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 future rival. It was a combination of arcade, shopping center and social network. Their main selling point was lower prices for buyers who recruited other buyers to make group purchases. Customers can spend time playing video games or earn money by logging in daily to browse the app.
Now no one takes the company lightly.
Pinduoduo is the sister company of Temu, the bargain shopping app that has amassed tens of millions of users outside China, including in the United States, where it is spending billions of dollars on promotion. Americans who haven’t used Temu yet have probably seen its Super Bowl ads or Instagram posts.
Like TikTok, Temu is the foreign version of a highly successful Chinese company. As its popularity has grown in the United States, its business practices have also come under scrutiny. Members of Congress have questioned whether it is providing a U.S. channel for products made in China using forced labor. It has received criticism for its labor practices and for failing to enforce intellectual property laws.
Within China, Pinduoduo has also been gaining more attention. As a popular destination for low-cost groceries and household items, it is now closing in on JD, China’s second-largest online retailer, in terms of market share. And when it briefly overtook Alibaba as the country’s most valuable e-commerce company last year, Alibaba founder Jack Ma sent an internal memo imploring his company to “change and adapt” to keep up.
Last month, PDD Holdings, the parent company of Pinduoduo and Temu, reported that its annual revenue nearly doubled in 2023, while Alibaba and JD’s revenue grew less than 10 percent. The company described the result as a “fundamental chapter” in its history.
Pinduoduo has successfully capitalized on one of China’s biggest economic challenges: sluggish consumer spending and falling prices for food and other items. As the country’s growth has slowed, consumers are adopting a low-spending lifestyle focused on shopping on Pinduoduo.
It was different when Pinduoduo emerged in 2015. China’s rapid growth over the previous decades had instilled confidence that an expanding middle class would continue to flex its newfound wealth with lavish spending.
Around that time, Alibaba opened a supermarket chain selling king crab legs, 30-year-old single malt Scotch whiskey and other luxury items. JD started an e-commerce portal called Toplife for premium brands.
“The biggest mistake at the time was the belief that China had become filled with middle-class consumers and would continue to grow in the future,” said Robert Wu, editor of the Baiguan newsletter, which focuses on investment. and business in China.
In a 2018 interview, Pinduoduo founder Colin Huang, who is now China’s second-richest person, said he was trying to cater not only to China’s nouveau riche but also to people outside the “fifth ring of wealth.” Beijing”, a colloquialism for people with financial difficulties who live far from major cities in China.
Pinduoduo, which did not respond to requests for comment, grew by word of mouth because it offered deep discounts. Sharing the deals online was easy because Pinduoduo was deeply intertwined with Tencent’s WeChat, a ubiquitous messaging service in China. Within a year, Pinduoduo had 100 million users. After five years, it surpassed Alibaba with 788 million users.
In a 2023 report, Goldman Sachs estimated that Pinduoduo accounted for 19 percent of China’s e-commerce market by value of products sold, compared to 20 percent for JD and 41 percent for Alibaba.
Pinduoduo buyers deal directly with suppliers, farmers, and manufacturers to get low prices. The company keeps the rates it pays to users and sellers low and has avoided large investments by outsourcing its logistics to other companies. Huang once said that he wanted Pinduoduo to be like Facebook for shopping, a destination where people would gather without necessarily intending to buy.
Following the success of Pinduoduo, social commerce is now the norm in China. Each e-commerce app features live shopping with influencers testing new products and answering user questions. Some of China’s biggest social networks are shopping destinations. These include Xiaohongshu, the domestic version of Instagram, and Douyin, the ByteDance-owned app that runs TikTok outside of China.
The main attraction of Pinduoduo is its surprisingly low prices. A 5.5-pound box of cherry tomatoes costs about $4.50, but the price per box is cut in half if another person joins in to make a “team purchase.” A dozen rolls of five-ply toilet paper cost 80 cents. Both are delivered free.
In its beginnings, Pinduoduo was invaded by imitations. He took aggressive steps to address the problem. Buyers who receive counterfeit products are entitled to a refund of up to 10 times their money from the seller. Sellers offer a no-questions-asked refund if a customer is dissatisfied with a purchase.
Rainbow Wang, an English teacher in Beijing, said she was a devoted Pinduoduo shopper of everyday items such as fruits, vegetables, rice and yogurt. She gets even bigger discounts by paying a monthly membership of $1.50.
Ms. Wang said she loved the low prices, free shipping and generous return policy. There used to be more discounts, she said, but she will continue to shop there because “their products are still cheap.”
For marketers, the huge traffic to the app is the draw. Marcus Ding, general manager of a sporting goods company, said he made more money with Pinduoduo because of its lower seller fees. But about a fifth of the revenue he generates on Pinduoduo goes to promoting his products on the platform. Pinduoduo makes most of its money from advertising on the site. Last year, about two-thirds of its revenue came from sellers who paid for product listings to appear prominently.
The advertising model was likely influenced by Google, where Mr. Huang worked as an engineer from 2004 to 2007. Pinduoduo ads are sold using a Google-like auction system for bidding on keywords.
There are other signs of Google’s influence.
In a 2018 Nasdaq IPO filing, Huang, who left Pinduoduo in 2021 but remains its largest shareholder, began a letter by declaring that “Pinduoduo is not a conventional company.” Fourteen years earlier, Larry Page and Sergey Brin, the founders of Google, opened their IPO letter in the same way.
Google stated that one of its principles was “Don’t be evil.” Mr. Huang also echoed that sentiment. “We may not always be understood, but we always do things with good will and do no evil,” he wrote.
Such claims 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 found it contained malware. And Pinduoduo is likely to face increased scrutiny due to Temu’s success. It is one of the most downloaded applications in the United States and is expanding to dozens of other countries.
Temu does not sell groceries, it focuses on clothing, beauty products and gadgets. Like Pinduoduo customers in China, Temu buyers buy products directly from manufacturers and suppliers. You are probably losing money on most orders due to their low prices.
Since most of Temu’s products originate in China, it costs about $11 per order to ship products to the United States and about $9 to $10 per order to ship to Europe and Australia, according to Robin Zhu, China Internet analyst at Bernstein. Research.
Last month, Chen Lei, co-CEO and president of PDD Holdings, told analysts that Temu’s global expansion was at an early stage with many uncertainties. But he is taking advantage of a lesson from China: Consumers always want more savings.