Sally Zhang is a Certified Lecturer at Alibaba’s Taobao University. In that role, which is not compensated, she teaches International Brand Communication in professional management classes across Asia and Australia.
Her employer, WPIC, is an approved partner of Tmall and Pinduoduo. The organization has been approved by various e-commerce platforms in China to activate online stores on behalf of brands.
This fall, Pinduoduo, China’s leading social e-commerce platform, released its financial report for the previous year, indicating strong performance across multiple metrics. After that earnings report was released, the company’s stock shot up 16% in one day.
Pinduoduo CEO Huang Zheng, also known as Colin, was quoted last month announcing that their platform’s Gross Merchandise Volume (GMV) has exceeded that of JD.com, making it second largest in China, behind Alibaba’s Tmall.
Alibaba clearly takes the challenge from Pinduoduo very seriously, as evidenced by the fact that they have gone out of their way on multiple occasions to highlight their performance in “lower tier cities”—Pinduoduo’s geographic stronghold—during the recent Double 11 shopping festival, which concluded earlier this week.
So, how did a platform targeting lower-middle class consumers achieve such strong growth—outperforming the industry by a factor of ten—in a supposedly slow economic environment?
First, it’s important to look at the current consumer trends in China. Media narrative has been suggesting that consumer appetite has declined this year. The data, however, suggests that consumer confidence in China is growing, not declining.
The Nielsen consumer trends index (CTI), which measures overall economic conditions, is composed of three main factors:
- Market employment expectations, which reflects the confidence of the entire consumer market
- Willingness to consume, which reflects stability—if you have a stable income, you’re more likely to spend
- And the personal economic situation of consumers, which marks the depth of their pockets
If the CTI exceeds 100, it means consumption is growing. If it is lower than 100, it means consumption is negative. Neilsen calculated a strong 2019 Q2 index of 115, while the Q1 index in 2016, for context, was 105.
From 2016 to 2017, CTI rose quickly, while from 2018 to 2019, it was relatively stable. So it’s an exaggeration to suggest that consumption across the country is declining. In reality, consumption this year the same as it was in Q3 of 2017.
Where Pinduoduo has the largest runway for growth, however, is in the fact that the CTI in second-tier and third-tier cities is highest, and those are the regions where the platform has its highest penetration.
How is Pinduoduo performing?
According to Pinduoduo’s quarterly reports, during the 12-month period ending June 30, 2019, Gross Merchandise Value (GMV) on Pinduoduo reached RMB 709.1 billion (about $100 billion). GMV for the same period last year was RMB 262.1 billion, meaning the platform saw a YOY increase in GMV of 171%.
Meanwhile, in the first half of 2019, total online retail sales (representing the entire e-commerce industry in China) increased by only 17.8% YoY. In other words, Pinduoduo’s growth rate was nearly ten times the industry’s average growth rate.
Additionally, the number of active buyers on the Pinduoduo platform reached 483.2 million, an increase of 39.9 million (+41%) from the previous quarter. For context, the number of active buyers on JD was 321.3 million, and 674 million on Alibaba, meaning Pinduoduo is quickly catching up to and may soon surpass the industry titans.
In particular, users in lower tiered cities increased by 72.2 million, which exceeded user growth in the rest of the e-commerce ecosystem by 2 million.
Additionally, the average annual consumption of active buyers on Pinduoduo increased to RMB 1,467.5, up 92% from RMB 762.8 in the same period last year.
Although they have historically been perceived as a lower-middle class focused platform, PDD’s growth among high end consumers is remarkable. Today, the GMV of PDD’s first tier and second tier cities is growing and accounts for 48% of the platform’s GMV (up from 37% one year previous).
How have they grown their tier-1 city penetration? By leveraging the fact that Chinese consumers are looking for deals on disposable goods.
A Chinese shopper in the market for a handbag or a pair of designer shoes is willing to pay a “Tmall premium” in order to get the specific brand they want. However, for daily, household and disposable goods (packaged groceries, fruits, cleaning supplies, etc.), consumers with limited discretionary income- across all tiers- aren’t willing to “splurge” for brand name items that are not any better than the off-brand alternatives. Those are the items that Pinduoduo offers, at more competitive prices than Tmall.
In short, across all cities, Pinduoduo has much more affordable prices for items where brands aren’t important. As a result, Pinduoduo is evolving, and becoming perceived as more of a universal platform across China.
How is Alibaba responding?
While Tmall continues to grow in tier-1 cities, Taobao is dropping prices on its average products this year, in order to catch up to Pinduoduo.
Additionally, Alibaba has restructured its social e-commerce division, making its Pinduoduo-rival, JuHuaSuan, an independent business. Clearly, Alibaba is positioning JuHuaSuan to take on Pinduoduo.
However, JuHuaSuan’s performance over the past two years has not been particularly strong. From running stores across multiple platforms, e-commerce practitioners like myself see firsthand that JuHuaSuan stores are not performing particularly well, despite Alibaba’s best efforts.
To address this, Alibaba is leveraging promotional days in an attempt to drive traffic to the JHS platform. For instance, last year’s 9/9 promotion was a disappointing event in terms of GMV, but this year, Alibaba has doubled down, marking the annual JHS 9/9 promotion at “S-level”, as a highest priority sale (S-level sales like 11/11 and 6/18 are the most important for Alibaba each year, followed by A-level and B-level).
Clearly, they take the PDD threat very seriously in Hangzhou.
What does all this mean?
Could Pinduoduo unseat the ultimate king in China e-commerce, exceeding Tmall in GMV and maybe even corporate revenues?
It’s tough to say at this point, but the social e-commerce app does have quite a tailwind at this point.
And according to the data, China’s lower tiered cities are likely to be the country’s growth engines over the next 2-3 years, which means these trends are unlikely to reverse.
Even with taxes due to the trade dispute with the United States, it’s likely that these are going to impact foreign imports, which are most prevalent in tier 1 cities like Beijing and Shanghai. The tier 3 and 4 cities, for now, seem to be sheltered from those slowdowns, which means Pinduoduo looks to be positioned strongly.
Long term, however, in order to keep growing, Pinduoduo will need to diversify its product offerings and revenue streams, the way that Alibaba and Tencent have masterfully done over the past decade.