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Pinduoduo: A Rising Star Challenging Alibaba and JD.com [2/2]
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Pinduoduo’s net profit and net profit margin are improving.
Pinduoduo's unique model of 'C2M' is grabbing small merchants from Taobao.
► The brand has a focus on consumer operations, aiming to provide consumers with a more fun user experience, Pinduoduo is speeding up to become next Disney.

In the previous article, we overviewed the development of the Chinese e-commerce market and how Pinduoduo performed compared with Alibaba and JD.com. Here, we will focus on the company's profitability and its potential opportunities.

Not profitable but improving

Pinduoduo has not turned the loss into profits yet but had a narrowed loss in 2019. First, the cost of revenue is significantly lower than expected. The financial report shows that Pinduoduo's revenue cost was CNY 2 billion in 4Q2019, an increase of 11% month-on-month and a year-on-year increase of 43%, which was significantly lower than the total revenue growth of 44% and 91% year-on-year.

Second, the cost is better than expected. Since 3Q2019 and 4Q2019, Pinduoduo has been subsidizing to the tune of ten billion. 3Q2019 sales expenses were CNY 6.9 billion, and 4Q2019 sales expenses were CNY 9.3 billion, accounting for 86% of revenue, which was lower than 107% in 4Q2018 and 92% in 3Q2019. It can be seen that although sales expenses increased by CNY 2.4 billion, the revenue growth rate was faster, which means that Pinduoduo's 'ten billion in subsidies' are valid.

This policy not only brought rapid revenue growth but also brought more users. Statistics show that after Pinduoduo's '10 billion subsidies' last June, the annual growth rate of active buyers rose rapidly from 6% in 1Q2019 to more than 9%. At the same time, the retention rate of Pinduoduo users continues to increase, which means that most users continue to consume on Pinduoduo.

When the stickiness of users and merchants is high enough, the subsidy intensity can be reduced and the profitability can be improved. However, the current amount of CNY 33.3 billion in cash on Pinduoduo's financial account can still be subsidized for a long time.

Data shows that the average annual consumption of active buyers has reached CNY 1,720, a year-on-year increase of 53% in 2019, which exceeds the annual growth rate of active buyers of 40%. There is a lot of room for improvement from the ARPU perspective. It is approximately only one-eighth or one-seventh of the leading competitors, such as asJD.com and Alibaba.

In 4Q2019, Pinduoduo continued to make a profit in terms of merchant monetization. In terms of take rate, the company continued to provide preferential policies for high-quality merchants. In a single quarter, the take-rate continued to decline by 0.1% to 2.9% from the previous month, and the annual monetization rate reached 3.0%. Compared with the 3.62% of Taobao and Tmall monetization rate in 2019, Pinduoduo still has room for improvement.

Why long PDD? 

1. Pinduoduo is grabbing market share from Alibaba and JD.com from 2.5% in 2017 to 12.8% in 2019. Since 2012, Tmall has always occupied more than 50% of the market share, which peaked in 2014, and then showed a slight decline year by year. JD's market share is between 20%-30%, showing steady growth, while Pinduoduo's market share is showing a strong momentum of 'leaping growth,' may pulling Alibaba's market share below 50% for the first time in 2020.

2. Penetration rate can be much higher in lower-tier cities in the future, revealing a substantial potential market. With the popularization and upgrading of mobile Internet in lower-tier cities and towns, and the strengthening of necessary social capabilities such as township logistics, the penetration rate of China's online retail continues to increase.

3. Pinduoduo's unique model of 'C2M' is grabbing small merchants from Taobao. The retail model has gradually evolved from the original 'people looking for goods' which used by Taobao to the 'products looking for people' applied by Pinduoduo. The former model helped squeeze out small merchants on Taobao as this platform use the centralization model to top big merchants. Therefore, small merchants will seek new platforms such as Pinduoduo to settle in.

4. Use WeChat as traffic entry. The platform directly invokes China's current most effective consumer link network, WeChat, to transplant users to the leading site instead of placing users in the position of independent buyers. Besides, merchants provide fast store launches and traffic bonuses, as well as a perfect de-stocking model of purchase.

5. The agricultural products sector can use consumers' empathy for the concept of poverty alleviation to significantly increase the conversion rate. In 1Q2020, the number of farming product orders from rural online stores exceeded 1 billion. Users in the higher-tier cities of the platform consume more than 70% of agricultural products and agricultural and sideline products, indicating a good start to compete with other giants in Tier-1 and Tier-2 cities. Besides, as a sector that national policies support, agricultural products are highly probably to improve Pinduoduo's market share.

In total, it has connected 586,000 agricultural product merchants with 240 million active users, and users have purchased agrarian products with a repurchase rate of over 70%.

6. Focus on consumer operations, aiming to provide consumers with a more fun user experience. Users can play games on the platform such as 'Duoduonongchang' to get free products, increasing consumer's stickiness and one step closer to Disneyland, which Pinduoduo aims to become in the future. By transplanting social networks and cultivating the use of entertainment functions, Pinduoduo has data from social connections and from entertainment features that highly reflect user preference characteristics, which will bring considerable data support for Pinduoduo to explore the future C2M model.

*Contributor: Qasim | Editor: Luke Sheehan

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