Saturday, February 24

Jack Ma’s biggest e-commerce rival is coming for Amazon

Jack Ma essentially invented the e-commerce business in China by co-founding Alibaba Group Holding Ltd. and steering it to the top of the country’s private sector. But a couple weeks ago, the celebrated entrepreneur called out a little-known rival for outpacing his brainchild and becoming a role model for the tech industry.

“Congratulations to Pinduoduo for their decision-making, execution and efforts of the past years,” Ma wrote on an internal forum, prodding Alibaba’s 220,000-plus employees to “correct its course.”

For those outside of China, the name Pinduoduo may have drawn a blank. Yet the upstart, formally known as PDD Holdings Inc., has been surging in popularity for years, winning over customers in the domestic e-commerce market with a range of innovations. It’s also the company behind the hit shopping app Temu in the US, which has gone from zero to rivaling Amazon.com Inc. and Walmart Inc. in just more than a year. After Ma’s comments, PDD’s market valuation climbed above Alibaba’s for the first time ever, a seismic shift for an industry that has been dominated for more than a decade by the house that Jack built.

“This is a watershed moment for PDD, surpassing Alibaba,” said Daniel Ives, managing director at Wedbush Securities. “PDD has been a thought leader and found success in every pocket of the market, while Alibaba has been a mini debacle.”

PDD has only been around for eight years, about a third of the time Alibaba has been operating. From its start in Shanghai, founder Colin Huang, a serial entrepreneur, wanted to make the online retail upstart different from traditional services like Alibaba and Amazon by incorporating features from the game companies he had run before. PDD shoppers get bargains by hunting for products and then telling their friends about deals they can land together. They also collect discounts by spinning roulette wheels or raising virtual fish in the app. Huang’s idea was to make shopping online more fun — and more social — than what the competition was offering.

“A few companies have tried this before, but no one has really been able to do it,” Huang said in an interview with Bloomberg News in 2017, one of his first with foreign media. “We felt we had a competitive advantage.”

Huang stepped down from the chief executive officer job in 2020, and PDD declined to make executives available for interviews for this story. In a statement to Bloomberg, a Temu spokesperson said its app features are inspired by activities people would find in a shopping mall or fair. “For example, our time-limited deals are similar to flash sales in physical stores, while our prize wheels and lucky draws are reminiscent of shopping mall promotions,” the statement said. “Our aim is to replicate these familiar offline experiences in the digital world, adding an element of fun and familiarity to online shopping.”

Through Temu, people in more than 40 countries are now getting a taste of the company’s game-like features and rock-bottom prices. In the US, the app made a splash in February with its “Shop Like a Billionaire” Super Bowl ad — and quickly became one of the most downloaded in the country. Temu.com was the fastest-growing multi-category retailer over Black Friday, with traffic up 84%, compared with 2% at Amazon.com, according to the research firm SimilarWeb.

Charlotte Hryse can testify to the service’s addictiveness. The 32-year-old finance manager from the San Francisco Bay Area downloaded Temu at the urging of a friend and now plays games compulsively on the platform. Like many users though, she’s ambivalent about the experience. “I told my friend I did not want to download this app and my worst fears were confirmed,” she said. “I keep blaming them for having me sign up and then get addicted to this cheap dopamine.”

With those kinds of emotions, skeptics question whether the app’s success is sustainable. Customers get hooked on scrolling through the app to find too-cheap-to-believe bargains, like a sonic toothbrush for $3.28 or AirPod-like earbuds for $2.98. But take away the millions of dollars in subsidies and marketing, and will people stay? The tech industry is littered with one-time wonders — Wish.com, Groupon, Pets.com — that spent heavily on subsidies only to find they couldn’t convert users into loyal customers.

“Temu may not be able to offer its current low prices indefinitely, which could result in the erosion of its key value proposition,” wrote Morgan Stanley analysts including Simeon Gutman in a recent report entitled “The Temu Effect.” “The data could suggest Temu is ‘burning through’ new shoppers without generating stickiness after initial trials on the platform.”

