No good timing for speculation in Pinduoduo: escalated domestic competition and substantial overseas investment

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Pinduoduo is undoubtedly a star stock among Chinese concept stocks. In the past few years, while Alibaba and JD dominated the majority of the Chinese e-commerce market, Pinduoduo carved out a path from the lower-tier market. Pinduoduo understood the pain points of manufacturers' development in the Chinese industrial chain and firmly captured consumers' attention with a viral marketing approach. The combination of these factors propelled it to become a dark horse in the Chinese e-commerce market.

In just 8 short years since its establishment, Pinduoduo has already become one of the top three platforms in the Chinese e-commerce market and continues to grow rapidly. An analysis on Xueqiu, a Chinese online investor community, suggests that Pinduoduo's GMV (Gross Merchandise Volume) in 2022 should have surpassed JD, accounting for around 38% of Alibaba's. A recent expert memo for this year indicates that Pinduoduo's expected GMV growth rate for Q2 is between 40% and 50%, and the growth rate might still be maintained at around 30% in the second half of the year. Compared to Alibaba and JD's low teens growth rate, Pinduoduo's growth rate is quite impressive. (Source)

However, the landscape of the e-commerce battlefield is ever-changing, and other e-commerce platforms have begun to take proactive actions. As described in our previous article, whether it's traditional e-commerce platforms like Alibaba and JD or live-streaming e-commerce platforms like Douyin (TikTok), they are all expanding their merchant base and focusing on building a perception of affordability as their upcoming strategy. Additionally, content-driven commerce itself is a formidable competitor for Pinduoduo. Short video platforms occupy the majority of users' screen time, posing a potential threat to any internet platform.

Amidst the escalating competition in the domestic market, Pinduoduo has turned its gaze to overseas markets. The success of Temu in the United States has given Pinduoduo the confidence to compete comprehensively in major markets. The investment in Temu might continue for a considerable period, which is an undeniable variable for global e-commerce platforms.

With expectations of the intensifying competition and the ongoing investment in Temu, Pinduoduo's stock price has once fallen by more than 30% this year. At this point, how should we understand Pinduoduo's current situation? Today’s post delves into three pivotal questions. By leveraging insights from seasoned investors, media perspectives, and exclusive BigOne Lab data, we aim to offer clarity on:

1. How is Pinduoduo dealing with intensified domestic market competition? What is its strategy amid the rapid growth of content-driven commerce?

2. What are the primary factors influencing monetization, and how should we interpret Pinduoduo's monetization potential? In today's heightened competition, will monetization slow down?

3. What stage has Temu's development reached in overseas markets? What are the next directions for its development?"

New Competition in the Domestic Market

Pinduoduo's success originates from its unwavering dedication to low prices.

Competing in the e-commerce platform space, focusing on low prices, revolves around four key elements: supply, perception, algorithms, and ecosystem coordination.

Starting with the supply aspect, Pinduoduo was the first to tap into the untapped potential of white-label products, which Alibaba and JD had overlooked but were in high demand due to abundant surplus supply. Through lenient entry requirements and friendly policies, Pinduoduo attracted a multitude of small and medium-sized businesses to join its platform, gaining a competitive edge in lower-tier markets and carving out a new battlefield.

Through rigorous stipulations, Pinduoduo accelerated an ecological reshuffle, pushing out merchants unable to offer low prices. After cycles of intense price competition, the surviving and increasingly resilient businesses have become the supply chain that Pinduoduo needs. These businesses, refined through pressures, have forged robust supply chains, consistently delivering low-priced goods to the platform and consistently sparking new battles in terms of pricing and supply chains.

In this endless battle, local industrial capabilities have been elevated, and Pinduoduo has rightfully emerged as the champion of low prices. [Source]

As of the current timeline, both Alibaba and JD have initiated low-price strategies this year. In our previous article, we described Alibaba and JD's investments in low-priced goods and content as responses to a context of consumer downgrade and escalating competition.

