Nothing in this article is intended to be financial advice and should not be taken as such, please do your own research before investing.
Pinduoduo (拼多多), China’s online marketplace, was founded in 2015 and has its IPO in July 2018. It was growing very fast and not profitable. Yet, it was able to continue to grow well and turn profitable during the Covid period while many Chinese companies were struggling:
- MissFresh (NASDAQ: MF) backed by Tiger Global, provides fresh produce and fast-moving consumer goods to end-consumers. It has just released its long-delayed 2021 Annual Report showing huge losses and cash burn with a weak cash position. The company shut down its instant delivery business nationwide in July without any advance notice, and now reportedly faces 1,381 lawsuits brought by its Chinese subsidiaries, employees or former employees
- Dingdong (NASDAQ: DDL), a fresh grocery e-commerce company, has been scaling down its business operations. Its investors include Softbank Vision Fund, Sequoia, Tiger Global, and General Atlantic.
- Shihuituan whose investors such as Alibaba and GGV Capital have closed its businesses nationwide and its community group buying is turned off. It was consumer goods such as fresh fruits, vegetables, and packaged goods targeting lower-tier Chinese cities with group buying.
Large established companies like Alibaba, Meituan and JD.com are also facing slowing revenue due to Covid and regulatory issues.
A comparison between Pinduoduo and its competitors.
| Pinduoduo | Alibaba China Commerce | JD.com Retail | |
| GMV | RMB 2,441 billion (USD 383 billion); a 46% increase | RMB7,976 billion (USD 1,258 billion), a 6.4% increase | RMB 3,297 billion, a 26.2% increase |
| Revenue | RMB 93.9 billion (USD14.7 billion); a 58% increase | RMB575 billion (USD90.9 billion), a 18% increase | RMB 866 billion (USD 135.9 billion), a 25% increase |
| Orders | 61 billion orders placed on the Pinduoduo mobile platform | ||
| Active buyers | 868.7million; a 10% increase | 903 million; an 11% increase | 569.7 million; a 21% increase |
| Annual spending per active buyer | RMB 2,810 (USD 441) | 98% of annual active consumers who each spent over RMB10,000 on purchasing physical goods on Taobao and Tmall | |
| Active merchants | 11.5 million | 40,000 |
Its 3-year compounded annual revenue growth rate from 2019 to 2021 is 46%. It has free cashflow (FCF) positive. Net profit margin is 8.3% while FCF to sales is 27.6%. The cash ratio is at 99% as of the end of 2021.
Pinduoduo’s business model
Pinduoduo focuses on cheap items targeting price-conscious consumers hunting for bargains. Its platform offers a range of competitively priced items including consumer goods, beauty products and agricultural produce. It pioneered “Team Purchase” and “C2M” (consumer to manufacturer) processes to aggregate user demand and share the information with manufacturers to tailor-make products according to user’s preferences and drive down costs.
There are several critical components to its model.
Market
It started with focusing on the lower-tiered cities in China which are neglected and driving the bulk of the spending growth in China. Since then, it has since expanded to target price-conscious consumers throughout China.
Product offerings
The focus has been perishables, clothing and essential household items which are low-cost regularly bought and used.
User experience
The marketplace is built more for discovery not searching. Products were sourced to users in a feed similar to Facebook, Instagram, Twitter, or TikTok. Pinduoduo created a synchronous mobile shopping experience equivalent to going to the mall with friends. Cheap essentials like toilet paper created loyal customers who invited their friends to work together and came back again and again.
Its success comes from a singular focus on what users want. It works hard to solve problems in the best possible manner in the mobile era, with more savings and more fun. In 2015, no marketplace was focused on agricultural products.
Team purchase that creates dual flywheels
Team purchase (group buying) is in the name of Pinduoduo (拼多多). 拼 means piece and 多 means many.
Through gamification and Team Purchase (group buying), buyers can enjoy huge discounts. Buyers can recruit others to buy to enjoy more discounts and this creates strong network effects. Team Purchase creates aggregate demand and more revenue for merchants.
Pinduoduo focuses on the consumer experience, and how to create and manage two-sided networks to create the flywheel effect and its moat. Team purchase flipped the traditional retailing model from being supply-driven (“how do we sell what we’ve produced?”) to demand-driven (“how much should we produce?”).
The team purchase is a critical piece of the puzzle. The team helps aggregate demand, which is especially important for agricultural products because they are perishable. The farmer needs to have the reassurance to move a large volume in a short period.
Upgrading enterprises, improving its ecosystem
Pinduoduo has been investing in upgrading rural economy enterprises and manufacturers and craftsmen to sell better by connecting directly to consumers, improving product development cycles, branding and aligning themselves better to market needs.
Agriculture, a niche and their secret sauce
Pinduoduo is the largest agriculture marketplace in China. Fruits and vegetables are a daily necessity especially when many of its customers are in lower-tiered cities.
Agricultural products are a hard category for e-commerce as they are highly perishable. They need to be transported delicately and maintained at a certain temperature to ensure freshness and look nice and not rotten. It is a category that few attempt and get big.
Pinduoduo’s ability to aggregate demand and generate large volumes of orders helps create economies of scale for their farmer merchants. Agriculture is a good use case for Team Purchase for Pinduoduo where they manage the two-sided networks to their advantage.
Farmers can sell directly to consumers through the platform and become less dependent on wholesale distributors. They offer dedicated training programs to enable farmers to become better business operators. It also collaborates with reputable agricultural institutions to invest in technology and fund research to improve food production, quality control, food safety and sustainability so that a greater volume of better, fresher and safer agricultural products can go directly from farm to table.
