Pinduoduo rolls up the global e-commerce battle

Pinduoduo dominates global e-commerce

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Pinduoduo’s journey to go abroad continues to advance.

Source: Juchao WAVE

Author: Sian

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First picture: authorized based on CC0 agreement

In April, its cross-border e-commerce brand, TEMU, officially launched in multiple European countries. Two days after its launch in the UK, TEMU also went online in Germany, the Netherlands, Italy, France, and Spain at the same time. Previously, TEMU had already officially launched in the United States, Canada, New Zealand, Australia, and other countries.

TEMU’s tentacles have now reached nearly half of the global e-commerce market, covering four continents and ten countries overseas, and this is only 7 months since Pinduoduo officially went abroad.

According to the report of the mobile intelligence company Sensor Tower, in a month ending with March 26th, TEMU has become the app with the largest download volume in the US app store (only counting Apple and Google’s official app stores). It has dominated the free shopping app rankings in the US for 170 days, in Canada, Australia, and New Zealand, the data is 120 days, 20 days, and 39 days respectively.

In addition, TEMU’s repurchase rate has now reached about 10%, and the amount of each transaction is about 25 US dollars.

Looking back at the domestic market, Alibaba and JD.com are continuously pushing for internal reform and business restructuring, while Pinduoduo’s business in the domestic market has become more stable. Apart from optimizing Duoduo Mai Cai and entering the local life service field, there are basically no new actions. Cross-border e-commerce and overseas markets will become its business focus for the next few years.

On the demand side, driven by the epidemic, global consumer demand is accelerating towards online. At the same time, the continued inflation of foreign currencies has increased consumers’ demand for low-priced goods.

On the supply side, the increasingly saturated domestic e-commerce market has caused a backlog of mature mid-to-low-end supply chain production capacity, and factories urgently need to find new markets to release production capacity. SHEIN, a cross-border brand that embarked on the path of overseas e-commerce before Pinduoduo, relies on its flexible supply chain’s fast response and products with ultimate cost-effectiveness. While maintaining low inventory, it can continuously output new products to overseas markets. Last year, its net profit was close to 1 billion US dollars.

TikTok also places great importance on cross-border e-commerce. Starting from Southeast Asia and expanding to Europe and America, after establishing a foothold in North America, TikTok Shop’s next stop will be Spain. In addition, old cross-border e-commerce platforms led by Amazon are also frequently adjusting their business models, intending to attract more sellers to join and improve the slowing growth.

Pinduoduo’s timing for going global is just right, with a new round of e-commerce wars, and the battlefield has expanded globally.

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Consistent Strategy

Pinduoduo’s “tactics” may be constantly changing, but its “strategy” has never changed.

As the cross-border business has not been online for a long time, Pinduoduo did not mention it too much in the annual report. However, the online marketing expenses increased by 56%, which still gave us a glimpse of Pinduoduo’s large investment in TEMU.

Since its launch, TEMU has been impacting the US retail market with Pinduoduo’s model. On the one hand, it follows the low-price model and imitates SHEIN, focusing on cost-performance and women’s clothing. On the other hand, it uses burning money subsidies and social fission marketing to launch policies such as 1 cent postage-free zones, recommendation rewards, and other policies to attract new customers. Meanwhile, it has placed a large number of advertisements on social platforms such as Twitter and Facebook. It even bought $100 million worth of ads on the Super Bowl alone.

TEMU invests heavily in marketing in the US.

A large number of discounts can help TEMU attract users in a short period of time, but the high marketing costs are a necessary investment. Whether these marketing costs can create long-term value after the investment period is over will become a question that Pinduoduo’s management must consider.

Furthermore, the three-stage logistics used by TEMU will also bring higher distribution costs (the first stage is for domestic merchants to transport goods to Guangzhou warehouse, at a cost of 3.5 yuan per order; the second stage is for Guangzhou warehouse to send to the United States, with an average cost of 15 US dollars; the third stage is for local warehouses in the United States to send to the user’s delivery address, with an average cost of 9-15 US dollars per order), which accounts for 40%-50% of the total cost of goods.

However, TEMU, backed by Pinduoduo, does not need to worry about this in the short term. In September 2022, when TEMU just went online in the United States, Liu Jun, the vice president of finance of Pinduoduo, said at a financial report meeting that TEMU is not driven by financial indicators. In other words, TEMU can invest without considering costs in the early stage to achieve sales volume. Judging from the current volume and revenue of Pinduoduo, this is not difficult to achieve.

In addition, Pinduoduo’s strategy has always been low price + high conversion, relying on direct procurement from suppliers and marketing investment. Pinduoduo has accumulated more than 11 million suppliers in many years of operation, and has incubated more than 1,000 factory brands since 2015 (including many suppliers of world-renowned brands), which also gives TEMU a stable source of goods.

To summarize, Pinduoduo’s strategy has always been low price + high conversion, relying on direct procurement from suppliers and marketing investment.

In addition, to retain existing users, TEMU focuses on large discounts similar to early Pinduoduo. Users can often see links to 50%-90% discount products in the most prominent positions. Now, this strategy has also been replicated in overseas markets.

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The intensification of competition

The North American e-commerce track is becoming increasingly crowded.

The North American market has always been the main battlefield for Chinese cross-border e-commerce. According to Statista data, the North American e-commerce market revenue reached $1 trillion in 2022, making it the second largest e-commerce market in the world. According to predictions, the e-commerce market in North America will maintain a growth rate of 15% from 2022 to 2026. By 2026, its market size will reach $1.8 trillion.

