High speed and high quality!

Editor: Junyi

Fengpin: Liran

Source: Rhodium Finance - Rhodium Finance Research Institute

Low prices or innovation, which is the core driver of business development?

On November 21, Eastern Time, Pinduoduo released its third-quarter earnings report, with revenue of 99.4 billion yuan, an increase of 44% year-on-year. This growth rate is significantly slower than the 131% and 86% in the first and second quarters, respectively. It is also lower than the market expectation of 102.83 billion yuan. Net profit was 24.9807 billion yuan, an increase of 61% year-on-year but a decrease of 22% quarter-on-quarter. Adjusted earnings per share were 18.59 yuan, lower than the market estimate of 20.19 yuan.

Perhaps affected by the underperformance, on the evening of the 21st, Pinduoduo's share price opened with a gap-down drop of over 10%, trading at a low level throughout the day and finally closed at $104.09, down 10.64%, with a total market capitalization of $144.6 billion, shrinking by over $17 billion in a single day. On the 22nd, it fell another 3.86%, barely holding the $100 mark and closing at $100.07. As of November 27, Eastern Time, the company's closing price was $99.31.

The volatile share price sparked sensitive investor nerves and stirred public opinion. Reviewing various voices, the underperformance of earnings was mainly influenced by two factors: fierce competition in the e-commerce industry and the impact of the platform's measures such as the "10 billion yuan reduction" on short-term financial performance.

According to Guandian.com, this is the fourth time in the past five years that Pinduoduo's quarterly report data has fallen short of market expectations. At the second-quarter earnings conference in 2024, Chen Lei, Chairman and Co-CEO of Pinduoduo Group, stated that the company's profits would gradually decline starting from the third quarter, with no short-term rebound, and a long-term decline in profitability was inevitable.

The underperformance of the latest third-quarter report naturally led to different interpretations from the market. Were there unspoken hardships behind the proactive slowdown? What is the future outlook and is there still investment value? Will the past rapid growth be reproduced?

1

Is the low-price moat still stable?

To analyze a series of questions, we need to find answers from fundamentals.

First, in terms of business, Pinduoduo has transformed from a self-operated e-commerce platform to a platform-based one, shifting from a B2C model to a C2B model. Its revenue sources have shifted from pure merchandise sales revenue to online marketing services, transaction services, and merchandise sales revenue.

Taking the third quarter as an example, the company's online marketing services and other revenues were 49.351 billion yuan, an increase of 24% year-on-year. Online marketing services refer to the advertising revenue paid to the platform by merchants on Pinduoduo, who obtain search rankings and keyword rankings on the platform through online bidding, converting traffic into profits through greater exposure.

Transaction service revenue refers to the commission fees charged by Pinduoduo for merchants selling goods on the platform. In the third quarter of 2024, the corresponding revenue was 50.003 billion yuan, an increase of 72% year-on-year. Both volume and growth rate have exceeded service revenue.

In terms of expenses, third-quarter sales and marketing expenses increased by 40% year-on-year to 30.484 billion yuan, mainly due to increased expenditures on promotions and advertising activities; general and administrative expenses increased by 138% year-on-year to 1.806 billion yuan. In contrast, the growth rate of R&D expenses was much lower, increasing from 2.8473 billion yuan in the same period last year to 3.0634 billion yuan, an increase of less than 220 million yuan.

Total cost of revenue reached 39.7092 billion yuan, an increase of 48% from 26.8302 billion yuan in the same period of 2023, mainly due to increased fulfillment fees and payment processing fees. Total operating expenses were 35.3527 billion yuan, an increase of 39% year-on-year, mainly due to increased sales and marketing expenses. The company's gross margin was 60%, down about 5 percentage points from 65% in the second quarter. Over a longer period, Pinduoduo's gross margins were 78% at the end of 2022 and 61% at the end of 2023, representing a decrease of about 19 percentage points from the 79% gross margin in the third quarter of 2022 to the third quarter of 2024.

Warren Buffett believes that only companies with a sustainable competitive advantage can remain profitable in the long run, especially those with a gross margin of 40% or higher.

