TEMU - A Durable Disruptor?

Embracing Peter Thiel’s mantra that “Competition Is for Losers,” Chinese e-commerce juggernaut Temu has set its sights on US retail domination.  But this meteoric rise raises an essential question – can Temu translate disruption into durability?

Morgan Stanley estimates that Temu holds a 0.2% share of total US retail sales. While 0.2% may seem insignificant, it equates to $8 billion in gross merchandise value. To give you some perspective, this means that Temu has surpassed William-Sonoma, a retailer that has been in operation for nearly seven decades. Some estimates put Temu’s current sales at an annual run rate of $12 billion. That’s equivalent to a Dicks Sporting Goods! This leads us to the first question…

… Who is Temu?

Temu is the international subsidiary of the Chinese E-commerce company Pin Duo Duo (PDD).  It’s a discount marketplace that offers a wide range of products at substantial discounts of 50% - 70%. The typical Temu customer is young, female, and tends to have a lower income.

Before we dive further into Temu, it’s worthwhile to understand PDD’s evolution in China.

PDD was established in 2015 in a Chinese market that was largely controlled by Ali Baba and J.D. So, how did PDD manage to succeed? They chose to play a different game.

It’s Easier To Dominate a Small Market Than A Large One
Just like how Bezos started Amazon with books, PDD chose to start with fresh fruits and produce. Why fresh fruits and produce?

Produce is a challenging category due to its perishable nature and small transaction size. These characteristics make shipping uneconomical and increase the risk of returns and customer dissatisfaction. As a result, the two e-commerce market leaders, BABA and JD, avoided this category. PDD had to compete with offline merchants to win.

Gamification

PDD introduced gamification and social shopping, replicating an offline shopping experience that has been fundamental to consumer behavior for centuries. This made online shopping fun and unique.

Group Ordering

PDD addressed the poor unit economics of produce transactions by introducing a group buying model. Consumers could either recruit family and friends to initiate a group order (and get a free purchase as a reward initially) or join an existing group order.

Once the group consisted of 10 or more consumers, PDD finalized the order and forwarded it to the supplier. The order would be fulfilled by PDD’s fulfillment center within 2 – 3 days. This unique group buying model led to virality, rapid growth in new customers, larger basket sizes, and economic shipping costs.

Scale Economics

In an undifferentiated product category, scale is a differentiator and the lowest costs win. Low group prices attracted consumers and created scale at a rapid pace. Perishables have high order frequency which means customers regularly come back for more deals. This growing volume attracted dedicated sellers, creating a win-win situation.

As a result, PDD grew to over 500 million users within just a few years. In comparison, it took BABA and JD decades to reach this milestone.

Temu – Shop Like A Billionaire

How is it possible for an entrant to grow this rapidly in a mature US retail ecosystem where Amazon, Walmart, Costco, and Target dominate the market?

The next generation of marketplace winners will be the brands that successfully combine the joyous discovery of offline shopping with the infinite options of online shopping.

-  A16Z

Amazon’s guiding principle was low prices, large selection, and fast shipping. Costco offers high private label penetration, low prices, and high quality in large quantities. Temu, on the other hand, has anchored on PDD’s learnings of gamified commerce in China, the power of deep discounts, and leveraged social media virality to grow to an unimaginable scale in less than a year.

Easier To Dominate a Small Market Than A Large One  

Initially, Temu targeted young, female, and price-conscious customers. Temu used the TikTok influencer channel through product referrals and affiliate programs to build price awareness and brand virality to reach this core demographic. Gamification using limited-time deep discounts created a sense of urgency and drove customer action. However, Temu’s biggest differentiator is its rock-bottom prices and unbranded goods. Temu’s prices are 50-70% lower than prevailing products in the market.

Fast Fashion

The days when product assortments were planned 6 months in advance are gone. Zara and Shein have shown the retail world the advantages of the fast fashion model. While clothing and apparel are only part of the offering, Temu is leveraging fast fashion fundamentals of gauging demand, sharing this data with its merchant partners, and rapid turnaround of high-demand items.

Huge Losses

Despite slow shipping times of a week or more, Morgan Stanley estimates each order is losing $20-30 per order. Temu has already spent approximately $1 billion on advertising and customer acquisition. Today, these losses are subsidized by PDD’s cash flows and by the supplier network.

Repeat Customers?

The lifetime value of the customer is ultimately determined by the order frequency. The quality of the consumer experience, i.e., product quality and customer service, drives frequency. While Temu is hot out of the gates, without consumer loyalty and repeat purchases, the business model is unsustainable. There is some evidence that the initial fervor is cooling.

Will Temu be a sustainable winner like PDD in China or will it fizzle over time? The outcome today is unknowable. However, Temu’s case study has important learnings about ‘how to rapidly launch a business’ that we can all learn from. However, the most important lesson is that ‘Competition Is for Losers’. Be different.