Is Temu Pinduoduo 2.0?

Pinduoduo (PDD) released its fourth-quarter and full-year 2022 earnings on Monday. The company missed its Q4 expectations but remains the largest and fastest-growing e-commerce platform in China, dwarfing Alibaba and JD.com. The question, though, is where the next phase of growth will come from, and management believes it will be from new customers overseas. That means there’s a big role for Temu, PDD’s new budget shopping app for overseas consumers, to play going forward. As Part II of my China Cross-border Commerce 3.0 series, for this article, I want to look at the three contrarian bets that PDD made as a fledgling e-commerce platform and what they may mean for Temu.

1. Customer Base

When PDD first launched, most observers doubted there was room for a new entrant to the e-commerce sector. Not with Alibaba and JD already dominating the scene and expected to grow even larger. Moreover, the increased spending power of Chinese consumers pointed to a trend toward higher-ticket items as the growth driver for these companies. As a result, Alibaba and JD eagerly invited larger and more international brands to their platforms, looking to book higher ad revenue and take rates in the process.

But there were problems with this approach. Smaller and long-tail merchants were deprioritized by Alibaba and JD and, ultimately, bumped off the platforms. And not all of China’s consumers were participating in this upgrade in consumption. Maybe those in first-tier cities such as Beijing and Shanghai were seeing their incomes and spending power grow, but that left hundreds of millions of other Chinese consumers in very different financial circumstances. Case in point: In 2016, Alibaba’s Taobao mobile shopping app had 369 million monthly active users compared to the more than 700 million monthly active users on mobile chat app WeChat. It was these other 331 million consumers that PDD sought to serve, consumers with less income and more free time during their day than their urbanite peers.

These two factors would make the consumers in lower-tier cities the perfect customers for PDD’s price-conscious merchandise, gamified shopping features, and group buying and referrals-for-discounts incentives. Also, it gave the small and long-tail merchants now out of favor on Alibaba and JD’s platforms a new and much-needed sales channel. In turn, these customers and merchants shaped PDD, pushing it to look for innovative ways to cut costs (from customer acquisition to designing its supply chain) to keep prices low for consumers.

That focus on “cheap” turned into a positive branding exercise for PDD. Today, Chinese consumers see the platform as the place to find the best-value products available in China.

2. Customer Acquisition

PDD's second contrarian bet was the idea to combine "social" and "commerce,” launching on WeChat, the largest social platform in China. The company used the social networks on WeChat to grow its user base by promoting group buying, which incentivized users to invite their friends and family to the app to get discounts on the items they purchased. At the same time, WeChat Payment made it easy to complete a transaction without leaving the platform. These initiatives – along with designing PDD to be a place where consumers spent time discovering new products, socializing with friends and chasing deals – sent growth soaring. By the end of 2015, PDD was handling more than 100,000 orders a day.

No matter how much it grew, PDD kept the focus on value and discounts as the primary way to acquire users. While Western investors may focus on organic growth and product-led growth, PDD knew its target audience was drawn to monetary incentives. When the company launched its short-form video platform DuoDuo Videos – a way to leverage content to keep users on the platform for longer periods of time – it paid users real yuan depending on how many videos they watched. Even when PDD eventually moved to target wealthier consumers, it launched the "10 Billion RMB Subsidies" campaign (equivalent to 1.5bn US dollars), buying higher-ticket items such as iPhones and then selling them to consumers at much lower prices than their market value. Ultimately, the subsidies campaign helped PDD grow beyond low-cost items, acquire a new high-end consumer and merchant segment, and maintain its value-for-money branding across all of its product categories.

PDD proves that high initial marketing expenses could work as long as one new user brings more users onto the platform and the resulting demand scales across the platform.

3. Consumer-to-Manufacturer Selling

PDD also innovated by reorganizing its supply chain. While Taobao had established its reputation for having the widest selection of products available on its platform - what it called "qianren qianmian" in Chinese or “a thousand people, a thousand faces” in English meaning that the system will show individual consumers different fronts – PDD focused on the common interests of its users. This allowed the company to aggregate that demand into large order volumes and leverage it to negotiate better prices directly from manufacturers, cutting out the middleman and passing the savings onto its users. The ultra-low prices, in turn, attract consumers to buy more, further increasing the order volume and forming a virtuous cycle and an incredibly powerful business model for PDD.

What’s That Mean for Temu?