Reviewing Pinduoduo's development history, since its establishment in 2015, it has successfully entered the social e-commerce arena with its low-price strategy and viral "cut a price" marketing. By combining user consumption behavior with social behavior, it has created a new consumption scenario and brand recognition. In 2023, the number of annual active users exceeded 900 million, fully demonstrating the great success of its low-price strategy and differentiated positioning.

It can be said that low prices are the core competitive advantage supporting Pinduoduo's high performance growth. Then, the fluctuating decline in gross margin is naturally not good news. Does it mean that the competitive advantage is weakening and its sustainability is compromised?

In the market, Pinduoduo's low-price strategy has a low threshold and is not short of followers. In addition to JD.com's awakening wave of "price-busting" and return to low prices, according to "LatePost", Douyin E-commerce has also set "price power" as its top priority for 2024. At this point, Pinduoduo, JD.com, Taobao, and Douyin have all elevated "low prices" to a core platform strategy.

Taking JD.com and Taobao as examples, the former, with Liu Qiangdong's "return to the front line," has called on senior management, with Xu Lei "retiring" and Xu Ran taking over, making the low-price offensive even more aggressive. Precisely targeting Pinduoduo's 10 billion yuan subsidy, it launched a 10 billion yuan subsidy channel with the slogan "low prices every day."

Taobao, on the other hand, has learned from its more proficient bidding ranking system, with search evaluations fully returning to GMV, no longer focusing on order volume and DAC, but rather using low prices and price reductions as an important criterion for traffic distribution. Faced with competitors' aggressive strategies, Pinduoduo is undoubtedly under development pressure, and the stability of its low-price moat should be a profound question.

2

How much of the national subsidy dividend has been received?

Like a butterfly flapping its wings, the derivative effects of the above low-price competition became a refracting window during Double 11.

According to Star Chart data, during Double 11 in 2024, the cumulative sales of various platforms reached 1.4418 trillion yuan, an increase of 26.6% year-on-year. Tmall took the top spot in sales, followed by JD.com and Pinduoduo.

From Tmall's performance report, during the entire Double 11 period, a total of 589 brands achieved sales of over 100 million yuan, an increase of 46.5% year-on-year, with a record number of purchasing users.

According to JD.com's data, the number of Double 11 shoppers on JD.com increased by over 20% year-on-year, and the number of live streaming orders increased by 3.8 times. Over 17,000 brands achieved sales growth of over 5 times, and over 30,000 small and medium-sized merchants achieved sales growth of over 2 times.

Among them, home appliance sales were a major highlight. According to data from the Fudan Consumption Big Data Laboratory, among the sales proportions of household appliances on major platforms, JD.com ranked first with 44%, followed by Taobao with 32.3%, with the two platforms accounting for almost 80% of the market share.

The reason behind this is that platform subsidies can be stacked with national subsidy offers, contributing to this sales feast. In July 2024, the National Development and Reform Commission and the Ministry of Finance, along with multiple ministries and commissions, jointly arranged for special ultra-long-term treasury bond funds of about 300 billion yuan to support large-scale equipment upgrades and trade-ins of consumer goods. Strongly boosted, home appliance sales became a bright spot during Double 11: According to Tmall transaction data, during the event, core categories enjoying national subsidies, including air conditioners, refrigerators, washing machines, televisions, water heaters, gas stoves, and range hoods, became the seven fastest-growing categories on the first day of sales, with year-on-year growth of over 4 times compared to the first day of pre-sales during Double 11 last year. Among them, air conditioner sales grew by over 1200%, and refrigerator sales by over 1800%.

Unfortunately, compared to Alibaba and JD.com, the above proportions indicate that Pinduoduo did not benefit much from this wave of national subsidies. Whether this reflects long-term reliance on asset-light operations, inadequate self-operation, and brand effect to be enhanced are issues worth examining by the company.

It is noteworthy that this dividend "bullet" is still flying and there is a trend of expansion and reinforcement. On November 19, the spokesperson for the National Development and Reform Commission revealed that measures would be studied and proposed to continue increasing policy support for the "two news" (new energy vehicles and new-energy related industries) and expanding the scope of support in the future. The "renewal" policy is driving the continuous recovery of home appliance sales. The next step will be to conduct an assessment of the effectiveness of the policy supporting the "two news," summarize and continue good experiences and practices; timely announce and continuously promote the benefits of the "two news" policy for the public and profits for enterprises.

