As China’s economy is experiencing a big hit from the coronavirus pandemic, internet giants like Tencent are looking into lower-tier markets for new growth opportunities. In 2025, physical goods in lower-tier markets will account for 45% of total online retail sales in China, or some RMB 8.1 trillion (around $1.25 trillion), Xingye Research estimates. This would represent a compound annual growth rate (CAGR) of 18.3% from 2018 to 2025 (although these estimates were made before the disruption of the coronavirus outbreak). 

Group buying has proved a successful selling medium in these markets, and Pinduoduo is its king. In recent years, major e-commerce players have launched group-buying platforms to tap into Pinduoduo’s shopper demographic. JD.com set up its group-buying mini program on Wechat in June 2018 and launched a group-buying app Jingxi in April 2019. Suning.com established its own group-buying app in July 2018.

Seeing the great success of group-buying players like Pinduoduo and Jingxi on Wechat, Tencent itself has started to roll out a group-buying mini program. In doing so, it is stepping into Pinduoduo’s turf. The two companies have worked in synergy since 2016 when Tencent led Pinduoduo’s Series B.  

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Deborah Weinswig is CEO and Founder of Coresight Research. Additional contributions by Eliam Huang.

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Pinduoduo’s partnership with WeChat has been an important factor for Pinduoduo’s success. It helped the relatively new e-commerce platform keep customer acquisition costs low, fueling its expansion.

A closer look at Pinduoduo

Pinduoduo, launched in 2015, operates a group-buying model, inviting users to form groups with others that want to buy a specific product. With increased quantities sold, the merchants can lower the price for each consumer. Users can receive steep discounts, of up to 90%, on certain products if they have enough friends to form a group to buy together. 

Encouraging bulk buying, Pinduoduo’s model has found massive success. it is the fastest-growing e-commerce platform in China. It has enjoyed continuous growth in terms of GMV, and a number of annual active users, from 2017 to 2019. 

Pinduoduo’s gross merchandise value (GMV) rose to RMB 1,007 billion for the fiscal year 2019, from RMB 141 billion in 2017. This represents a staggering 620% growth. By comparison, in the same time period, Alibaba’s Tmall and Taobao combined GMV growth was 52% and JD.com’s was 61%.

GMV of Pinduoduo, JD.com, and Alibaba, Fiscal Year 2019-19 (billions of RMB). Here, Alibaba’s GMV includes Tmall and Taobao. (Source: company reports; Image credit: Coresight)

Pinduoduo’s fast growth is closely linked to its high penetration in lower-tier markets. Around 58.9% of Pinduoduo’s users were from lower-tier cities in 2019, compared to JD.com’s 48.4% and Alibaba’s 57.4%, according to data firms QuestMobile and GeTui

Percentage of users from lower-tier cities for Pinduoduo, JD.com, and Alibaba, 2019. (Source: QuestMobile and GeTui; Image credit: Coresight)

Tencent forays into group-buying 

On April 29, Tencent launched mini-program Xiao’e Pinpin. The mini-program allows users to purchase products at a lower price by forming groups. Currently, available products include electronics, apparel, groceries, and cosmetics. 

It shows products from various sellers in a content feed.  But products are not categorized, instead of appearing in a news feed format. This makes it difficult for consumers to locate specific products they want to purchase, particularly as there is no search function.

Xiao’e Pinpin. (Screenshot: Coresight)

Xiao’e Pinpin charges merchants deposits ranging from around $700 to $8,500. Through the deposit scheme, Tencent ensures merchants ship products on time and comply with platform regulations. If merchants do not fulfil these requirements, the platform deducts money from their deposit.

A way forward for Tencent?

In light of Pinduoduo’s success and the slowing economy post-COVID-19, it makes sense for Tencent to look into the group buying model for further growth. The Shenzhen giant has been pursuing e-commerce for over a decade. It launched its own e-commerce platform, Paipai, in 2005, which was acquired by JD.com in 2014.

Tencent has collaborated with Pinduoduo since 2016, when it led the e-commerce platform’s Series B. Tencent also held a 18.5% stake in the company until October 2019.

By pushing further into online shopping, Tencent is now entering its old friend’s turf.

Wechat still gives users multiple entry points to shop on Pinduoduo, delivering meaningful reductions in the cost of customer acquisition: In the June quarter of 2019, Pinduoduo spent around RMB 153 per acquired customer, compared to JD.com’s RMB 520 and Alibaba’s RMB 535. 

But Tencent’s foray into group buying might not compete directly against Pinduoduo. Tencent has proved that it can simultaneously cooperate and compete with other big tech companies. Many retailers have their own stores on WeChat’s mini-program, even Alibaba’s close ally Suning. Tencent is also partnering with multi-category platforms, such as Pinduoduo and JD.com. 

Given Tencent’s track record in this regard, it is not clear whether Xiao’e Pinpin will go after Pinduoduo’s customers. One thing is certain; Tencent wants to reach out to budget shoppers through a push into group buying.

Deborah Weinswig

Deborah Weinswig is CEO and Founder of Coresight Research, a research and advisory firm that provides future-focused analysis and consulting on the intersection of retail, technology, and fashion. Deborah...