Amazon, eBay, and Shopify are the leading platforms in the North American market, but a large number of independent sites also occupy market space. The decentralization and fragmentation of the e-commerce channel have led to a long-standing “people finding goods” model. One-stop platforms represented by TEMU and SHEIN, which adopt a “goods finding people” model, provide North American customers with a new option for low-priced online shopping.

North America is the world’s second-largest e-commerce market outside of China.

A new paradigm of going overseas with great advantages in the supply chain has also enabled more domestic Internet companies to see new opportunities in cross-border e-commerce.

After restructuring its business and building its own logistics center, TikTok Shop officially opened its US site in November of last year. In order to accelerate the formation of its US e-commerce business, TikTok has also built its own logistics center in the US, trying to create a supply chain system that can challenge Amazon.

SHEIN, whose growth has slowed, has not relaxed its efforts. On the one hand, it continues to open up emerging markets, and on the other hand, it tries to explore diversified development model strategies. It is moving towards a third-party platform model on the basis of its independent site framework. After platformization, SHEIN will break through the limitations of the current fast fashion category.

New players continue to enter the market, but the position of old players is also difficult to shake. According to data released in 2021 by eMarketer, a market research company, Amazon continues to occupy about 40% of the US e-commerce market, while the second-ranked Walmart only accounts for 13%.

In order to attract more sellers, Amazon is also adjusting and introducing a series of policies that are favorable to sellers. New sellers on the Amazon platform can receive a welcome package and enjoy rights such as brand, logistics, and promotional coupons. Walmart also disclosed in its latest quarterly report that its e-commerce sales in the US market increased by 27% year-on-year.

After the epidemic, with the sudden increase in the number of Chinese cross-border sellers, industry competition has become increasingly fierce. The after-effects of a large amount of stocking during the early stages of the epidemic have begun to show, and in order to relieve the backlog of inventory, most sellers will choose to dispose of their goods at low prices. In addition, with the increasing number of factory sellers joining in, the internal competition of the entire industry is intensifying.

As more and more competitors enter the North American e-commerce market, the industry will become increasingly crowded, and the internal competition will continue to intensify.

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Risks on both sides

Pinduoduo’s expansion into overseas markets seems to be smooth sailing, but it is not without risks.

The potential risks mainly come from two aspects: domestic business inertia and unknown risks abroad.

Domestic business inertia refers to the fact that Pinduoduo continuously squeezes the profit margins of goods in exchange for greater sales and its own profits, and its return and exchange policies have long favored consumers, which has put long-term pressure on many merchants. Although the threshold for joining Pinduoduo is very low, the actual threshold for staying is very high, and only those merchants with super-strong supply chain and execution capabilities can survive here in the long-term.

Pinduoduo continues to test the bottom line of merchants, and the grievances of merchants have become a hidden danger, which is like a snowball rolling down the hill – the problem has already erupted on a small scale in China. It can be foreseen that TEMU will continue this pattern overseas, and corresponding potential risks will also continue.

Outside the platform, the low-profit cycle of the cross-border e-commerce industry continues. According to incomplete statistics, nearly 80% of the 14 A-share listed cross-border e-commerce companies maintained revenue growth in the first three quarters of 2022, but due to the impact of the overseas consumer market environment, some companies have seen an increase in revenue but not in profits.

Externally, although there are large markets for North American e-commerce to explore, it is also an area with many policy restrictions and risks.

For various reasons, Huawei has withdrawn from the North American market. Recently, TikTok has also been banned to varying degrees by governments across the United States due to data security issues. Although TEMU is still in its early stages, uncontrollable risks still exist in the external business environment.

In addition, the emphasis on ESG-related matters in European and American countries also puts cross-border e-commerce platforms in a situation where they could be regulated at any time.

For Pinduoduo, the overseas e-commerce market is far from being as mature as the Chinese e-commerce market was in 2015. Operating in a foreign land means longer transaction and feedback cycles, as well as different user psychology and business environment. Facing the unknown and high uncertainty, Pinduoduo can only apply its experience accumulated in the domestic market and constantly explore new markets to find another bottom line.

In other words, the greatest risk TEMU faces is the unknown.

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Final thoughts

The essence of cross-border e-commerce is retail, an industry based on manufacturing and extremely focused on price.

Benefiting from the advantages and dividends of large-scale production, low prices have enabled Chinese manufacturing to dominate overseas markets, while also providing new opportunities for cross-border e-commerce models – when global consumers are plagued by the troubles of inflation, shopping apps that offer fresh, low-priced goods with free delivery are bound to be extremely attractive.

No matter how you analyze it, TEMU’s popularity among overseas consumers is inevitable.

But the problem is that there are often fundamental and irreconcilable conflicts between the interests of consumers and merchants. When domestic suppliers can no longer bear these low prices and when they will rebel is unknown. It is also unknown when the foreign policies and regulatory layers representing the interests of overseas enterprises will launch a counterattack against such low-priced dumping.

This also creates potential risks for Pinduoduo/TEMU. This is a double-sided opportunity and risk, and whether their massive investments can lead to commercial success is the key.

Note: The author of the article is Sian and the source is Juchao WAVE. The article does not represent the position of Cross-Border Guide Observation. It is only for readers to learn and communicate. If you need to reprint it, please contact Juchao WAVE.

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