As early as the media communication meeting before Double 11, Jiang Luo, President of Tmall, mentioned that national subsidies would be a significant highlight of this Double 11, with a huge outbreak expected. Moreover, national subsidies should be a long-term strategy, with Tmall gradually following up with technology, inventory, services, and consumer protection, increasing investment to provide a one-stop solution for consumers in various provinces to enjoy national subsidy consumption experiences.

Watching competitors feast, it is not clear if Pinduoduo feels any regret. Of course, it has not been idle. As early as August, it announced the official launch of the "10 billion yuan reduction" plan, exempting merchants from 10 billion yuan in transaction fees over the next year.

Industry analyst Sun Yewen said that the "10 billion yuan reduction" plan is a merchant version of the 10 billion yuan subsidy plan, used to stabilize merchants, meaning that Pinduoduo needs to provide more benefits beyond traffic to stabilize merchants. However, in the national subsidy competition, many consumers have begun to find similar low-priced products and efficient services on Alibaba and JD.com, with platforms relying more on their own subsidies to maintain their ecosystem. It remains questionable how long Pinduoduo's low-price advantage can be maintained. After all, with subsidies for both users and merchants, Pinduoduo's third-quarter performance has already shown signs of slowing growth and pressure on gross margins. If national subsidies become normalized in the future, how Pinduoduo adjusts its subsidy strategy to adapt to new trends and prevent market share erosion should be a serious topic.

3

'Anti-counterfeiting' and 'bad money drives out good money'

Cold reflection on millions of complaints

Change is indeed needed. This Double 11 was not entirely smooth for Pinduoduo, as it not only missed out on a wave of national subsidy benefits but also faced questions from brand owners regarding "anti-counterfeiting." Earlier this month, the liquor giant Wuliangye criticized the platform, stating that some counterfeit products originating from the platform's "10 billion yuan subsidy" channel had been identified.

On November 1, Wuliangye also released a "Statement on Wuliangye's E-commerce Sales Channels" on its official website, listing multiple official self-operated stores, including those on Tmall, JD.com, Douyin, and Suning, but excluding Pinduoduo.

Wuliangye stated that according to activity data statistics for this month, out of the 148 bottles purchased by consumers online, a total of 18 bottles were identified as counterfeit, accounting for 12% of the total identified; among them, based on purchase receipts provided by consumers, 14 bottles of counterfeit products were found to originate from stores in the "10 billion yuan subsidy" channel on a major e-commerce platform, accounting for 77% of the total counterfeit products, while the remaining 4 bottles originated from stores on other e-commerce platforms. None of these counterfeit-selling stores were listed in Wuliangye's published sales channels.

This is not the first time Wuliangye has cracked down on counterfeits this year. As early as March 2024, it issued a statement stating that it had not yet opened a "Wuliangye Official Flagship Store" on Pinduoduo and had not authorized any merchants to use the Wuliangye name in store names on the platform. The company would continue to investigate and, upon discovery, pursue legal responsibility for the sale of counterfeit Wuliangye products on Pinduoduo.

It is not only Wuliangye. Recently, Guizhou Jinsha Ancient Wine Co., Ltd. also issued a statement stating that the company had received numerous inquiries from consumers regarding the authenticity of "Jinsha Ancient" products purchased on Pinduoduo and Taobao. After verification, most were found to be counterfeit products, seriously damaging the company's reputation and consumer rights. Currently, only the "Jinsha Ancient Official Flagship Store" on Pinduoduo and Taobao sells genuine products. The company will continue to investigate counterfeit products and take administrative reports, complaints, or legal action against illegal stores and e-commerce platforms.

The storm had barely subsided when Nongfu Spring's Zhong Shanshan delivered another blow. In an interview with the media on November 19, he stated that internet platforms like Pinduoduo were driving down price systems, which was not only "bad money driving out good money" but also an industrial trend that was a huge detriment to Chinese brands and industries.

In Zhong Shanshan's view, there is no free lunch in the world, and someone has to pay for low prices. E-commerce platforms that control traffic and channels are powerful and have more say in product pricing. The consequences of low prices seem to be borne more by the industry side.

Compared to Wuliangye's subtlety, the language of this former Chinese richest man is sharper, and some public opinions even claimed that he had exposed Pinduoduo's "underwear." Regarding who is right and who is wrong, whether objective or extreme, let time be the judge.

