PinDuoDuo (PDD) has defied all odds to become one of China e-commerce’s fastest growing companies. Going up against (and winning) established giants such as Tmall and JD.com is no small feat. Last year it overtook JD.com by number of active users and cemented their position as China’s third largest online retail provider. They also raised $1.6 billion on a $60 billion valuation in their NASDAQ IPO, followed by a further $1 billion in a share-raising earlier this year.
What’s PDD’s secret sauce? We believe their success can be attributed to two key factors: 1) Capitalising on consumers’ increasingly social behaviour when it comes to shopping
2) Serving China’s large and fast-growing lower-tier markets
In this article, we’ll take a deeper look at PDD’s business model, some of its key challenges, and why (or why not) you should consider this platform when planning for your China strategy.
Pinduoduo’s Key Strengths
Strength 1. Savings for China’s Underserved Populations
Pinduoduo adopts a customer-savings first mentality towards their supply chain. It opts to cut out middle-men and connect consumers directly with manufacturers and distributors (where possible). Consumers also reap the benefits of micro-economies of scale via ‘group buy’ discounts.
PDD’s goods also ship express to most lower tier cities and seldom charge for delivery. The same cannot be said for Alibaba’s Taobao, where merchants tend to charge a premium for long-haul shipments.
Strength 2: A Truly Social and Shareable eCommerce Experience
Pinduoduo has been building a powerful social eCommerce model, the likes of which has eluded Alibaba. Group-buys provide a direct financial incentive for users to share listings (and the PDD brand) with friends and family. This transforms online shopping into a fun, socially-engaging and rewarding experience. Furthermore, following Tencent’s 2016 investment: PDD also integrates seamlessly into the user’s WeChat experience. This provides a world of opportunity for brands to connect with customers in truly innovative and engaging ways.
Strength 3: Engagement through Entertainment
Relative to Taobao’s search-based interface, Pinduoduo utilises an almost social newsfeed comprised of user-tailored listings and promotions. In other words, on Pinduoduo, the goods find you. PDD also frequently executes targeted initiatives (such as coupons, free gifts and lottery events) to boost user-engagement. Furthermore, brands can also tap into China’s booming mobile gaming market, and engage with consumers via Pinduoduo’s games and ‘game-like occasions‘.
Overview of Strengths: Pinduoduo’s Winning Targeting Strategy
Pinduoduo’s core strengths rest in their commitment to bringing modern Chinese eCommerce standards (i.e. cost and delivery efficiencies) to China’s lower-tier and rural (i.e. new-to-internet and lower-income) populations. Beyond growing 3-4x faster than their tier-one counterparts, lower-tier cities are also comparatively underserved and uncontested by major brands and retailers. The overwhelming majority of low-tier internet-active populations regularly use WeChat and can hence engage with Pinduoduo.
Implications for businesses entering China
Leveraging the lower-tier opportunity saw PDD hit ¥100 billion Gross Merchandising Value (GMV) in little over two years. This same feat took Taobao over five years and JD fifteen. Their 443 million active users make them second only to Alibaba. As such, for any FMCG brand developing a China strategy, Pinduoduo is becoming increasingly difficult to ignore. This is particularly true for food brands, which represent PDD’s largest category.
However, there are a few key watch-outs for including them in your distribution strategy as well. It’s worth considering the below factors:
Factor 1. Spam-Like Business Model and Low-Quality Perception
PDD’s social ‘group-buy’ model helps boost its product sales, but can also be perceived as ‘low-end’, ‘cheap’ and even ‘spam-like’. Shopping on PDD is not associated with ‘status’, and some people even hide the fact that they are PDD users.
In addition, PDD’s highly publicised counterfeit and IP issues deepen their low- quality reputation. PDD is widely seen as a haven for tens of thousands of daigou and counterfeiters operating unchecked as merchants.
Factor 2. Alibaba’s Enforcement of Mutual Exclusivity
Further to PDD’s list of challenges is Alibaba’s attitude of mutual exclusivity with Tencent-affiliated brands and merchants. We’re encountering a growing number of brands having their Tmall visibility cut for little reason other than their JD presence. This is a real point of contention for PDD. In April, Pinduoduo CEO Colin Huang even called Alibaba out and requested a more level playing field.
What lies ahead
PDD is taking steps to address their challenges and enhance their legitimacy as a major player in the e-commerce space.
In 2018, Pinduoduo raised their investment in R&D (covering talent acquisition, algorithm design, systems etc.) by 764% to ¥1.12 billion. This allows their technical engineers to develop algorithms aimed at identifying marketplace irregularities. In 2018, these initiatives led to the closure of 60,000 counterfeit/illegitimate shops and more than 30 million suspicious links.
PDD is also cutting ties with Daigou traders and up-scaling their CBEC platform offerings. This may be reflective of a new strategic focus to tap into China’s more contested and wealthier top-tier cities.
As 2020 approaches, we may begin to see a new, safer, more legitimate, engaging and slightly more premium version of Pinduoduo.
This article is an abbreviated and edited version of the blog post first appeared on China Skinny’s Blog.
For the full article, please click here.
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