When Pinduoduo, the Chinese app for shopping for discounted groceries, debuted about a decade ago, tech giants Alibaba and JD. com dominated e-commerce in China.
Pinduoduo seemed more like a gimmick than a long-term rival. It’s a combination of an arcade, a shopping mall, and a social network. Its main selling point reduces costs for buyers who recruit other buyers to make corporate purchases. Customers can simply spend time betting on video games or earn money by logging in. daily to navigate the app.
Now, no one takes the company lightly.
Pinduoduo is the sister company of Temu, the cheap grocery shopping app that has amassed tens of millions of users outside of China, in addition to the United States, where it spends billions of dollars on promotions. Americans who haven’t used Temu yet have. You probably noticed his Super Bowl classified ads or his Instagram posts.
Like TikTok, Temu is the foreign edition of a successful Chinese company. As its popularity has grown in the United States, its business practices have also come under scrutiny. Members of Congress questioned whether it featured a U. S. channel for Chinese-made goods. work. It has been criticized for its harsh labor practices and failure to enforce intellectual asset laws.
In China, Pinduoduo is also getting more attention. As a popular destination for shopping for groceries and reasonable family items, it now surpasses JD, China’s second-largest online retailer, in terms of market share. And when it overtook Alibaba as the country’s highest-value e-commerce company last year, Alibaba founder Jack Ma sent out an internal memo imploring his company to “change and adapt” to stay on its feet.
Last month, PDD Holdings, the parent company of Pinduoduo and Temu, announced that its annual profit had nearly doubled in 2023, while Alibaba and JD’s had risen less than 10%. The company called the result a “pivotal chapter. “” in its history.
Pinduoduo has effectively capitalized on one of China’s biggest economic challenges: weak customer spending and falling prices for food and other goods. As the country’s expansion slows, customers are adopting a way of life of so-called degraded spending, focused on shopping on Pinduoduo.
The situation was different when Pinduoduo appeared in 2015. La immediate expansion of China in recent decades had instilled confidence that an expanding middle class would continue to use its newfound wealth with generous spending.
At the time, Alibaba opened a chain of supermarkets promoting king crab legs, 30-year-old single malt Scotch whisky, and luxury goods. JD has introduced an e-commerce portal called Toplife for high-end brands.
“The biggest mistake at the time was that China had become filled with middle-class consumers and that this population would only grow in the future,” said Robert Wu, editor-in-chief of the investment-focused newsletter Baiguan. and Business. in China.
In a 2018 interview, Pinduoduo founder Colin Huang, who is now China’s second-richest user, said he seeks to satisfy not only China’s nouveau riche, but also others outside of Beijing’s “fifth ring,” a colloquial term for others. people with monetary difficulties who live far from China’s major cities.
Pinduoduo, which did not respond to requests for comment, grew thanks to word-of-mouth by introducing significant discounts. Sharing bargains online was simple because Pinduoduo was deeply connected to Tencent’s WeChat, a ubiquitous messaging service in China. Within a year, Pinduoduo had a hundred million users. After five years, it has surpassed Alibaba with 788 million users.
In a 2023 report, Goldman Sachs estimated that Pinduoduo accounted for 19% of China’s e-commerce market in terms of the price of products sold, 20% for JD and 41% for Alibaba.
Pinduoduo buyers deal directly with suppliers, farmers, and brands for low prices. The company helps keep the fees it pays to users and distributors low and has avoided large investments by outsourcing its logistics to other companies. Huang once said he was looking for Pinduoduo to be like Facebook for shopping, a destination where other people congregate without necessarily intending to buy.
After the good fortune of Pinduoduo, social commerce is now the norm in China. Each eCommerce app offers live grocery shopping with influencers testing new products and answering users’ questions. Some of China’s most important social networks are grocery shopping destinations. These come with Xiaohongshu, the national edition of Instagram, and Douyin, the ByteDance-owned app, which runs TikTok outside of China.
The main appeal of Pinduoduo is its incredibly low price. A 5. 5-pound can of cherry tomatoes costs about $4. 50, but the price of the can is partly reduced if the user joins in to make a “team buy. “A dozen rolls of five-layer toilet pack consistent with a charge of 80 cents. Both come loose free of charge.
In its early days, Pinduoduo was overrun with fakes. It has taken strong action to address the problem. Buyers who obtain counterfeit goods are entitled to a refund of up to 10 times their money from the seller. Sellers consider a no-questions-asked refund if a visitor is rarely very satisfied with a purchase.
Rainbow Wang, an English teacher in Beijing, said she is a committed visitor to Pinduoduo with products such as fruits, vegetables, rice and yogurt. You get even bigger discounts by paying a $1. 50 monthly subscription.
Wang said he likes the low prices, flexible shipping and the generous return policy. Before, there were more discounts, he says, but he’ll keep shopping there because “the products are cheap. “
For distributors, the attraction is the massive traffic to the app. Marcus Ding, general manager of a real estate company, said he made more money with Pinduoduo because of its lower selling costs. But about one-fifth of the profits it generates on Pinduoduo is reinvested in selling its products on the platform. Pinduoduo makes the most of its money from advertising on the site. Last year, about two-thirds of its profits came from distributors who paid for product listings to be prominently displayed.
The advertising style was likely influenced through Google, where Huang worked as an engineer from 2004 to 2007. Pinduoduo’s classified ads are sold with a bid formula similar to Google’s for bidding on keywords.
There are symptoms of Google’s influence.
In a 2018 IPO filing on the Nasdaq stock exchange, Huang, who left Pinduoduo in 2021 but remains its largest shareholder, began a letter stating that “Pinduoduo is not a traditional company. “Fourteen years earlier, Larry Page and Sergey Brin, the founders of Google had opened their IPO letter in the same way.
Google has said that one of its principles is “Don’t be mean. “Huang echoed that sentiment as well. We may not be understood, but we do things with intelligent will and cause no harm,” he wrote.
Such statements of altruism run counter to some of the company’s tactics, critics say. Last year, the Google Play Store suspended Pinduoduo’s app outside of China after cybersecurity experts discovered it contained malware. And Pinduoduo will most likely come under greater scrutiny because of Temu’s success. It is one of the most downloaded apps in the United States and is expanding to dozens of other countries.
Temu doesn’t sell groceries, but focuses on clothing, attractive products, and gadgets. Like Pinduoduo consumers in China, Temu shoppers buy products directly from brands and sellers. It loses cash on peak orders due to its low prices.
Because most Temu products originate in China, it costs about $11 per order to ship products to the U. S. Between $9 and $10 per order for shipments to Europe and Australia, according to Robin Zhu, China analyst at Bernstein Research.
Last month, Chen Lei, co-CEO and chairman of PDD Holdings, told analysts that Temu’s global expansion was in its early stages and had many uncertainties, but it is based on a lesson from China: Consumers need more savings.