PDD and Temu have plenty of supporters. The parent company, they point out, has already demonstrated it can turn a swathe of users into profitable customers. PDD is on track to boost net income by about 60% this year to 51 billion yuan ($7.1 billion) on revenue of 235 billion yuan. Temu is losing billions now, but many analysts think it will turn profitable and become a significant part of the company’s business over time.

“We expect the company to be a force to be reckoned with globally in the coming years,” Sanford C. Bernstein analysts led by Robin Zhu said in a research report in August.

PDD says it’s bringing substantial innovations to e-commerce, including interactive game-like shopping and a more efficient supply chain that connects consumers directly with factories for lower costs. “The ‘Consumer-to-Manufacturer’ (C2M) model with Pinduoduo has been a pioneering effort in China. With Temu, we’re adapting this model for global markets,” the company spokesman said in its statement.

Ma and Huang represent a generational shift in the Chinese technology industry. Ma, 59, hung out at hotels as a boy to learn English from foreigners and started his business as the Communist Party began to open up the economy to private enterprises. He got the idea for Alibaba when he tried searching for beer online and realized that almost nothing could be found in the Chinese language.

Huang, a math prodigy 16 years younger, started his career with global opportunities. He went to graduate school at the University of Wisconsin and worked for both Microsoft Corp. and Google. When he founded PDD, he spotted an opportunity between the two leaders of the China tech industry — Alibaba and Tencent Holdings Ltd., the social media and games giant. He realized Alibaba couldn’t really do social or games very well, while Tencent struggled with online commerce. “These two companies don’t really understand each other,” Huang said in the 2017 interview. “They don’t really understand how the other makes money.”

PDD suffered plenty of setbacks on the path to success. After going public on the Nasdaq in 2018, its shares sunk below its initial public offering price amid profit concerns. Alibaba and other e-commerce players started imitating PDD’s strategy, leading to more red ink. Huang also stepped down as chairman in 2021 after his net worth climbed to $45 billion, as Beijing began cracking down on China’s technology giants and billionaires like Ma.

Yet PDD pressed ahead. Under CEO Chen Lei, the company boosted revenue by expanding into China’s smaller cities and overseas markets. The company turned its first annual profit in 2021 as revenue hit 94 billion yuan, and then tripled profits last year as revenue rose to 131 billion yuan.

The company focused on grabbing users in third- and fourth-tier cities, sidestepping bruising battles with the incumbents in richer metropolises. That strategy proved prescient as China’s economy suffered through years of Covid lockdowns. The management navigating through those challenging times included Chen, who also went to the University of Wisconsin; Zhao Jiazhen, a co-founder who is now co-CEO; and Chief Operating Officer Gu Pingping. Gu, one of the most senior women in the China tech sector, is considered the architect of Temu’s global strategy.

PDD certainly benefited from Alibaba’s travails. In October 2020, Ma made his now-infamous speech criticizing Beijing regulators for their oversight of innovative industries such as technology. The Communist Party quickly cracked down on Alibaba’s finance affiliate, Ant Group Co., and then on Alibaba itself. The government sharply criticized “platform” companies that used their dominance to curtail competition, and hit Alibaba with a record $2.8 billion fine in 2021 after an anti-trust probe.

Xiaoyan Wang, a Shanghai-based analyst at 86Research, said juggernauts like Alibaba had to tread lightly because of the government attention — one reason perhaps the e-commerce leader hasn’t been able to catch up with PDD’s strategy. “The tech regulatory scrutiny was focused on concerns that internet companies were too powerful,” she said. “PDD faces less pressure than these tech giants.”

Huang is also no Ma. The elder entrepreneur grew famous over the decades not just because of his company, but because of his public profile. While Ma appeared at Davos and other high-profile gatherings around the world, Huang largely stayed out of the spotlight. Ma embraced the role of celebrity businessman — which may have been viewed as a threat to President Xi Jinping — while Huang’s priorities could have been lifted from the Communist Party’s own agenda. In earnings reports and press releases, PDD repeatedly stressed its desire to help lift people in the countryside out of poverty, help farmers get their produce to markets and solve the problems of food security and scarcity.