This has raised some concerns about Pinduoduo.

Taotian [Baiguan: Taotian refers to Taobao & Tmall] have adjusted their traffic allocation methods this year. By tweaking algorithm weights, they now prioritize recommending products with higher browsing conversion rates and longer user engagement times. This means they are favoring products that users prefer and that offer high value for money, rather than focusing solely on the most profitable items for the platform. Beyond directly attracting user engagement, Taobao and Tmall have also been accommodating various needs of small and medium-sized businesses.

Meanwhile, JD, which boasts a stronger supply chain and brand advantage, has joined the competition with billion-dollar subsidies. JD is ahead in terms of logistics speed, after-sales service, and consumer reputation. If JD manages to offer competitive prices that surpass Pinduoduo's, it could potentially win back the middle to high-end consumers who were drawn away by Pinduoduo. Moreover, JD could even expand its presence in lower-tier markets.

In summary, in terms of user engagement strategies, Taobao and JD are launching aggressive offensives, while Pinduoduo is shifting towards a more defensive stance. This transition from offense to defense could potentially dilute Pinduoduo's carefully nurtured perception of being a "low-price champion." [Source]

These concerns are not unfounded. Additionally, competition from Douyin cannot be overlooked either. The competition from Douyin live streaming rooms is beginning to affect Pinduoduo's core base.

On Douyin, the platform frequently launches regular leaderboard activities, among others. Many merchants, in order to secure a favorable ranking in these activities, proactively lower prices in their live streaming rooms, and sometimes even give away products to consumers for free. In some cases, the prices on Douyin for similar products are even lower than those on Pinduoduo.

For Pinduoduo, it might not matter how many billions Luo Yonghao, top KOL on Douyin, can generate on Douyin, or how many billions Dong Mingzhu, head of Gree, can generate through JD. However, when products on Douyin start to form a significant price advantage, it's certainly not a positive situation for Pinduoduo. [Source]

Douyin's foray into shelf e-commerce is eyeing Pinduoduo's merchant resources.

From March 1st to May 31st this year, Douyin Mall intensified its support for shelf e-commerce by offering commission-free benefits, specifically by exempting commissions for transactions made through product cards on Douyin Mall's detail pages during these three months.

By opening shelves on Douyin Mall, they have significantly lowered the entry barrier for small and medium-sized businesses without short video and live streaming capabilities. "Among the merchants who use Douyin Mall's shelf feature as their primary business platform, more than 50% are small and medium-sized businesses," revealed a service provider. [Source]

Douyin Mall is offering low price products

In the face of fierce competitors, Pinduoduo has taken a series of measures.

Faced with invitations extended by Alibaba, JD and Douyin to merchants, Pinduoduo announced the establishment of the "Billion-Ecology" initiative to provide resource support to high-quality merchants and products.

This marks Pinduoduo's first strategic-level project aimed specifically at the merchant side. Under the leadership of Zhao Jiazhen, Executive Director and Co-CEO of Pinduoduo, merchants have gained greater importance. Behind the Billion-Ecology initiative, Pinduoduo aims to strengthen and expand the merchant ecosystem.

By lowering entry barriers and offering direct support and policies, Pinduoduo aims to grow the Billion-Ecology initiative, allowing new merchants to enter the platform, enriching existing product categories, fostering the development of the industry chain, and enhancing supply chain innovation to make it more competitive. [Source]

In the realm of content-driven commerce, Pinduoduo introduced short videos and live streaming services in early 2020, but the results were somewhat unsatisfactory.

According to exclusive information from 36Kr, Pinduoduo's short video business "Duoduo Video" achieved a daily active user (DAU) count of over 150 million from the end of last year to early 2023, stabilizing at 100 to 120 million. The peak user engagement time exceeded 40 minutes, now stabilizing around 30 minutes. This signifies that while Duoduo Video's DAU is still behind platforms like Douyin (over 600 million) and Kuaishou (nearly 400 million), it surpasses Xiaohongshu (nearly 100 million), and its user engagement duration is on par with WeChat Video Accounts (around 30 minutes). [Source]

However, the revenue generated by Duoduo Video is limited.

