Pinduoduo: Fast-growing retailer with 500 million customers

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Pinduoduo, a fast-growing Chinese retailer with 500 million customers
a fast-growing Chinese retailer with 500 million customers

The new player (Pinduoduo) is growing due to the WeChat messenger and offers customers to join groups for discounts. But may not survive the battle with larger competitors.

At the core of the Pinduoduo retailer’s success is its social shopping model. It motivates buyers to share links to products and attract friends and relatives for group purchases. This way the product will become much cheaper.

Pinduoduo recently issued new stocks and also made its first major purchase for expansion. But JD and Alibaba have launched similar products that could seriously compete with the fast-growing newcomer.

How the platform differs from other Chinese online stores and whether its group shopping business model can remain competitive is CNBC analysis

What is the essence of Pinduoduo

The retailer is attracted by the group shopping feature. By choosing a product, the user can join customers who need the same thing. The more people come together, the cheaper.

Each product has a minimum number of buyers to complete the purchase. If they are not collected for a day, the purchase is canceled, and those who have already paid for the order are returned the money. You can buy the product directly, but the price will be higher. Pinduoduo also develops personalized recommendations in the app.

Business model

Pinduoduo receives 100% of its income from online market services, writes CNBC about company representatives. These are mainly sales commissions and platform ads.

Alibaba and JD.com also make most of their money in online retail. But they are also developing other businesses, such as cloud computing. Thus, Pinduoduo’s revenue is still limited.

Pinduoduo Business model

But in percentage terms, Pinduoduo’s revenue is growing faster than competitors’ revenue. In the fourth quarter of 2019, service revenue increased by 91% and reached $ 1.55 billion. In the same quarter, Alibaba’s revenue grew by 38% compared to 2018, reaching $ 23.19 billion.

Both Alibaba and JD.com posted a net profit in the same quarter, while Pinduoduo had a $ 250 million loss.

Number of users

Pinduoduo is China’s third largest e-commerce company after Alibaba and JD.com.

In 2019, Pinduoduo announced 585.2 million active buyers. These are users who have made at least one purchase during the year. JD.com for the same period – 362 million, Alibaba, according to the company itself, from September 2018 to September 2019 there were 711 million active buyers.

Number of users

The growth of Pinduoduo is large because the site is available inside the WeChat messenger – more than 1 billion people use it per month. Users can order on Pinduoduo without leaving the messenger, which reduced the cost of attracting customers, CNBC said.

“Direct traffic is mainly generated by sending referral links by active buyers and marketing campaigns,” said the March report of the Chinese investment bank Guotai Junan Securities.

Part of the traffic in the Pinduoduo app comes from user recommendations and product demonstration features, through which customers share goods on WeChat and QQ.

Most of Pinduoduo’s user base is concentrated in small towns, where more attention is paid to price. JD.com and Alibaba, by contrast, dominate metropolitan areas like Beijing and Shanghai. There Pinduoduo was unable to compete with them, remarked CNBC expert Jacob Cook.

In 2019, Pinduoduo reported that 45% of the site’s total turnover (Gross Merchandise Volume) was accounted for by large cities. This means that more than half of GMV comes from small towns.

GMV takes into account the value of all orders, it does not matter if the goods were simply sold, delivered, or returned.

Investments and IPO

In July 2018, Pinduoduo went public on the NASDAQ, with an initial stock price of $ 19. By April 22, 2020, the price rose to $ 50.94, the company is estimated at $ 59.21 billion.

In March, the service held a private placement of newly issued Class A shares in the amount of $ 1.1 billion. They plan to spend the money on expansion.

April 19 Pinduoduo entered into a partnership with the retailer Gome. The company invested $ 200 million in bonds, and in return will receive from Gome goods, logistics facilities and after-sales customer support.

Competition and Risks

Having achieved success in megacities, Alibaba and JD.com began to pay more attention to smaller urban development and to launch services that directly competed with Pinduoduo.

In March 2020, Alibaba released a special version of the Taobao application, focused on the c2m model, where users can directly buy from the manufacturer, bypassing the intermediary seller. Pinduoduo is growing due to the same mechanics, CNBC notes.

A year earlier, JD.com launched the Jingxi group shopping app, which is also available inside WeChat.

“From an end-user perspective, Pinduoduo’s offer is not as attractive as it used to be, because Alibaba and JD.com have released similar products,” said Chun Chun, head of research firm iResearch, in a conversation with CNBC.

Chun noted that Alibaba and JD.com are partnering with c2m factories, and Alibaba’s strong position in cloud computing can provide manufacturers with more “digital capabilities” than Pinduoduo.

Also, these retailers are strong in logistics, JD.com can deliver goods on the day of order. There are no such logistic capacities in the Pinduoduo ecosystem, Chun concluded.

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