If you watched the Super Bowl this month, you are probably familiar with Temu — the privately-held Boston-based deep discount retailer — that spent “tens of millions of dollars” on its “shop like a billionaire” ads, according to the Boston Globe.
Temu is growing very quickly. Since launching in September 2022, Temu’s ultra low prices — such as $10 for a shirt — helped the company’s service become the top U.S. e-commerce app with downloads “skyrocketing 50x from 600,000 to 30 million in just one quarter,” according to an October 2023 Bernstein analysis featured by CNBC.
By January 2024, Temu monthly users totaled 51 million — up 300% from the year before, noted CNBC.
The user growth has boosted revenue at Pinduoduo — Temu’s parent company. Under the leadership of Chair and co-CEO Chen Lei — a computer science genius with a PhD from University of Wisconsin — the company’s revenue popped 94% in the September 2023-ending quarter, according to the Q3 2023 PDD Holdings earnings call transcript.
Pinduodo — which started as a platform that by 2022 was enabling more than 16 million Chinese farmers to sell food and produce directly to 880 million consumers, according to NPR— says the company provides consumers a superior value proposition.
“It’s the balance of quality and price that consumers care most about,” Chen told investors in the Q3 PDD Holdings conference call. “Recognizing this trend, we are more confident about our value proposition of more savings and better service,”
Should you buy the Temu winners — Pinduoduo and Meta PlatformsFB
— and sell the losers — most notably Dollar General and possibly Amazon?
I think buying Pinduoduo could be a good bet — with some reservations related to whether Congress will impede its efforts to penetrate the U.S. market.
Does Temu Makes Money?
There are two common strategies for earning a profit:
Differentiation — charging a higher than average price for a superior product and keeping your costs below that higher price.
Cost leadership — setting the lowest price in the industry for a good product and using the scale resulting from gaining market share to keep your costs below your price.
Obviously, many companies do not bother with earning a profit. Indeed, Goldman Sachs estimates Temu lost money in 2023 as the company followed a cost leadership strategy hinging on two pillars:
Bombarding consumers with marketing — including “TV ads, coupons, free shipping countdowns, flash sales and discount wheels” — and
Low labor and distribution costs by using low cost Chinese labor to make its products and shipping them directly to consumers, according to CNBC.
Temu’s rapid growth has captured the attention of U.S. politicians who according to CNBC criticized the company for
Undercutting U.S. retailers by “exploiting de minimis shipping rules” — which relieve goods valued under $800 from duty taxes and extensive customs checks.
Using forced labor to supply its products — thus violating U.S. import law according to allegations of a U.S. House committee. Specifically, Temu does not have any system to ensure compliance with the Uyghur Forced Labor Prevention Act (UFLPA) — which “all but guarantees that shipments from Temu containing products made with forced labor are entering the United States on a regular basis,” the committee wrote to CBS in a bid for the network to bar Temu’s SuperBowl advertising.
A Temu spokesperson told CNBC its standards and practices surrounding the use of forced labor are “no different” from “Amazon, eBay and Etsy ” and the allegations “are completely ungrounded.”
Is Temu profitable? Since the Pinduoduo — which earned a 22.5% net profit margin in Q3 2023, according to the 2023 Q3 earnings call transcript — does not report Temu’s financial statements, investors can only guess at the answer.
JPMorgan estimates Temu will spend $3 billion on marketing in 2024 — 77% more than in 2023. Goldman Sachs guesses Temu lost an average of $7 per order in 2023, reported the Wall Street Journal.
Temu may be following the two step strategy it used to compete with Alibaba in China. The first step was to sell its products at low prices and offer heavy promotions to win market share.
After gaining a market foothold, Temu’s second step was to get profitable by “scaling back on customer acquisition, generating more advertisement fees from merchants and moving into higher-margin categories,” the Journal noted.
This second step will only work in the U.S. if Temu can keep customers buying — possibly by selling more expensive items such as “iPhones and home appliances,” wrote the Journal.
Temu Winners And Losers
Temu’s enormous marketing budget has helped some companies and hurt others.
Temu Losers
The losers have been U.S.-based so-called dollar stores. Research firm Earnest Analytics studied over 500,000 Dollar General shoppers whose spending on Temu rose to 10% of their total spending in December 2023, up from 1% a year before. The study found customer spending at both Dollar General and Dollar Tree declined during the period, the Journal reported.
“Temu has the advantage of novelty and excitement that is hard to re-create for staid low-end discount retail brands,” Michael Ashley Schulman, chief investment officer at Running Point Capital Advisors, told CNBC.
Amazon could also take a hit from Temu. However, since most Amazon customers are wealthier than the more price- sensitive people those who buy from dollar stores, Temu might not enjoy the same success in winning Amazon customers.
A Numerator study found nearly half of Amazon’s customers are relatively well off. While Amazon customers pay a premium for quick deliveries; Temu’s free shipping takes nine to 20 days, RetailWire reported. Simply put, Temu is likely to appeal more to lower income consumers who are willing to wait to take delivery of much lower priced products.
Temu Winners
In addition to Pinduoduo — whose stock added 50% in the year ending February 16 — Meta is the big winner from the e-commerce giant’s marketing spending. Temu and Shein are among the Chinese advertisers that spent some $13.7 billion on Meta advertisements in 2023. Meanwhile, in late September, the price to send an ad to 1,000 people on Meta rose 24%, according to the Journal.
Meta — whose stock soared 175% in the year ending February 16 — may be counting the Chinese e-commerce marketing spending as a mixed blessing. CFO Susan Li told investors on Meta’s October earnings call the company has “benefited from spend among advertisers in China reaching customers in other markets.”
However, should Temu and Shein spend less on marketing, “Meta’s growth rates could take a hit,” noted CNBC.
Should You Buy Pinduoduo And Meta And Sell Dollar Store And Amazon?
I would hesitate to buy shares of Pinduoduo given its visibility to U.S. consumers and politicians in this contentious election year. Politicians could make it more difficult for Temu to do business in the U.S.
Meanwhile, advertising from Temu and Shein is siginficant for Meta; however, the Instagram parent has other revenue sources to propel its growth.
Finally, Dollar Store stock — which has lost 2% of its value in the last year — could be hurt more by Temu, while Amazon — whose shares have added 79% — has little to fear in the short-term from the deep discounter.
