To The Moon

Why Temu's 'Team Up, Price Down' Model Is No Longer Enough for PDD

After the earnings report of $Pinduoduo Inc.(PDD)$   , the parent company of Temu, its stock price plummeted by more than 13% on Tuesday. The report revealed that its net profit fell significantly short of expectations, and marketing expenses surged. However, the financial problems are just the superficial problem; the core issue lies in the fact that PDD's business lacks deep barriers to entry.

Why was the company so successful initially?

On September 1, 2022, Temu was officially launched in North America. By the end of 2022, it had become the most downloaded app in the US and maintained a long-standing position at the top of the global app download charts. In 2023, it expanded into Australia, Canada, New Zealand, the UK, Japan, South Korea, and several European countries and regions. From January 2023 to 2024, its sales in the US grew by 840%, and during the 2023 holiday shopping season, they soared by 1100%.

Temu continued to expand globally, with total downloads nearing 900 million and monthly active users (MAU) reaching 350 million by the end of 2024, nearly matching Amazon's level. It has nearly 152 million active users in the US every month.

Years before going international, Temu's Chinese parent company already saw a significant increase in sales in China. The user base in China grew from 240 million in 2017 to 780 million by 2020, with GMV increasing tenfold to 1.6 trillion yuan by 2020.

PDD's success can be attributed to several key factors: a social fission marketing model, excellent after-sales service, and addictive precise product recommendations. Temu attracted users to share download links through invite codes, which led to viral spread and gained a large number of customers.

Despite PDD's explosive growth in the early years, the company still faces many challenges in China and other countries:

1. The core value of e-commerce is no longer solely "cheap" but "cheap + fast + high quality." PDD lacks its own logistics system, whereas its Chinese competitors like Alibaba, JD.com, and Meituan, which invest heavily in logistics (both in terms of courier staffing and warehouses), are more capable of achieving same-day delivery. Thus, PDD missed out on China's recent "Instant Shopping" trend. Even the "cheap" advantage is diminishing. In international markets, after Temu impacted Amazon's low-priced products, Amazon officially reduced the fees for low-priced goods to meet the challenge.

2. PDD's simplified shopping process, including "one-click ordering, one-click refunds, cashback for reviews, etc.," is not irreplaceable. E-commerce competitors have copied many of PDD's features, such as Alibaba's Taobao, which also offers rapid refunds to premium customers. Meanwhile, other traditional e-commerce giants have a richer brand matrix. Data shows that in the latest quarter, PDD's GMV Margin has fallen behind Alibaba's.

3. The low-price brand image has solidified, and premium brands are reluctant to join the platform, with few successes in its efforts to upscale. PDD's low-cost traffic mechanism makes it difficult for premium merchants to stay, forcing them to compete on low costs, exacerbating the phenomenon of low-quality goods. 

Moreover, the refund-only policy attracts numerous freeloaders, making it difficult for branded products to accept similar "refund-only" services, causing premium brands even more reluctance to join.

4. Corporate ESG issues arise because Chinese products overseas are easily questioned for non-compliance with Western standards in terms of materials, labor, and environmental protection, thus posing legal risks.

5. Promotional incentives are no longer that effective. The company's marketing expenditures have skyrocketed, growing far faster than revenue growth, reflecting intensified industry competition, but the company struggles to break through its area of expertise in low prices area. While it was understandable for PDD to use group-buying and social sharing tactics at the stage of low penetration, continuing to reflexively use old tricks at a stable and mature stage has left users indifferent.

While PDD has its strengths, such as a high ratio of personnel efficiency and stronger cost control, the market might find it hard to be convinced until the management explores a development path more suited to the company itself.

Moreover, the market is concerned about the impact of US tariffs on PDD. In fact, the US MAU relative to Temu's total had declined to 11% by April 2025, while Europe and Latin America reached 27% and 30% respectively. Growth in non-US markets will compensate for some of the losses, and in the long term, the impact might even diminish.

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