Online shopping platform Pinduoduo, owned by listed PDD Holdings, recently overtook e-commerce giant Alibaba Group Holdings to become China’s No 2 Internet player behind video-gaming, music and messaging supremo Tencent Holdings (market value of US$373 billion or $501 billion). The change of leadership among China’s tech giants has as much to do with the fading of Alibaba as the rise and rise of new players like PDD, TikTok owner Bytedance and apparel e-retailer Shein whose addictive apps aren’t just dominating the domestic market but are big global players.
The engine powering PDD’s phenomenal growth and its market capitalisation of US$190 billion ($255 billion) is America’s most downloaded app, Temu, an online marketplace of heavily discounted goods based in Boston, Massachusetts, which in turn is controlled by listed PDD that is based in Ireland, the European tax haven. Temu and Shein are popular among Gen Z consumers for their low-cost trendy merchandise. Unlike Amazon.com which aims to deliver within hours or by the next day from a network of local warehouses across the US, Temu takes several days to deliver directly from China yet customers hardly seem to mind since they are getting a great price.
Temu and Shein are leveraging a real-time retail strategy using platforms like TikTok, Instagram and Facebook to identify and respond promptly to emerging trends they constantly monitor on social media. If Taylor Swift embraces a new fashion trend, you bet Shein and Temu are already on it. And, oh, no one can match their price point. Temu doesn’t just sell US$4 T-shirts (less than a Starbucks Venti latte), it also sells five pairs of socks for just US$1.69, excluding shipping costs.
For Gen Z users, Temu and parent PDD are not Alibaba or JD.com, their parent’s e-commerce sites. Founded in 2015, a year after Alibaba’s IPO, Pinduoduo pioneered social commerce — or e-commerce leveraging social media. The main attraction of PDD is its group buying function. Here’s how it works: When a user selects an item on Pinduoduo, they can choose to participate in group buying. The more people who join in, the lower the price you will pay for whatever it is that you are buying. That also incentivises buyers to share links to what they are buying with friends or broadcast it to their followers on social media. The business model is also conducive to influencers on TikTok or Instagram.
Another differentiating factor: PDD’s main base is in rural China as well as in third- and fourth-tier cities which e-commerce incumbents Alibaba and JD had shunned in their push to grow in big cities and expand margins. That left a gaping hole in the rest of China which PDD deftly exploited. Even now, half of PDD’s total gross merchandising value, (GMV) or the value of goods sold on its platform, in China comes from lower-tier cities and rural areas.
PDD’s revenues grew to US$9.62 billion, or a whopping 94% annualised in the July-Sept quarter, way ahead of its main rivals Alibaba’s meagre 9% growth and JD’s even more paltry 1.7% growth, during the same period. Revenues from Temu soared 315% in the same quarter to nearly US$4 billion. Barclays Capital forecasts PDD’s profits to surge to US$10.8 billion this year from US$6.7 billion last year. The e-commerce firm’s net profits are forecast to grow to US$12.1 billion next year. PDD’s stock is up 68% this year while shares of rival Alibaba — with a market cap of US$180 billion — are down 22% and those of JD are down 54% this year.
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Wooing Gen Z via TikTok
Once a poster child for Chinese innovation, Alibaba has struggled to keep up with changing consumer habits in China as Pinduoduo helped move online shoppers to social commerce and Shein and Temu leveraged TikTok to woo away Gen Z consumers. Alibaba shares have plunged 79% from their October 2020 peak when it was forced to pull the plug on the Hong Kong IPO of its fintech affiliate, Ant Group.
Temu and Shein are seen as flagbearers of the next wave of fast fashion taking the reins from incumbents like Spain’s Zara, Swedish apparel retailer H&M Hennes & Mauritz and Japanese retailer Uniqlo’s parent Fast Retailing. The business model of Zara and its ilk was simple: Master the complex apparel supply chain and logistics, source for inexpensive materials, make the cheapest clothes on earth and ship them quickly to stores around the world.
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Unlike casual apparel chains of the 1980s and the 90s like GAP, Old Navy, American Eagle Outfitters or Levi Strauss that dominated the space as they spent a ton of money on designers as well as marketing, the fast fashion retailers shamelessly copied designs from fashion capitals of the world like Paris, Milan, London and New York, faxed the designs to sweatshops from Urumqi to Hanoi where they would be promptly replicated, churned into apparel that is shipped to store shelves across the globe within a few weeks compared to six to eight months it would take conventional casual wear rivals.
In the developed world, an average young person wears more than twice as many clothes as her or his peers 30 years ago. With inexpensive clothes, fast-changing fashion trends and addictive social media such as Instagram and TikTok, closets are being updated more often than ever. In the aftermath of the pandemic, consumers have become more cost-conscious due to inflation and higher interest rates. Enter Shein and Temu with new technology and more efficient supply chains to remake the fast fashion space. Sure, they still copy from Milan or Paris runways but instead of faxing replicas, they now use PDF files of designs or ripped-off photos from Instagram and TikTok that are then WhatsApped to sweatshops in Xinjiang, Vietnam and Bangladesh.