PDD will need all of its political acumen as it expands globally. In many ways, Temu is similar to TikTok — a smartphone app developed by a parent company that has roots in China. Yet while Washington politicians have threatened to ban TikTok, PDD has almost completely escaped scrutiny. That may be because TikTok’s videos are considered potentially dangerous in influencing American kids, while buying cheap goods has few political overtones. Or it may simply be that Washington politicians haven’t yet tuned in to the surging popularity of PDD’s service.

Temu set off a rush of downloads this year with its Super Bowl ad and heavy marketing on platforms like Facebook. The app is also frighteningly addictive. Once you install the software, you’re immediately offered a chance to win $200 in coupons if you spin a roulette-like wheel — and everyone wins something. You then find out that your coupons will be boosted to $300 — if you make purchases within 10 minutes. That sets off an adrenaline-fueled scramble to scroll through thousands of deals on items you never knew you wanted, like a $3 gun holster or $16.98 sleeping bag that looks like a shark.

Such bizarre offerings are mocked on social media, earning Temu a reputation as the internet’s version of a dollar store. Still, its numbers are nothing to laugh at. The mobile service had 48.2 million monthly average users in the US as of the end of October, just 27% less than Amazon, according to app-tracker Sensor Tower. Temu’s website attracted about 100 million visitors in November, making it the seventh-most popular retail website in the US behind Amazon, eBay, Walmart and others, according to estimates by SimilarWeb.

Temu has quickly surpassed another app with roots in China, Shein. Its sales first topped the fast-fashion service in May in the US, beating its rival by about 20%, according to Bloomberg Second Measure, which analyzes consumers’ credit and debit card transactions. It has extended that lead every month since, and in November recorded almost triple Shein’s observed sales in the country.

Temu’s revenue in the third quarter likely grew more than 300% to about $1.8 billion, according to Zhu and the other Bernstein analysts. They estimate Temu will see a $3.65 billion operating loss this year on sales of $13 billion, but they expect it to turn profitable in 2025 or 2026. “Repeat after me: Temu is not worth zero,” they wrote, poking fun at skeptics who think the overseas business may be a bust for PDD.

Temu said in its statement that Bernstein’s loss estimate “diverges significantly from the reality” but didn’t provide its own figures.

There are signs Temu’s growth could be short-lived. About 44% of its shoppers are spending less on the platform while just 22% are spending more, according to surveys by Morgan Stanley, an indication it’s burning through new deal-hungry shoppers without converting them into loyal customers. Temu shoppers skew female, young and low-income. More than half have annual incomes of less than $50,000 and 58% are younger than 45, according to the firm.

Hryse, the finance manager from the Bay Area, purchased $20 fuzzy pajamas and some small trinkets on her first order and received everything in about a week. “I was pleased with the items although disappointed in myself,” she said.

The future of Temu is far from clear. It does offer more than trinkets, including clothes that compete with Shein and other fast-fashion rivals. Yet customers gripe regularly about the quality of goods on the platform and mistakes in delivery. Even fans say the app’s addictiveness is unsettling. “This is so fun that I lost track of seven hours,” one YouTuber recently proclaimed.

Temu objected to any comparison with Wish.com, the e-commerce sensation that became the most downloaded e-commerce app in the world in 2018 as it struck marketing deals with the Los Angeles Lakers and soccer World Cup players — and then saw its revenue collapse after it pulled back on subsidies. “Our platform and supply chain are distinctly different from those of Wish.com,” the company said in its statement, adding it can sustainably offer low prices by cutting out middlemen between producers and consumers.

For now, a cottage industry is springing up to help consumers navigate through the burgeoning world of Temu. One Houston mother reviews her hauls on YouTube, praising the affordable and attractive while critiquing any misfires. “Isn’t this the cutest thing?” she says in one recent clip, holding up an oversized mushroom pillow in beige. “I’m thinking of getting it in every single color.”

She also gives the nod to a styling mat that can hold hot items like curling irons.

“I almost bought it on Amazon, but then I found it on Temu for super cheap,” she said. – Bloomberg

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