When Chinese discount shopping app Pinduoduo debuted nearly a decade ago, tech giants Alibaba and JD.com dominated China's e-commerce business.
Pinduoduo felt more like a gimmick than a potential rival. It was a combination of arcade, shopping mall, and social network. Its main selling point was low prices that allowed shoppers to recruit other buyers to make joint purchases. Customers could kill time playing video games and earn money by logging in and browsing the app every day.
Now no one takes this company lightly.
Pinduoduo is a sister company to bargain shopping app Temu. Temu has tens of millions of users outside of China, including the United States, and has spent billions of dollars promoting it. If you're an American who hasn't used Temu yet, you've probably seen the company's Super Bowl ads and Instagram posts.
Like TikTok, Temu is the international version of a hugely successful Chinese company. As its popularity in the United States has grown, its business practices have also come under scrutiny. Lawmakers have questioned whether China is using forced labor to provide a U.S. route to products made in China. The company has faced criticism for its labor practices and lax enforcement of intellectual property laws.
Pinduoduo is also attracting increasing attention within China. As a popular place to buy groceries and daily necessities at low prices, it is now closing in on China's second-largest online retailer, Jingdong, in market share. And last year, when Alibaba briefly overtook it as the country's most valuable e-commerce company, Alibaba founder Jack Ma sent out an internal memo imploring his company to “change and adapt” to catch up.
Last month, PDD Holdings, the parent company of Pinduoduo and Temu, reported that annual revenue would nearly double in 2023, while Alibaba and Jingdong's revenue growth was less than 10%. The company called the results a “pivotal chapter” in its history.
Pinduoduo is taking advantage of one of China's biggest economic challenges: sluggish consumer spending and falling prices for food and other goods. As the country's growth slows, consumers are embracing a so-called down-spending lifestyle centered around purchases in Pinduoduo.
The situation was different when Pinduoduo arrived in 2015. China's rapid growth over the past few decades had instilled confidence that its expanding middle class would continue to use its newfound wealth for extravagant spending.
Around that time, Alibaba opened a chain of supermarkets selling luxury goods such as king crab legs and 30-year-old single malt Scotch whisky. JD has launched an e-commerce portal called Toplife for premium brands.
“The biggest mistake I made at the time was believing that China was full of middle-class consumers and would continue to rise,” said the editor of Baiguan, an investment-focused newsletter. says Robert Wu. and business in China.
Pinduoduo founder Colin Huang, currently China's second-richest person, said in a 2018 interview that his company is not only a big hit with China's nouveau riche, but also one of China's “Fifth Rings” (5th Ring of Beijing) He said he is also trying to satisfy people outside of the community (a colloquialism for people in the country). It is far away from major cities in China.
Pinduoduo did not respond to requests for comment, but it has grown through word of mouth as it offers deep discounts. Pinduoduo's deep ties to Tencent's WeChat, China's ubiquitous messaging service, made it easy to share deals online. Within a year, Pinduoduo had 100 million users. Five years later, it surpassed Alibaba with 788 million users.
Goldman Sachs estimates in a 2023 report that Pinduoduo accounts for 19% of China's e-commerce market based on product sales, compared to Jingdong's 20% and Alibaba's 41%. did.
Pinduoduo shoppers work directly with suppliers, farmers, and manufacturers for low prices. The company keeps fees low for users and sellers, and avoids large investments by outsourcing logistics to other companies. Fan has previously said he wants Pinduoduo to be like the Facebook of shopping, a destination where people can gather even if they don't necessarily intend to shop.
After the success of Pinduoduo, social commerce has become the norm in China. All e-commerce apps have a live shopping feature where influencers test new products and answer user questions. Some of China's largest social networks also have sites for shopping purposes. These include Xiaohongshu, China's version of Instagram, and Douyin, an app owned by ByteDance, which operates TikTok outside of China.
Pinduoduo's biggest appeal is its incredibly low price. His 5.5-pound box of cherry tomatoes costs about $4.50, but if another person participates in a “team buy,” the price per box is half off. A dozen rolls of five-ply toilet paper cost 80 cents. Both are delivered free of charge.
In its early days, Pinduoduo was full of counterfeit products. He took active steps to address this issue. Buyers who receive counterfeit products are eligible for up to a 10x refund from the seller. If the customer is not satisfied with the purchase, the seller will issue a refund, no questions asked.
Rainbow Wang, an English teacher in Beijing, said she is an avid Pinduoduo shopper, buying daily necessities such as fruits, vegetables, rice and yogurt. She can get an even bigger discount by paying for a $1.50 monthly membership.
Wang said she liked the low prices, free shipping and generous return policy. Although she used to have better discounts, she said she will continue to shop there because “the items are still cheap.”
For sellers, the huge amount of traffic to their apps is attractive. Marcus Ding, general manager of a sporting goods company, said Pinduoduo was more profitable because of lower sales commissions. However, about one-fifth of the revenue he earns from his Pinduoduo goes back into promoting products on the platform. Pinduoduo makes most of its revenue from advertising on the site. About two-thirds of the company's revenue last year came from sellers who paid to have their products listed prominently.
This advertising model was most likely influenced by Google, where Huang worked as an engineer from 2004 to 2007. Ads on Pinduoduo are sold using a Google-like auction system where you bid on keywords.
There are other signs of Google's influence.
When it filed for an initial public offering on the Nasdaq exchange in 2018, Huang, who left Pinduoduo in 2021 but remains its largest shareholder, began his letter by saying, “Pinduoduo is not a traditional company.” declared. Fourteen years ago, Google founders Larry Page and Sergey Brin famously launched their IPO letter in the same way.
Google has declared that one of its principles is “Don't be evil.” Mr. Huang also agreed with that opinion. “We may not always be understood, but we always do things with good intentions and never do bad things,” he writes.
Critics say such altruistic statements contradict some of the company's tactics. Last year, Google Play Store suspended Pinduoduo's app outside China after cybersecurity experts discovered it was laced with malware. And Temu's success will likely expose Pinduoduo to even more scrutiny. It is one of the most downloaded apps in the US and has expanded to dozens of other countries.
Temu does not sell groceries, but focuses on clothing, beauty products, and gadgets. Similar to his Pinduoduo customers in China, Temu's shoppers buy products directly from manufacturers and vendors. Because of the low prices, you're probably losing money on most orders.
Most of Temu's products are made in China, and it costs an estimated $11 per order to ship the products to the U.S. and to Europe and Australia, according to Robin Chu, China Internet analyst at Bernstein Research. It costs between $9 and $10 per order.
Last month, Cheng Lei, co-chief executive officer and chairman of PDD Holdings, told analysts that TEM's global expansion is in its early stages and there are many uncertainties. But they are taking a lesson from China: consumers are always looking to save more.
