PDD Holdings Inc. - Temu-ltuous disruption
PDD Holdings Inc. was established in 2015 in China by Colin Huang. The company is an e-commerce retailer that began by selling fresh groceries, but quickly diversified into inexpensive product categories. It is now the third largest e-commerce platform in terms of gross merchandise value (GMV) in China through its Pindoudou app. It also owns the high-growth international online marketplace app, Temu.
Both apps act as a marketplace to bring buyers and sellers together, generating revenue from charging commission and for marketing costs. Approximately 70% of PDD Holdings' stock keeping units (SKUs) are white label products and it focuses on low value and price competitive products.
China's e-commerce market
Chinese online sales penetration is currently around 33%. Growth in online sales has slowed over the past few years because of what has been a relatively tough economic climate for the Chinese consumer. It is expected though that as consumer confidence gradually improves and with high consumer savings, there will be a reacceleration in online sales growth in China to around 10% per annum over the next few years.
Pindoudou
Pindoudou is the company's e-commerce site that operates in China with the slogan "Together, More savings, More fun". It aims to combine the experience of Costco in terms of value for money, and Disney in terms of entertainment with a gamified shopping experience.
The platform layout and navigation are optimised for browsing rather than searching and focuses on community building and group purchases. For instance, if a customer wants to buy an item at a cheaper price, they can start a group of buyers to bring the price of the product down. All buyers must complete the group purchase within 24 hours, or the purchase is cancelled, thereby incentivising users to invite friends and family onto the platform quickly. This word-of-mouth marketing means Pindoudou can reduce its cost of customer acquisition.
Before Pindoudou, China's e-commerce sector was dominated by Alibaba (Tmall & Taobao) and JD.com. Pindoudou's emergence attracted small merchants in lower tier cities that were marginalised by the dominant e-commerce players. At the same time Pindoudou focused on low prices which helped it attract consumers from poorer communities that had also been historically underserved by Alibaba and JD. The company also benefitted from the consumption downgrade in China, which is ongoing.
Pindoudou keeps prices low by operating a customer-to-manufacturer model - working directly with farmers and manufacturers, thereby reducing the number of intermediaries. This allows manufacturers to reach customers directly and set their own margins. Pindoudou also avoids heavy investment by outsourcing its logistics as products are shipped directly from merchant to consumer.
Against this background, Pindoudou grew very rapidly in China with the help of Tencent's WeChat. Tencent owns 15% of PDD Holdings and uses WeChat to share bargains online and reduce acquisition cost. Pindoudou had around a 17% share of the Chinese e-commerce market in 2022 and last reported monthly average users of 751 million in 1Q22, however, it's estimated that Pindoudou's monthly average users are now similar to Alibaba's at around 900 million.
International expansion
In September 2022, Pindoudou launched its international e-commerce platform called Temu in the US and since then it has expanded quickly into 49 countries. Temu leverages its China domestic supply chain to attract customers globally with value-for-money products across apparel, home goods and accessories. Temu uses a 'fully-managed' marketplace approach where merchants agree on a selling price to Temu and ship goods to its warehouse in Guangzhou. Temu then sets the consumer price and handles all shipments to the consumer as well as marketing and customer service.
Temu's monthly average users have grown rapidly since it expanded internationally, although the international business is still making a loss as it expands aggressively. Temu has been particularly successful in the US, however, it has not been disruptive enough for Amazon yet. Instead, Temu has taken market share from discount retailers such as the Dollar General, which saw its share of its customers discount wallet fall from 60% to 50% in a year, and Dollar Tree whose share was 30% and is now just 25%. Temu now has 14% of the discount wallet in the US.
Temu remains a very small player in the US e-commerce market, and the four large Chinese e-commerce companies with a presence there (Temu, AliExpress, Shein, TikTok) make up less than 10% of Amazon's US GMV. It is also estimated that Shein, Temu, TikTok and AliExpress currently represent just 2% of the US e-commerce market. There is currently little cross-selling between Temu and Amazon as it's estimated that only around 5% of Amazon users have made a purchase from Temu.
While Temu began its international foray in the US, it has expanded to other markets around the world and now only 35% of monthly average users are in the US. PDDs Holdings' domestic business allows it to invest aggressively to grow users worldwide. Temu is estimated to have made a loss of $3 billion in 2023 and is expected to continue to make a loss as it aggressively acquires users around the globe. However, this loss will reduce over time as the company narrows its discounts, stabilises sales and marketing in more mature markets, and manages to sell through higher average order volumes in developing countries.
Financials
Pindoudou earns its revenue from online marketing services and transaction service fees.
Revenue growth of just under 50% in 2024 is expected to be driven by growth in overall GMV but at a higher take rate. This is as it attracts more merchants to its site through its large user base and benefits from increased marketing to increase visibility of these merchants on the platform.
International growth is expected to continue to be strong as Temu expands into more markets and we believe the company will benefit from the implementation of its high-quality growth strategy where it aims to sell high quality, larger ticket items at affordable prices, with strong service and more branded items in the mix.
Although PDD Holdings is profitable, its key priority for now is the high-quality development of its platform. Key investments will be made in giving back to consumers to gain market share and investing in Ramp;D. However, as the company manages to normalise sales and marketing spend and Temu becomes profitable, we expect margins to gradually increase over time.
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