Pinduoduo launches ecommerce price war in the U.S. with new app Temu

Yesterday, online discount retailer Pinduoduo released its financial report for the third quarter, and it was another highly profitable quarter:

• Revenue of 35.50 billion yuan ($4.92 billion), a year-on-year increase of 65.1%.
• Net profit of 10.59 billion yuan ($1.47 billion), an increase of 546%.

While revenue and profit were up, so were sales and marketing costs (14.05 billion yuan/$1.95 billion compared with 10.05 billion yuan/$1.39 billion last year), and research and development costs (2.70 billion yuan/$374.83 million compared with 2.42 billion yuan/$335.96 million last year). Research and development costs increased by 11.4% year-on-year, and are now at a record high.

During the earnings call, CEO Chén Lěi 陈磊 stated that competition in the industry is currently fierce, and Vice President Liú Jùn 刘珺 cautioned that the current profit levels are not sustainable because of the company’s “planned projects and investments.”

Right at the heart of these planned projects and investments is Temu, Pinduoduo’s new global ecommerce platform, which was launched in early September. Regarding Temu, Chen Lei stated that “currently we are still in the early stage of business development, and there are many things that can be optimized in the services we provide. We will remain patient and modest.”

In fact, Temu has already made a big splash in the U.S. market in the last two months, likely accounting for most of Pinduoduo’s higher expenditure on sales and marketing, and research and development. Temu has been anything but modest in its attempts to gain an ever larger share of customers in the U.S. In September, the company already became the leading shopping app in Apple’s U.S. App Store, and in November, it became the most downloaded free Android app in the U.S.

The price butcher

Ever since fast-fashion brand SHEIN surpassed Amazon as the most downloaded shopping app in North America in 2021, it has set the benchmark for global ecommerce. Shein has invested large amounts in social media advertising campaigns, and offers extensive discounts, coupons, and other promotions. SHEIN currently has around 22 million followers on Instagram and more than 3 million followers on TikTok.

Yet despite SHEIN’s extensive discounts during this year’s Black Friday, Temu went even lower, offering Chinese prices to customers in the U.S. For example, an iPhone case priced at $16.90 on Amazon was priced at only $1.88 on the Temu platform. One observer referred to Temu as the “price butcher” (价格屠夫 jiàgé túfū), and noted that during this year’s Black Friday promotion, Temu’s prices were 10-20% of those of Amazon, and 30-60% of those of SHEIN. In addition to rock-bottom prices, Temu also offered customers free shipping and full refunds if they’re not satisfied.

Temu is not only undercutting SHEIN’s prices abroad, but also has reportedly poached some of SHEIN’s staff and suppliers in China. According to a report published in Southern Weekly, Temu set up its office in Guangzhou close to that of SHEIN’s, and enticed SHEIN staff members with promises of doubling their salaries. For its part, SHEIN has tried to hide its address book from prying Temu hands, and told its staff that those who get hired by Temu can never return. According to one supplier, SHEIN fined two factories hundreds of thousands of dollars for working with Temu.

The battle for GMV

The real battle lines are drawn between SHEIN and Temu in terms of gross merchandise value (GMV), the total value of merchandise sold online. Back on October 27, the news website 36kr reported that Temu‘s daily GMV was $1.5 million, based on sales of merchandise from nearly 30,000 suppliers. Temu’s plan is to reach GMV of $300-500 million by the end of 2022, and $3 billion by the end of 2023, which would be equivalent to around 10% of SHEIN’s total projected GMV of $30 billion in 2022.

Temu is paying top dollar to get the word out. According to the 36kr report, Temu’s placement budget reached 1 billion yuan ($138.82 billion) in September 2022, and this will exceed 7 billion yuan ($971.80 million) in 2023, mainly for traffic acquisition and content placement, which will clearly account for some of the “planned projects and investments” mentioned during Pinduoduo’s earnings call yesterday.

By mid-November, another report by 36kr reported that Temu’s total GMV had reached $90 million. According to a new industry report, the investment firm China Merchants Securities expects Temu’s global GMV to catch up with SHEIN’s current volume in 3-5 years. Temu could attain $30 billion GMV in a period of five years, an achievement that took SHEIN 10 years to attain.

Is “blitzkrieg ecommerce” sustainable?

Temu’s “blitzkrieg” (闪电战 shǎndiànzhàn) approach, as one observer put it, has so far made quite an impact in the U.S. market. Several articles have been published reporting on U.S. consumers being pleasantly surprised by the price and quality of merchandise they bought on Temu. And as outlined above, Temu seems on its way to eventually catch up with SHEIN’s current level of GMV (after having poached some of its employees and suppliers).

There are also some less auspicious signs for Temu, however. For one thing, as Temu still has no warehouses in the U.S., its delivery times cannot compete with those of Amazon and SHEIN (as one Wired article reported after making a company purchase on Temu). But it’s also still very early days for Temu in the U.S. market, and one Black Friday doesn’t make a summer: It remains to be seen whether low prices and extensive promotions during one Black Friday will garner consumer loyalty for Temu in the U.S., especially as it’s unlikely that Temu will be able to sustain such low prices for very long.

Nevertheless, Temu now has plans to expand to markets in Canada, Spain (as a springboard for the European market), and various African countries. These “future planned projects and investments” will eat into Pinduoduo’s future profit margins, and (hopefully for Pinduoduo) provide Temu with a loyal user base that will stick around when the platform inevitably starts to move away from “blitzkrieg” ecommerce.