Objectively speaking, there are always two sides to a coin. From one perspective, in recent years, the platform economy has developed rapidly, leveraging data-driven and digital technology advantages to break through time and space constraints, efficiently connecting supply and demand, optimizing resource allocation, and injecting new vitality into economic growth.

On November 22, the State Council Executive Meeting pointed out that the development of the platform economy is crucial for expanding domestic demand, stabilizing employment, benefiting the people, empowering the real economy, and developing new productive forces. It is necessary to further strengthen overall guidance for the healthy development of the platform economy, increase policy support, expand the industrial internet platform system, support consumer internet platform enterprises in tapping market potential, strengthen the supply of data elements in the platform economy, promote the lawful and orderly cross-border flow of data, and enhance the consistency between policies in the platform economy and macroeconomic policy orientations.

From another perspective, behind the rapid growth of platforms, there have also been extensive developments and some gray areas. For example, the use of big data analysis for differentiated pricing occurs from time to time. Price wars between platforms are often achieved by squeezing the profit margins of merchants and manufacturers, and the supply chains established through scaling face hidden dangers of uneven profit distribution.

In this regard, the above meeting also pointed out that it is strictly forbidden to use algorithms to implement big data "price discrimination," strictly forbidden to use user characteristics such as age, occupation, and consumption level to implement differentiated pricing for the same product, improve the transparency of promotions and discounts, clearly state the conditions for obtaining coupons, the number of coupons issued, and usage rules, etc. It is necessary to regulate market competition order, improve regularized supervision systems, promote platform enterprises to operate in a standardized manner, compete in an orderly manner, improve quality, and promote mutual benefit and win-win results for all parties. Effectively protect the legitimate rights and interests of consumers and workers, and improve systems such as online consumer complaint disclosure and post-consumption evaluation.",

Specific and segmented search results show that quality, falseness, and after-sales service are the key words. Among them, 101,951 complaints involve quality issues, 121,965 involve falseness, mainly concerning false advertising by platforms and merchants; 71,774 involve after-sales issues, mainly focusing on the difficulty of safeguarding rights for problematic products.

Objectively speaking, consumers have diverse needs, and it is unrealistic to satisfy everyone. The above complaints may also be biased. However, the scale of over a million complaints should serve as a wake-up call for the platform. With low prices alone no longer sufficient to support high performance growth, Pinduoduo urgently needs to find a new growth curve in strategic planning that emphasizes differentiation and quality experience.

During the third-quarter earnings call, Chen Lei emphasized the importance of the long-term value brought by ecological investments and the continued focus on "new quality supply." The company plans to increase investments in compliance and governance, which is expected to enhance product and service quality, create more value for consumers, and may face short-term pressure on profitability.

Embracing a long-term perspective and setting long-term strategies is commendable, but it is crucial to match words with actions. Whether Pinduoduo can integrate knowledge and action, reshape its ecosystem, improve quality, create more value, and tell a compelling story about "new quality supply" remains to be seen. The company and its senior management need to provide clearer information, starting with listening to user feedback.

4

Rebuilding Ambitions: How to Fight the Protracted War?

It is certain that this process will not happen overnight. As Zhao Jiazhen, Co-CEO of Pinduoduo, said, high-quality development of the ecosystem and supply side is crucial for the platform's long-term development and creating long-term value for consumers. This is a lengthy and patient process. We are prepared for a protracted war, and external changes in the competitive environment will not affect our pace.

The willingness to engage in a protracted war with a clear initial intention is valuable and necessary. From a long-term perspective, what will be the next core label after low prices? This is an unavoidable question.

Reviewing strategic layouts in recent years, agriculture and the westward expansion of e-commerce are two key words. Public opinion analysis suggests that agriculture is a fundamental aspect of Pinduoduo's development. The latest third-quarter results show that the company continues to increase its investment in agriculture, making multiple investments in agricultural research and development.

For example, by increasing investment in agricultural research and technology courtyards, Pinduoduo promotes the modernization of agriculture and facilitates its entry into the digital era. Zhao Jiazhen said that thanks to firm investments in the supply side, the platform provides users with a richer variety of agricultural products, domestic products, and global goods, further satisfying their increasingly diverse consumption needs.

