Reflection on Our Talk with Pinduoduo VP in View of the Firm's Q2 Financials
Pinduoduo is determined in the further engagement of users and merchants. The interview with Victor Tseng, VP of Corporate and Investor Relations, shed lights on its future strategy in entertaining consumption, supply-side upgrading and the new brand plan.
Pinduoduo Inc. (PDD:NASDAQ), an innovative and fast-growing “new e-commerce” platform in China, today announced its unaudited financial results for the second quarter ended June 30, 2019.
The company's GMV amounted to CNY 709.1 billion (USD 103.3 billion) in the twelve-month period ended June 30, 2019, an increase of 171% from the same period last year. Total revenue for the June quarter reached CNY 7.29 billion (USD 1.06 billion), up 169% compared to the same quarter of 2018.
“We are pleased with our results in the second quarter of 2019,” said Mr. Zheng Huang, chairman and CEO of Pinduoduo. “Putting users’ interests first, we worked with our merchants to provide our users with a targeted, compelling value proposition on their most coveted items. This unwavering focus on our users contributed to the significant increase in our annual active buyer base and annual spending per active buyer, which together led to the 171% increase in our last-twelve-month GMV."
Two other important indicators, the monthly active users (MAU) and the expenses in sales and marketing remains the focus. The increase rate of MAU, which already slowed down quarter-over-quarter, is considered highly related to the large expenses on sales and marketing.
Average monthly active users in the quarter were 366.0 million, an increase of 88% from 195.0 million in the same quarter of 2018.
As to sales and marketing expenses, it saw an increase of 105% year on year to CNY 6.1 billion (USD 889.1 million), representing 84% of the company's total revenues. Mr. David Liu, VP of Pinduoduo strategy department said that they plan to continue investing in users and merchants in 2019 to drive further engagement.
In terms of daily active users, Pinduoduo has broken the once-thought steady duopoly between Alibaba and JD.com to become the second-largest online e-commerce platform.
EqualOcean talked with Victor Tseng, VP of Corporate and Investor Relations in Pinduoduo a month ago, trying to have a better grasp of the company's future direction. Modestly and decisively, Tseng shared his initiatives to join the company, introduced Pinduoduo's effort in dealing with challenging issues and gave insights about the company's strategy in the new brand plan.
Below is the dialogue transcript.
Q: China plays a more important role globally, enterprises arise during the period will form a growing influence overseas. We believe Pinduoduo may be one of them that will represent not only China's enterprise but also our country. Since we know that you worked for Ctrip in the US and joined Pinduoduo early this year, could you share the catalyst that drove you to this company?
A: Excitement I would say. A lot of new business models and innovations are originated from China. Consumers and the retail market have leapfrogged their peers in the United States and have been followed by not only emerging markets like India and Indonesia but also developed countries. Plus China's total retail sales of consumer goods reached CNY 30 trillion, it is a spending market to surpass the US soon. The e-commerce sector, though prosperous in China, still poised a relatively low penetration rate. There are also great opportunities here.
Previously we say consumption upgrading, it seemed to be limited to expensive spendings. From my point of view, it should not be a one-sided explanation. In many western countries, non-branded goods sometimes grow faster than brand items. With a diversified geographic and demographic layout in China, Pinduoduo got the innovation initiative and opportunity to provide a different shopping experience for consumers.
Q: You mentioned the diversification of China's consumers. Since you have lived in the US for a very long time, what do you think of the stratification of consumption in the US?
A: Though the e-commerce penetration (14% in the US in 2018) is not as high as China's record of 23%, the US has rooted deeply in the brick-and-mortar business model and accumulated decades of offline retail experiences. Therefore, stores like Dollar Store, Wal-Mart and Costco are examples of consumption diversification to meet the needs of different consumers. For China, the country is so big that the shopping habits in different tiers of cities would vary substantially than in the US. The uneven situation offline should also exist and be met online with increasing Internet penetration rate, however, the traditional e-commerce giants might ignore this due to their already well-built business model. They tend to provide more online traffic to relatively well-known and expensive brands that might not suit the case for low-tier cities' consumers. Such a situation created another online opportunity and that's where Pinduoduo broke in. We also subverted the original online shopping habit of consumer-search-goods to goods-search-consumer.