Similar to PDD, Temu offers a wide selection of items across 200 subcategories at close-to-wholesale prices, which are on average 20% cheaper than Shein and 40% cheaper than Amazon. PDD launched Temu last September in the U.S. Now, it’s rolling out in Canada, Australia, New Zealand and the U.K. As of January, Temu had been downloaded over 24 million times within five months of launching and achieved $200 million in GMV in January alone. Given the explosive growth, Management raised the GMV target for 2023 from $3 billion to $5 billion.

It is still too early to tell how Temu will perform, and I see both opportunities and challenges. The fierce competition in China’s e-commerce sector has resulted in hard-won insights and seasoned management at PDD that others will find it difficult to compete with. Still, the company will have to leverage those at Temu to innovate in new ways, serve different demographics, and solve the challenges that come with running a cross-border business.

Opportunities

As a venture investor, I evaluate the team first. PDD is known for being very efficiency-oriented and maximizing employee output through technology and internal processes. You can see the results of that approach in the company’s first-class GMV per employee. Also, Temu is led by Abu, one of PDD’s founders, who helped lead the company through a number of incredibly fierce battles with Alibaba, JD, and Meituan for market share in both China’s e-commerce and community group buying space. I believe, with PDD’s resources and someone of this stature and decision-making authority at the helm, Temu will stand out against competitors weighed down by internal bureaucracies.

I also believe that there is an underserved consumer base overseas seeking value-for-money products similar to the one PDD targeted in China. The key phrase here is “value for money.” This is different from offering the cheap and poor-quality products you might find on Wish. The problem with a focus on price only, without some accounting for quality, means that merchants will chase the lowest production costs, which further erodes quality and prompts consumers to look elsewhere when shopping. PDD evolved beyond this by moving upmarket and acquiring higher-end suppliers while retaining its industry-best pricing. It also delivered superior customer experience through strict policies, such as responding to customer inquiries in 5 minutes, shipping goods in 48 hours, and refunding money to consumers immediately upon request. These kinds of superior strategies to serve and expand its customer and supplier base are what Temu needs to figure out next in overseas markets to avoid becoming Wish 2.0.

Even in a side-by-side comparison with Amazon, Temu shows promise. Temu uses the same discovery-based shopping as PDD, resulting in higher engagement and “sticky” shopping experiences for consumers, while Amazon is a traditional search-and-buy, one-off platform which is not the most efficient for deal seekers. That discovery-based approach presents deals like a news feed and helps guide consumers to new products they otherwise may not have considered. Also, Amazon's prices could never outcompete those of Temu. Although the majority of third-party sellers on Amazon are from China, most of them are retail merchants that source products from Chinese manufacturers and resell on Amazon. Instead, Temu sources directly from over 11 million Chinese suppliers and manufacturers and acts as a wholesaler to place orders in bulk to ensure the best prices for its users.

Challenges

I see customer acquisition and retention as the biggest facing Temu. There are no social networks overseas as powerful as WeChat is in China, where 1.26 billion monthly active users open WeChat more than 10 times a day and spend on average 66 minutes every day on WeChat. At the same time, over 200 million bank cards are linked to WeChat Pay. The absence of WeChat implies that a higher paid marketing spend will be required before the consumer-to-manufacturer flywheel kicks in. Today, Temu acquires users mainly through paid ads on Facebook, Instagram and Google. The all-in-one platform that WeChat offers also means a more dispersed audience and therefore a lower sales conversion rate, as consumers will need to be redirected to multiple applications to interact with their friends and complete transactions.

On the retention side, PDD started out with produce – fruits and vegetables – a category with a high frequency of purchase, which kept consumers coming back and driving upsell to other product categories. However, most cross-border products are by nature not purchased at that frequency. I presume this will lead to a lower customer retention and lifetime value (how much a customer will purchase on Temu before leaving the platform) before Temu breaks out to higher-priced categories.

Additionally, to provide the best value-for-money products and services where customer experience is one key pillar, Temu needs to overcome more challenges than its domestic counterparts, including developing cross-border infrastructure (logistics, fulfillment, returns, payment etc.) and localizing operations. All these challenges will lead to a longer path for customer satisfaction and profitability for Temu.

Temu is an important representative of China Cross-border Commerce 3.0, the rise of cross-border B2C platforms with Chinese characteristics. With both exciting opportunities and new challenges ahead, I am excited to see how a Chinese platform that innovated as well as PDD did will perform outside its home market and create value for consumers on a global scale.