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Growth and Challenges of Pinduoduo, the Chinese eBay – Initiate with Hold [1/2]
COVID-19 and China
Pinduoduo. Image Credit: EqualOcean

Pinduoduo (PDD: NASDAQ) released its 20Q2 earnings on August 21, 2020. The slower GMV growth in Q2 caused its share price to drop more than 10%. GMV refers to the total value of all orders placed on PDD – it is also an important metric that PDD emphasizes to represent its performance. In this article, EqualOcean takes a more in-depth look at Pinduoduo’s 20Q2 financials, explaining both PDD’s upsides and downsides. We recommend initiate with hold.

PDD is a US-listed e-commerce company and now the third-largest e-commerce player in China, just behind Alibaba (BABA: NYSE) and JD.com (JD: NASDAQ). It focuses on group buying – i.e. products and services offered at a lower price on the condition that a minimum number of people make the purchase collectively. The model 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. 

What makes PDD soar?

Upstream - PDD successfully balances the benefit between suppliers and consumers and adds value to both parties. It builds up the channel that directly connects suppliers and consumers, without traditional midstream parties like distributors & channels, retail outlets, etc. Without a middle-man, consumers can enjoy lower prices without hurting manufacturers' profit, and the boosted transaction volume can then help manufacturers to earn more.

Besides, the most successful part of PDD’s business model is how it supports small-to middle-size factories in China. Many of these factories in China are outsourcers of larger brands. They produce high-quality products and earn low profits because they cannot gain access to customers on their own. PDD cures this pain by providing platforms for these factories to access more than 500 million active users directly. Customers’ positive experiences lead to repurchases of the products, thus factories’ brandings are incubated.

Downstream - PDD has enjoyed a low customer acquisition cost as a result of support from Tencent. As a move to pressure Alibaba, Tencent integrated PDD into WeChat, meaning over one billion monthly WeChat users can get access to PDD and make payments through the app.

Bringing e-commerce into lower-tier cities was another factor that kept PDD's customer acquisition cost low – as Alibaba and JD were not accessing this market, PDD was able to grow quickly without intense competition.

In addition, PDD is tapping into its customers in three ways: 1. Through its big data base and emphasis on AI, PDD can accurately tailor suggested items to increase its customers' purchases. Its recommendation algorithms change traditional ways of searching for purchases. 2. PDD's group purchasing model leads to sharing and recommending purchasing items and experiences. 3. PDD also develops small games that award players with purchasing credits to increase the stickiness of customers.

New Vertical - In the most recent earnings call, the new CEO of PDD, Lei Chen, revealed the latest plan of PDD: "Our aim is to further consolidate our position as China's number one online agricultural platform and to build a worldwide presence in agriculture." Agriculture is still a blue ocean in China – on average, agricultural products have to go through five layers before reaching customers, adding 105% in costs and leading to 37% spoilage for vegetables. Furthermore, he expressed PDD's willingness to incubate new brands within the platform to build up brands for consistently high-quality products and recognize a premium on those products.

PDD's agricultural product sales increased by more than 136% in this year's shopping festival, a good sign for its plan. If this plan is successful, it can bring transformation in the area and be able to build a more stick customer base from first and second-tier cities, who demand high-quality food. Also, expanding from the current saturated e-commerce market into this untapped market can be a way to maintain PDD's high growth.

This article is part I of our analysis on Pinduoduo. Please continue to part II.

*Contributor: Linyan Feng | Editor: Luke Sheehan

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