Several insiders have disclosed that the fluctuation in DAU during 2022 was nearly synchronized with subsidy amounts: subsidies of 300-400 million RMB were provided in Q2, raising DAU from 100 million in Q1 to 120 million; subsidies decreased in Q3, causing DAU to quickly drop back to around 90 million; it only increased again after a boost in subsidies in Q4. In other words, the users of Duoduo Video are attracted by cash rewards and discounts, rather than a genuine interest in the content, which naturally affects conversion rates. [Source]

As per information from 36Kr, in 2022, the commercialization rate of Duoduo Video (short videos + live streaming) was only 33%, which includes the proportion of content with e-commerce links. This rate falls significantly behind Taobao Live, where the commercialization rate is approaching 70%.

Based on data obtained by 36Kr, the impact of Duoduo Video on conversion rates and purchase rates appears to be rather limited. "In Q4 of last year, the daily commission income for this business was only around one million RMB, and it's currently in a loss-making state," the source stated to 36Kr. [Source]

Duoduo Live has been even less successful. For a long period, Duoduo Live was considered a private marketing tool for merchants.

Initially, Duoduo Live didn't have its own entrance, and the platform provided minimal traffic support to merchants. Merchants who wanted to do live streaming on Pinduoduo had to rely on self-promotion through social communities.

Later, due to constant pressure from merchants, Pinduoduo reluctantly launched a live streaming entrance and invited celebrities like Stephon Marbury to host streams. However, due to insufficient initial attention, public awareness of Duoduo Live was shallow. Even with celebrity hosts like Marbury, the results were far from satisfactory. [Source]

As Duoduo Video matures and with the formidable presence of Douyin, Pinduoduo is now intensifying its efforts in live streaming.

According to multiple media reports, Duoduo Live is actively introducing service providers on a large scale. These service providers assist the platform in regional and category-based merchant recruitment efforts. They also offer one-on-one services to merchant anchors, implementing official operational standards and activity policies. These services include managed promotions, live streaming operations, and product inventory management for brand anchors.

Pinduoduo has already established partnerships with multiple MCNs (Multi-Channel Networks) for producing entertainment content. The revenue-sharing model involves Pinduoduo not charging MCN agencies any deposits and also not collecting commissions from sales made by influencers. E-commerce commissions are settled to the MCN's account, with the distribution between the agency and influencers negotiated offline. [Source]

How should we assess Pinduoduo's potential in live streaming?

We believe that it's worth our ongoing attention to see if Pinduoduo, by incorporating influencers, can make headway in the live streaming arena. Pinduoduo's foray into live streaming is a tough battle to prevent Douyin Live from eroding the low-price perception it has cultivated over the years. In contrast to direct content competition, we speculate that Pinduoduo might draw inspiration from Kuaishou. Kuaishou's "trusted e-commerce" strategy revolves around building private domain traffic for merchants through a "familiar contacts economy" and subsequently acquiring new customers through short videos. Pinduoduo could potentially adopt a similar model after introducing influencers, leveraging them to expand merchant influence. In this process, Pinduoduo can amplify its supply chain advantage while ultimately safeguarding its low-price competitiveness.

Investing in Pinduoduo undoubtedly requires considering its revenue potential and profit level.

• From the revenue perspective, factors affecting Pinduoduo's revenue growth go beyond GMV and also include its ability to monetize (reflected in the take rate). What is Pinduoduo's current level of monetization, and how do we assess its monetization potential at this stage?

• From the profit angle, as a platform-based company, there is substantial room for scale effects to make Pinduoduo highly profitable. However, the pace of overseas expansion has slowed down this process. How large is Temu's scale now (using our sales data of Temu), what is the extent of Temu's losses, and what measures is Temu employing to control these losses?

The following sections will try to provide you with answers.

The ceiling of monetization