In August 2021, it launched the “10 Billion Agriculture Initiative” to address some of the critical needs in the agricultural sector and rural areas. This initiative strives to facilitate the advancement of agritech, promote digital inclusion, and provide agritech talents and workers with greater motivation and a sense of achievement.
The deep focus and investment in agriculture from farm to table allows Pinduoduo to have exclusive access to a strategic product category where others are unable. It also helps China to improve agricultural productivity and alleviate rural poverty, working towards the government’s call for “common prosperity”.
More about Pinduoduo: The company, its products, agriculture
Pinduoduo launches new 10-billion-yuan initiative with profits to support agricultural modernization and rural vitalization, August 21, 2021
Flexible direct logistics
In May 2021, the company said that conditions are ripe for reimagining logistics towards a more flexible logistics (compared to a hub-and-spoke system) info system and agriculture-focused infrastructure that reduces the need for multiple transshipments and enables more point-to-point deliveries.
Their ability to eliminate layers of middlemen and reconfigure logistics will help both merchants to earn more and consumers to buy cheaper. Faster logistics with direct selling from source to consumers allow more accurate demand forecasts and insights. For agriculture, it ensures freshness and reduces wastage. About half of China’s annual food loss and waste occurs soon after harvest when the agricultural produce is being processed, stored and transported, according to a study published in Nature.
In August 2022, Pinduoduo was named one of the Top 10 most innovative logistics companies of 2022 by Fast Company for its work on a new logistics system for handling agricultural products. It has re-architected China’s hub-and-spoke-style delivery infrastructure, with the help of third-party logistics providers, and built out new cold-chain transportation routes to eliminate unnecessary transit points, which slow down delivery, diminish freshness, and increase food waste. In late 2020, it rolled out Duo Duo Grocery, its next-day self-pickup service as one means to create more convenient locations for farmers to deliver their goods and for consumers to retrieve them.
Good resources:
Pinduoduo and Vertically Integrated Social Commerce, Turner’s Blog, August 7, 2020
A conversation with Xin Yi Lim, Executive Director, Sustainability and Agriculture Impact at Pinduoduo, June 6, 2021
Beyond China: Temu
In September 2022, it announced the grand opening of its global online shopping marketplace, Temu. It has access to an impressive network of over 11 million suppliers and fulfilment partners. By leveraging Pinduoduo’s sourcing, logistics, and supply chain capabilities, Temu can give consumers some of the lowest prices for thousands of products that they are already buying from other US retailers.
Since its launch, it has been a top shopping app in the United States. Its rapid rise can be attributed to its generous subsidies offering a wide range of very affordable products. Many users remarked that the items are very cheap with quality exceeding expectations. Many of these users were buying from Amazon marketplace and physical retail stores.
It is still too early to judge Temu. Temu’s ability to replicate Pinduoduo’s success beyond China will have huge market potential. Hence, investors will be following the progress of Temu closely.
Risks
China
So far, Pinduoduo has been relatively unscathed by the government for regulation or antitrust issues, unlike Alibaba, Meituan, and Tencent. It has been implementing IP protection measures to fight against counterfeits as well as brand protection.
Materials:
Pinduoduo – IP Protection: Prospects, Challenges and Best Practices in China’s Highly Competitive E-Commerce Industry, August 2020
PDD, the New E-commerce, and its IP protection measures, November 2020
Pinduoduo IPR Protection Platform
Pinduoduo has been doing good. In February 2021, Pinduoduo was one of three technology companies commended for their contributions to China’s poverty alleviation efforts, according to a central government release. A total of 1,981 individuals and 1,501 organizations, institutions and companies were honoured. In August 2021, it launched the “10 Billion Agriculture Initiative” to address some of the critical needs in the agricultural sector and rural areas.
The United States
Pinduoduo with many Chinese companies listed in the US has been facing delisting risk. As of 15 December 2022, inspectors from the Public Company Accounting Oversight Board spent nine weeks in Hong Kong, gaining access to auditing disclosures from companies based in mainland China and Hong Kong to enforce the 2020 Holding Foreign Companies Accountable Act. The law passed in response to concern about the quality of Chinese companies’ financial disclosures, requires complete access to the audit working papers of the firms that reviewed those companies’ accounts.
Pinduoduo is not involved in high-tech semiconductor space or involved in military modernisation and human rights abuses, thus, no risk of being blacklisted thus far.
Summing up Pinduoduo’s competitive advantages
Let’s use some analogies to describe Pinduoduo and its competitive advantages:
- Shopify: Arming its small merchants with skills and tools to produce, market and sell cheaper, better and faster
- Costco, Dollar General and Dollar Tree: An online cheap and good retailer
- Shein: It is following Shien’s approach to selling globally with Temu leveraging its huge base of Chinese suppliers.
- Costco: Its user experience is more social and discovery than a search and buy approach.
- Shopee: As Temu grows and expands and its international footprints increase, its source of merchants may not be just from China. The suppliers may come from the countries they operate where they grow both their networks of consumers and suppliers.
Things to look out for
Revenue growth
Since its founding, Pinduoduo has been performing very well in competitive e-commerce by taking on difficult areas such as agriculture, small merchants and logistics.
The China e-commerce market is constantly evolving with very keen competition. We have established e-commerce platforms such as Taobao and Tmall from Alibaba and JD.com. There is also competition from livestreaming platforms like Douyin and Kuaishou.
These differentiate Pinduoduo. Is this good enough? Chen Lei, a co-founder and previously Chief Technology Officer, succeeded Colin Huang as Chief Executive Officer in July 2020 and Chairman in March 2021 amid the challenging Covid period. He, along with two co-founders and his team has proven their mettle. Their ability to navigate and execute will continue to be key.
Pinduoduo and Temu are worth watching.
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