Q: As you said, Pinduoduo has innovated in many ways, not only changed the way of online marketing but also adopted a group-shopping model and an entertaining way of consumption. But the underlying logic of innovative technologies is still based on people's social networking activities.
A: We don't define ourselves as a social e-commerce platform, but the company has accumulated users online shopping data and social relations to analyze one's behavior based on distributed artificial intelligence. By promoting entertaining consumption, we launched several online mobile games, which has also contributed to our user data pool, assisting better user portraits and promoting strategy.
Q: Pinduoduo sets the goal of a future company to be a combination of Costco and Disney. The entertaining game is one of your practices. One of the online game I recall is Duoduoguoyuan, what about Duoduonongyuan?
A: Just like you said, Duoduonongyuan's approach represents the Disney part, Duoduonongyaun's trial stands for the Costco part. It's a customer-to-manufacturer (C2M) business model. Traditional e-commerce players had paid lots of energy in online traffic distribution and infrastructure building such as logistic and mobile payment. When Pinduoduo started its business four years ago, those preparations were all in order. Thus we got more time to know our upstream suppliers, by abandon some of the unnecessary distributing procedures, we could save cost for suppliers and provide more benefit for our consumers. On the other way around, suppliers or farmers in Duoduonongyuan's case could also be updated with consumer market's feedback, and make production adjustment in time.
Q: Got it, so it's not just a poverty alleviation project.
A: It brings Pinduoduo opportunities as well and the direction is right. But we don't want this to be just another traffic distribution business. If we simply provide farmers with online users and display those goods on website, those rural area farmers will be better off for the moment but it is not sustainable. We want to move down the value chain of the industry. And that's why we have cooperated with China Agricultural University in this project to cultivate 10,000 talents who have their know-how in agriculture technology, industry and operations to help optimize and upgrade the redundant chains. The company's development is driven largely by rural consumers and it has a strong incentive to revolutionize the production and supply chains.
Q: I think Pinduoduo's strategic plan on entertaining consumption, poverty alleviation and supply-side optimization are very insightful. But speaking of the negative report of the company or the downgrade by some investment institutions, how do you deal with it?
A: We take those reports with a normal heart. The capital market, especially the secondary market is short-termed. Pinduoduo has a big vision that won't easily be shaken by quarter-to-quarter turbulence. So be patient is also important.
Q: Some questioned the high expense in Pinduoduo's sales and marketing, that's to some extent reasonable for the company at this stage. But one thing I notice is the take rate, meaning the take rate from GMV to revenue, seems to decline to 0.8% at Q1 this year.
A: If you look at the take rate quarter to quarter, it is bumpy, but if you see it in a twelve-month period, the number keeps increasing. This quarter should be 2.99%. We have 1 million merchants at the beginning of last year, by the end of 2018, the number jumped to 3.2 million. New merchants also need more time to adapt to our platform, to build trust and buy ads. It's a process, we are patient about it.
Q: I see, and for the Pinduoduo new brand plan, I think it's a very good strategy. As Pinduoduo grows larger in size, it is good enough to represent China's e-commerce. However, people may question the fake goods issue, how will the Pinduoduo's new brand plan help in this, especially in representing China's e-commerce overseas?
A: Selling counterfeits is one of the current situations, to be honest. But as a marketplace, Pinduoduo, as well as Alibaba and Amazon, are facing the same challenges. We are working hard to crack down those issues by both technology and mechanism. We require merchants' licenses that linked to the government ID to sell on Pinduoduo platform and fine10 times the price of those who sell fake goods. From the technology perspective, the merchant quality score is based on our rating algorithm. Merchants credibility, user review and so on will be included in the iterating ranking system. Even as a young company, we take this very seriously.
Q: Exactly. Back to the new brand plan, could you introduce a bit more on that?
A: Sure, China has accumulated a great number of manufacturers in the past two to three decades to serve as a world factory. Many of those have great product R&D and manufacture capability, but for one product that may sell for CNY 100, after tagging another brand, the price will double and redouble. Manufacturers want to sell with their own brands with a more appealing price, but they don't have suitable channels. Plus the uncertainties in the OEM model, the supply-side market status pose another opportunity for Pinduoduo, and we take it.