KEY POINTS
U.S.-listed Pinduoduo (PDD) is now 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.
The company recently issued new shares and also made its first major investment as it looks to expand.
But JD and Alibaba have both launched rival products to PDD which could bring stiff competition to the smaller rival.
Colin Huang, CEO, Pinduoduo during Nasdaq IPO
Colin Huang, chief executive officer and founder of Pinduoduo, speaks during the company’s listing ceremony at Shanghai Tower on July 26, 2018 in Shanghai, China.
VCG | Getty Images
U.S.-listed Pinduoduo (PDD) may not be a big name outside of China. But within the world’s second-largest economy, the e-commerce firm is growing faster than major rivals Alibaba and JD.com and gaining share quickly.
Behind that success has been its “social shopping” model that encourages users to share links to items they purchase with friends and participate in group buying.
Here’s a look at how the platform works, its financial performance and how it competes with Alibaba and JD.
How does PDD work?
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.
Each item has a minimum number of buyers required to complete the purchase. If that number is not met within 24 hours, then the group buy is cancelled and those who have already committed money will be refunded.
There is an option to just buy the item directly but the price of that product is higher than that of buying it in a group.
PDD has also focused on making personal recommendations within its app.
Business model
Currently, 100% of PDD’s revenue comes from what it calls “online marketplace services.” This is broadly made up of commission PDD takes from sales on its platform as well as advertising it runs.
While Alibaba and JD.com make most of their money from e-commerce, they both have other emerging businesses such as cloud computing. So PDD’s income stream is narrower.
But its revenue is growing faster in percentage terms. In the December quarter, PDD’s revenue hit 10.79 billion yuan ($1.55 billion), an increase of 91%. In the same quarter, Alibaba’s revenue was up 38% from last year but it raked in 161.45 billion yuan or $23.19 billion, nearly 15 times as much as PDD.
Both Alibaba and JD.com made a net income in the fourth quarter of 2019 while PDD recorded a loss.
User numbers
In 2019, PDD said it had 585.2 million active buyers — those that made at least one purchase on the platform during the year. JD.com had 362 million in the same period. Alibaba said it had 711 million annual active consumers on its Chinese e-commerce marketplaces in the 12-month period ended September 30, 2019, the latest available figure.
A large part of PDD’s growth has been driven by the fact that it can be accessed on Tencent-owned messaging service WeChat, which has over a billion monthly users. WeChat is a key part of daily life in China and allows people to make payments within the app. So a buyer can access PDD via WeChat and make payments there.
This has led to lower customer acquisition costs, according to analysts.
“Direct buyer traffic to PDD is primarily generated from word of mouth referrals by its existing buyers as well as the effect of its marketing campaigns,” Shanghai-based Guotai Junan Securities, said in a report from March. “A portion of the Company’s buyer traffic comes from its user recommendation or product introduction feature which buyers can share with friends or contacts through social networks such as WeChat and QQ.”
In terms of market share, PDD is the third-largest e-commerce player in China behind Alibaba and JD.com, according to a report released in July 2019 by eMarketer.
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.
“They (PDD) have made no in roads into existing market share of tier 1 cities,” Jacob Cooke, CEO of WPIC, an e-commerce tech and marketing firm that helps foreign brands sell in China, told CNBC.
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. GMV refers to the total value of all orders for products and services placed on the Pinduoduo mobile platform, regardless of whether the products and services are actually sold, delivered or returned, according to a financial filing from the company.
“We’re here to serve everyone, and wanting value for your money isn’t dictated by where you live,” a PDD spokesperson told CNBC.
Author: Arjun Kharpal
PUBLISHED TUE, APR 21 20208:52 PM EDTUPDATED WED, APR 22 20203:32 AM