PDD Holdings Inc. (PDD, Financial), founded by Colin Huang in 2015, has emerged as a multinational commerce group with remarkable success. Anchored by its flagship platform, Pinduoduo, the company has secured its position as China's third-largest e-commerce entity, offering a distinct shopping experience. The platform's popularity stems from its ability to engage millions of users, particularly those residing in lower-tier cities and rural areas who appreciate its social features and affordable prices.
The platform's innovative team purchasemodel, which encourages users to share product information and form shopping teams, has fostered a highly engaged user base. Pinduoduo has played a pivotal role in enabling small and medium-sized merchants and farmers in China to reach a wider customer base, thereby enhancing their efficiency and profitability. With its unique approach to e-commerce and focus on community-building, Pinduoduo has achieved remarkable growth, boasting close to 900 million active buyers. The company is now focused on expanding its presence in the international market.
Expansion through Temu
Pinduoduo's international expansion through its Temu platfrom has shown promising signs of growth and potential to become a serious competitor in the e-commerce market outside of China. With a user base close to 1 billion in China, the company has turned its attention overseas.
Temu, which was introduced in the U.S. in September 2022, aims to expand Pinduoduo's presence internationally by offering unbeatable prices on a wide selection of products. Leveraging the experience and supply chain of its parent company, Temu has the potential to disrupt the competitive landscape in the U.S. market. The platform also operates in several other countries, including Canada, New Zealand, Australia, France, Germany, Italy, the Netherlands, Spain and the U.K.
One of the key strategies deployed by Temu is to provide discounts, free shipping deals and even free first purchases to attract new customers and give them peace of mind when making transactions. Additionally, it offers a full refund for damaged or lost packages, 90-day free returns and protection against counterfeit products.
Challenges and competition in the U.S. market
Despite still being an early-stage platform, Temu has already shown signs of gaining traction in the U.S. market. The platform ranked among the top three app downloads in the Google Play Store and Apple App Store during the first quarter of 2023. However, it still has a way to go before it becomes a serious challenger to established giants like Amazon.com Inc. (AMZN, Financial) and Walmart Inc. (WMT, Financial).
One area where Temu lags is shipping time, with delivery taking seven to 15 working days compared to Amazon's free one-day or same-day delivery. This significant difference in shipping speed puts Temu at a disadvantage when it comes to meeting the expectations of consumers who value fast and convenient delivery options.
Further, Amazon's dominance in the e-commerce market cannot be ignored. With a market share of almost 40% in the U.S., Amazon is one of the largest players in the industry. The company's presence across multiple categories and its features such as Prime membership, which offers additional benefits to subscribers, make it a formidable competitor to Temu.
Amazon's dominance and Temu's counter strategies
The fact that around 70% of American adults are Amazon Prime members showcases the loyalty and trust consumers have in the brand. Customer spending statistics from Statista reveal Amazon’s dominance in the U.S. About 31% of U.S. adults spend between $50 and $100 per month on Amazon purchases, while U.S. Amazon Prime members spend an average of $1,968 per year on the platform. Its massive user base is reflected in the fact it has 2.72 billion unique monthly visitors, highlighting the company's wide reach and influence.
Amazon's fulfillment capabilities are also unparalleled, with the company shipping an impressive 18.5 orders per second. This translates to 66,000 orders every hour and 1.6 million orders shipped daily. The efficiency and scale of Amazon's logistics network enable it to meet customer demands for fast and reliable deliveries. Considering these performance statistics and Amazon's dominance in the e-commerce landscape, it is evident that Temu faces significant challenges in competing with this established incumbent.
To become a serious contender, Temu will need to focus on improving its shipping times, enhancing its logistics capabilities and attracting a loyal user base of its own. However, the platform is already facing challenges with counterfeit and low-quality products. Additionally, users are concerned about their data protection, with Google flagging several apps developed by its parent company as containing malware that could track users' information and activities across multiple apps, not just Pinduoduo.
Competition with Shein
Temu also faces direct competition from Shein, another Chinese e-commerce player that has experienced significant growth in the U.S. Shein's market share in the U.S. doubled between March 2020 and March 2022, reaching approximately 40%. Despite targeting price-sensitive customers, Temu and Shein have different business models, with Temu operating as an online store and Shein as a fashion retailer.
Nevertheless, Temu has quickly gained popularity among consumers due to its extensive range of products at affordable prices, giving it an advantage over Shein. The platform has successfully curated a vast array of high-quality products that strike a balance between affordability and decent quality. Data.ai recognized Temu as the top-ranking breakout shopping app in terms of downloads in the U.S. for 2022. According to New York-based market research firm YipitData, the platform recorded gross merchandise volume of more than $50 million for the week ending Feb. 5, highlighting the strong start Temu has made in America.
Next-gen manufacturing model and performance
The success of Temu can be attributed to its next-gen manufacturing model, which focuses on an intelligent and efficient supply chain. This model helps reduce production costs by at least 50% compared to conventional approaches, allowing Temu to pass on substantial savings to customers. By encouraging customer feedback, the platform creates a virtuous cycle that aligns production with consumer demand, resulting in tailored and budget-friendly products. This approach optimizes quantities and timing, driving down costs, minimizing waste and reducing the environmental impact, thereby creating a more sustainable and efficient retail ecosystem.
Temu's impressive performance is also evident from its holiday traffic in 2022, where it surpassed major e-commerce sites like Kohl's Corp. (KSS, Financial), Wayfair Inc. (W, Financial) and Nordstrom Inc. (JWN, Financial). Temu even surpassed low-price Chinese goods sellers Shein and Wish.com, establishing itself as a significant player. Further, in the first quarter of 2023, Temu's downloads increased by 57%, solidifying its position as the top-ranked free app in the U.S.
Growth and challenges in other regions
The rapid growth of PDD's Temu is driven by its ability to attract price-sensitive consumers in overseas markets, offering inexpensive, made-in-China goods across various product categories. This strategy has been particularly successful in light of global inflation and growing macroeconomic pressures, allowing the platform to carve out a niche and attract a substantial user base. By the end of the first quarter, Temu had amassed 17 million monthly active users as reported by Sensor Tower, reflecting the substantial user engagement and adoption of the platform among consumers. Some of this success can be attributed to how Temu has capitalized on the growing trend of mobile shopping in the U.S., where consumers spent a record-breaking 2.8 billion hours on shopping apps last year.
While Temu has been breaking records and gaining momentum in the U.S., its expansion into other regions, such as Australia, has faced significant challenges. Temu launched in Australia in March and received the same enthusiasm among customers. However, the platform began encountering criticism and controversies. Australian customers have voiced concerns about issues like damaged or delayed deliveries, incorrect orders and a lack of responsive customer service. Despite maintaining the number one rank in app stores in Australia, Temu's rapid rise and subsequent controversies have drawn attention and raised questions about its future in the region.
Conclusion
PDD Holdings is eyeing a major international expansion, which is evident from the aggressive launch of Temu in many key markets. Earlier this month, Temu was launched in Japan, making it the first Asian country the platform is targeting. Despite intensifying competition, PDD's Temu has achieved notable success since its launch in the U.S., but the platform will have to improve shipping terms to carry this momentum forward in the long run.
The growing tensions between China and Western countries may prove to be a hurdle for PDD in the coming years, which is a risk that needs to be actively monitored. At a forward price-earnings ratio of 18, PDD is not expensively valued given the company has reported double-digit revenue growth in the last two years and triple-digit revenue growth from 2017 to 2020.