Regarding the westward expansion of e-commerce, according to statistics from the China Internet Network Information Center, eastern China accounts for about 90% of domestic e-commerce sales, while western China accounts for less than 5%. This significant gap is mainly due to the more developed internet infrastructure, higher marketization level, and stronger e-commerce logistics supply chain in eastern China.

In response, Pinduoduo pioneered a transit and consolidation model in 2022, and in 2023, it was the first to introduce free shipping to villages in western China. Recently, it also implemented a new policy to reduce transit fees for remote areas.

Industry analyst Wang Tingyan said that Pinduoduo's transit and consolidation model reduces shipping costs for consumers in remote locations, expands the sales radius of platform merchants, making previously overlooked remote western regions a new incremental market, and increases express delivery volume for logistics companies, reducing logistics operating costs due to increasing marginal effects.

Indeed, considering the intensifying competition in the e-commerce market, slowing user growth, and rising costs, although Pinduoduo's profit growth slowed in the third quarter, the double-digit growth rate still demonstrates strong competitiveness, all benefiting from the company's early strategic positioning and continuous strategic efforts.

As of September 30, 2024, Pinduoduo had cash, cash equivalents, and short-term investments of RMB 308.5 billion. In comparison, this figure was RMB 217.2 billion as of December 31, 2023. This substantial cash reserve is essential to support the company's long-term strategic focus.

During the third-quarter earnings call, Chen Lei said that beyond financial data, Pinduoduo values the long-term value brought by ecological investments. In the coming quarters, the company will continue to invest in strategies such as "new quality supply" and the "westward expansion of e-commerce," bringing longer-term returns to users, merchants, and the industry.

It is worth mentioning that perhaps due to the underwhelming performance during the Single's Day sales, Pinduoduo seems to be putting a lot of effort into the upcoming Double Twelve sales. According to Ebrun, Pinduoduo has kicked off the recruitment for its Double Twelve year-end promotion. Merchants can sign up starting from 10:00 AM on November 21. The promotion will run from November 22 to December 12, offering merchants various benefits, including search recommendation weighting, hundreds of millions of traffic support, promotion labeling, official subsidies, and continuing the "preferential" policy for brands during Single's Day.

Obviously, despite the slowing growth rate and proactive cooling-off measures, Pinduoduo is not resting on its laurels and has no shortage of new growth curves and stories. The key lies in translating these expectations and visions into reality.

After all, competitors are also active. Taking the upcoming Double Twelve as an example, Douyin started its merchant recruitment earlier than Pinduoduo, beginning on November 20, 2024, at 2:00 PM. Promotional activities include official discounts and direct price reductions, both funded by merchants, with no lack of strength. It remains to be seen whether Pinduoduo can successfully intercept Douyin's efforts and regain the upper hand.

One thing is certain: competition in the e-commerce industry is intensifying, requiring continuous innovation, market insight, and self-evolution.

Zhao Jiazhen admitted that when responding to certain changes, the Pinduoduo team was gradually aging and lacked sufficient capabilities. "This caused us to miss some macro opportunities, such as the macroeconomic policies that have had a significant positive impact on certain industries and consumption since this year. Limited by the historical capabilities of third-party platform operations, the team failed to fully capitalize on the benefits of these macroeconomic policies. As a result, to maintain the same product competitiveness, the platform had to incur significantly higher costs than other competitors, which will inevitably affect Pinduoduo's profitability in the current and future periods."

It is easy to understand but difficult to implement. While it is good to dare to expose one's shortcomings and reflect, as the saying goes, "a journey of a thousand miles begins with a single step." To reverse unfavorable situations and break through doubts, it is indispensable to have doers who integrate knowledge and action. Overall, with increasing regulatory scrutiny, fierce industry competition, and a maturing and rational market, the e-commerce industry has entered its second half. Competition is becoming more diverse, and price is no longer the only factor retaining the market. Blindly pursuing low prices has reached its limit. Returning to the essence of value, comprehensively emphasizing user experience and product reputation, and truly achieving the best quality-to-price ratio and cost-effectiveness are the general trend and the key to transforming enterprises and winning the protracted war. How much has Pinduoduo achieved, and how much more is needed?

This article is originally created by Rhodium Finance

For reprints, please leave a message