So, how “fast” really is this new fast fashion and how much has the casual apparel business been transformed in recent years? Old-line casual apparel players like GAP and PVH Corp, which owns brands like Tommy Hilfiger, Calvin Klein and Van Heusen, move garments from the design board to shelves in three to five months while at fast fashion retailer Zara, the process takes no more than two weeks. Shein, however, does it all in just three days.
Let’s say a designer unveils new styles on Friday lunchtime in Milan. Within hours, images and videos from the fashion show are at Temu or Shein factories. By Sunday night, they have the apparel in a bunch of colours on their websites. Click “Buy” as you sit in your suburban New Jersey home on Monday and you could have that dress or shirt on your door by Friday although some dresses might take longer.
Shein and Temu also have a to-die-for range of styles. GAP adds only a few dozen styles every season and Zara adds up to 2,000 new styles every month while Shein adds between 2,000 and 10,000 new styles every day. Temu, whose slogan is “shop like a billionaire”, has also deftly used gamification of the shopping experience and generous rewards to make cut-price online shopping fun. Buy a lot of stuff on the platform and you see confetti on your smartphone screen alongside a note that your reward is on its way. Recommend a bunch of friends to Temu and you might be rewarded with a T-shirt, water bottle or a tote bag. The more you shop or your friends shop, the more rewards you collect.
Temu currently has over 160 million active users, over 82 million or so in the US and another 80 million outside the US. In 15 months since its launch, Temu has become the third most-visited e-commerce platform in America, behind Amazon and Walmart. Temu now accounts for 17% of the US market share in the discount retail category behind 43% for Dollar General and 28% for Dollar Tree. Amazon recently cut its commissions on apparel under US$15 to just 5% from 17% it previously charged, to effectively compete with Chinese challengers. Temu had set itself an annual target of achieving an audacious US$16 billion GMV this year which would exceed that of its main competitor, Shein. Analysts expect Temu’s GMV to hit at least US$14 to US$15 billion this year, just short of the ambitious goal. Going forward, “Temu will be the biggest growth driver for PDD with a long runway ahead of it despite being a loss generator in the foreseeable future”, says Jiong Shao, Barclay’s China Internet analyst.
The riches in those rags
With a tight grip on materials and manufacturing costs, low inventories, and by constantly updating styles, the new fast fashion chains maximised profits by making stuff that had less than 50% of the quality for about a quarter of the price, catapulting their owners like Zara’s founder Amancio Ortega (net worth US$96 billion) and Fast Retailing’s Tadashi Yanai (US$37 billion) to among the world’s richest. PDD and Temu’s founder Colin Huang is worth US$50.3 billion and Shein’s founder Chris Xu is currently worth US$11.2 billion, ahead of the firm’s IPO next year.
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Detractors say Shein and Temu, like Zara and Uniqlo before them, have routinely cut environmental corners amid pressures to slash costs and speed up production. They use toxic textile dyes which makes the fast fashion industry one of the world’s largest water polluters. Critics also allege that Chinese-owned Temu and Shein are relying on Uighur forced labour camps in Xinjiang. Temu and Shein deny the allegations. They have also tried to distance themselves from China. Shein last year moved its operational headquarters to Singapore. PDD is now legally based in Dublin and Temu insists it is based in Boston, not China.
The breakneck growth of Temu and Shein has also been powered by a tax loophole called “de minimis exemption” that allows packages below US$800 to enter the US duty-free, sparing US Customs the bother of collecting tiny amounts. Over the past 10 years, shipments using the exemption have grown from US$40 million a year to US$40 billion last year with Chinese e-commerce firms being the biggest beneficiary. One billion packages entered the US in the fiscal year ended Sept 30 under the exemption — more than twice the level in 2019. Shein and Temu now account for a third of the imports under the di minimus loophole.
What’s Temu worth? “The way to value Pinduoduo is to separate its domestic China business and Temu,” says Barclays’ Shao who values Temu at US$50 billion or 3.5 times price to GMV multiple on US$14 billion annual GMV for 2023. (Shein, which recently filed to go public next year, is targeting a US$90 billion valuation. It last raised funds at a US$66 billion valuation just five months ago) If Temu were to hit its original US$16 billion GMV target this year, a 3.5 times price to GMV multiple would take its valuation to US$56 billion. Shao believes such robust growth is sustainable over the next two years.
What’s next? Shein and Temu are suing each other for copyright and trademark infringements while fashion designers are suing both for stealing their designs straight off the catwalks of Paris and Milan. It could be years before the courts decide who is right and who should be banned. Congress is also likely to remove tax loopholes that have helped Shein and Temu’s growth though getting legislation through a deeply divided Congress will likely take time. By then, innovative players like PDD would have latched on to some new social media trend and moved on.
Assif Shameen is a technology and business writer based in North America
