballpark 70% of orders being under the (prior) de minimis, then this would be an extra 470k orders which required use of the DDP service, costing another $14m to fulfil. To cover this impost it would require 4% of US net revenues - when in Q4 delivered margin was under 18%.
Not. Happening.
Disclosure as a cost
Whilst excluding apparel from de minimis will require legislation - legislation the GOP appear in favour of - the administration is also using it’s rule making powers to require
This regulatory action will propose to require specific, additional data for de minimis shipments – including the 10-digit tariff classification number and the person claiming the de minimis exemption – which will improve targeting of de minimis shipments and facilitate expedited clearance of lawful de minimis shipments.
The proposed regulatory changes will also clarify who is eligible for the administrative exemption, and requires filers to identify the person on whose behalf the exemption is being claimed.
Currently shipments under the de minimis - including our shipment that shouldn’t have been under the de minimis but Cettire claimed was under the de minimis - don’t show up on customs entry forms and don’t require an HS code to be filed on entry.
This all changes with this rule. Not only will Cettire be required to file this for every shipment, but it will enable CBP to data match their shipments to HS codes and ensure compliance. Costs + risk.
Bull case
If the longs were holding out hope that Cettire’s woes were only coincident with scrutiny on their business model rather than caused by it - and if they thought that Cettire’s woes were temporary and thus ripe to rebound once the “promotional” environment had dissipated, then that also means that much more of the value of Cettire would be contained in the outer years, once the hypergrowth resumed.
Even in this Panglossian case, the risks manifest in Cettire’s business are coming to pass, one by one. The hoped for recovery is into a wall of risk - any one of which could kill the fragile model of Cettire.
Advantages last only so long
Whilst Temu and Shein took advantage of the de minimis exemption to gain an advantage, it was only a matter of time before Amazon developed a service to take advantage of the same exemption.
In the same way, it was only a matter of time since Cettire’s use of FSFE and de minimis has been publicised that similar drop-shipping businesses would adapt their flow to take advantage of the same loopholes, and this is beginning to become apparent with Cettire’s competitors.
If you can’t beat them - copy them!
So even if the bulls’ best hopes are realised and this reform takes a while to enact - the competition is coming, and the price advantages are being eroded.
Secrets told are no longer secrets
As we said in our very first piece on Cettire - a business model that requires secrecy to succeed has a single point of failure - and Cettire’s secrets are no longer secrets.
We can see their boxes piled up on tourist streets - we know their suppliers.
We can see their “customs flow” - we know about FSFE, de minimis and HS code switching.
We can see their accounting issues.
Tik tok.