U.S.-listed Pinduoduo (PDD) is the third-largest e-commerce player behind Alibaba and JD.com in China. A large part of PDD’s appeal is the group buying function where the more people who buy a product leads to a lower price.
However, both JD and Alibaba have launched rival products to PDD which could bring stiff competition to the smaller rival.
Nevertheless, this young start-up that just recently turned five years old, proved that it can compete against large incumbents like Alibaba and JD.
1) Feed-based shopping
Pinduoduo considers themselves to be under a feed-based shopping format which caters more to the current mobile era. As explained by PDD: Feed-based shopping underpinned by a “you don’t know what you want but happy to discover” philosophy.
They differentiate themselves from ‘search-base’ e-commerce sites whereby customers go search for products they know.
2) Lower prices
A large part of PDD’s appeal is the group buying function. When a user selects an item on Pinduoduo, they can choose to participate in group buying. The more people that join in, the lower the price of the item goes.
This encourages buyers to share links to the item they are buying with friends and family or over social media.
I see this as a double edged sword.
On one hand, the group buying model is very successful. It has driven PDD’s valuation to > USD100 billion within 5 years, a feat that Alibaba and JD took more than 10 years to achieve respectively. Its revenue comes from the commission fee it takes from sales on its platform and advertisements.
From the Upstream distribution channel point of view, PDD managed to balances the benefit between suppliers and consumers and adds value to both parties. PDD as a channel, directly connects suppliers and consumers, without traditional midstream parties like distributors & channels, retail outlets, etc. Hence eliminating much of the associated costs and thus allowing consumers to enjoy lower prices, without hurting manufacturers’ profit (eg. boosting volume).
From the Downstream customer acquisition point of view, PDD has enjoyed a low customer acquisition cost as a result of support from Tencent. Tencent integrated PDD into WeChat, meaning over one billion monthly WeChat users can get access to PDD and make payments through the app.
However, on the other hand, the impression of PDD selling cheap products seem to stick, and made it hard for PDD to break into the first and second-tier cities in China (go up scale).
Many people also associate being cheap or discounted products with inferior products.
Pinduoduo users are predominantly female, living in Tier 3+ cities. Pinduoduo’s average order price sits at roughly 30-50 yuan, a fraction of Tmall’s 214 yuan (11:11, 2018) and JD’s 422 yuan.
A large part of PDD’s user base is from smaller Chinese cities where there are perhaps more price-conscious consumers. JD.com and Alibaba appear to dominate in the so-called tier 1 cities in China.
Last year, PDD disclosed that 45% of its gross merchandising value (GMV) came from first and second-tier cities. That means that 55% still comes from tier three cities or below.
PDD, in Q3 2020 finally reported a gain on its bottom line (ever!), together with cash flows from operations of RMB8.3 billion ($1.2 billion).
The total revenues in the September quarter were RMB14.2 billion, representing a surge of 89% from RMB7.5 billion in the same quarter last year.
Notably, year-over-year revenue growth has accelerated from 67% in the previous quarter to 89% on the back of more active buyers, as well as higher spending per buyer. Annual spending per user improved 27% to 1,993 yuan.
Pinduoduo Reported Its First Ever Profit! Here’s What Investors Should Know (read here)
This figure is an impressive amount of cash flow for a company to make over a 90-day period, more than $1 billion in cash flows from operations, a dramatic increase from RMB2.6 billion (very approximately $400 million) in the same period a year ago.
Pinduoduo: Delivering very strong results, still cheaply valued (read here)
To quote the above article: “Going into COVID-19, Pinduoduo’s revenues got hit hard (Q1 2020; in China). But then, coming out of Q1 2020, we have seen its revenue growth rates accelerating once again, with Q3 2020 reporting 89% y/y growth rates.”
To tie in with the earlier point of the impression that PDD is selling cheaper goods: The pandemic induced recession which affected a large part of the lower income group appears to further accelerate the growth of PDD during this period.
4) Incredible Growth
Besides its profit / financial results, one should look at the GMV (Gross merchandise value) and active users.
Pinduoduo Inc (PDD) Q3 2020 Earnings Call Transcript (read here)
As mentioned by PDD Chief Executive Officer and Director, Lei Chen on 12 Nov 2020, for the 12 months ended September 30, 2020, Pinduoduo’s revenue yield of 731 million active buyers (36% increase YoY), 643.4 million MAU, monthly active users (50% increase YoY) and generated nearly RMB1.5 trillion GMV (73% increase YoY).
Lei Chen attributed this phenomenal growth over the past 5 years, to the growing support for the new interactive mobile commerce experience that PDD championed. PDD mobile platform has become a mainstream online shopping app. Their Open [Phonetic] ranked first on various app stores.
Most importantly, Pinduoduo has also become China’s largest online platform for agricultural products by enabling direct selling from farms to the dining table.
Alibaba highlights for Q3 2020; active customers reached 757 million (read here)
Now compare the GMV growth and the number of active users, to Alibaba’s e-commerce platforms. In the third quarter of 2020. the incumbent Alibaba reported 881 million mobile MAU in its retail marketplaces (Taobao and Tmall) with 757 million annual customers
Tmall online physical goods GMV, excluding unpaid orders, grew 21% year-over-year during the September 2020 quarter.
Tmall Global GMV, excluding unpaid orders, grew 37% year-over-year during the quarter.
Alibaba generates $101.46b GMV in the 11.11 Global Shopping Festival 2020 (read here)
In the recent Alibaba Group’s 2020 11.11 Global Shopping Festival, a total of RMB498.2b ($101.46b) in gross merchandise volume (GMV) was generated during the 11-day campaign from November 1 to 11, according to an announcement shared by the Group last Thursday.
Still that is only an increase of 26% compared to the same timeframe in 2019.
Meanwhile, JD.com’s transaction volume over the same period totaling RMB 271.5 billion ($40.97 billion), more than the RMB 204.4 billion it recorded in 2019 (32.8% increase YoY).
Pinduoduo revenue for the quarter ending September 30, 2020 was $2.093B, a 99.09% increase year-over-year.
In comparison, Alibaba revenue for the quarter ending September 30, 2020 was $22.838B, a 37.16% increase year-over-year. While JD revenue for the quarter ending September 30, 2020 was $25.659B, a 36.01% increase year-over-year.
In short, Pinduoduo the e-commerce firm is growing faster than its major rivals Alibaba and JD.com, and gaining market share quickly. This is after all a company that went above 100 billion RMB per year of merchandise sold on its platform 2 years after its launch, while it took 10 years for JD.com to get there.
In gist, the growth of Pinduoduo has been nothing short of amazing. The recent earning report showing the first ever gain in its bottom line has fueled a burst in its share price.
However, the recent growth could be due to the pandemic induced recession which has led to shoppers being more cost conscious. Nevertheless, it will be part of my stock shopping list, and I don’t mind further adding more PDD stocks to my portfolio if prices dropped abruptly (eg. in the event of a market correction or crash).
Please note that I am vested in Pinduoduo.
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