Is Pinduoduo on Its Way to Becoming a Global Company?

Pdd (NASDAQ: PDD), a rising star in China's e-commerce industry -- and better known as Pinduoduo -- has come from nowhere to become a leading rival to Alibaba Group and JD.com in that market.

And now, it is setting its sights on a larger stage: overseas markets. Does this young upstart have what it takes to become a successful global e-commerce company? Let's explore this further.

Customers shop online.

Image source: Getty Images.

Pinduoduo has been wildly successful in China

Launched in 2015, Pinduoduo is already the second-largest e-commerce platform in China, behind only Alibaba.

One of the reasons for that success is its unique approach to e-commerce. From the start, instead of focusing on search-based e-commerce -- the conventional method used by giants like Amazon and Alibaba -- the company focused on social e-commerce.

That is, it encourages users to invite family and friends to shop together and share their purchases via WeChat, China's leading social networking platform. This approach helps build a sense of community, which in turn improves user engagement. Shoppers also get discounts from manufacturers by buying products together. And that brings us to the second important factor in its success: low prices.

Pinduoduo typically works with manufacturers directly, bypassing all the intermediaries to offer shoppers rock-bottom prices. But that's just one part of the story. Thanks to its community and social element, the platform further aggregates orders from multiple users into bulk purchases. Doing so kills two birds with one stone: Manufacturers get larger orders, and users get even lower prices.

Combining social commerce and low prices, Pinduoduo quickly became the preferred platform for shoppers looking for great deals. And in less than eight years, the company has grown into a giant with close to 900 million active buyers, 131 billion yuan ($18.9 billion ) in revenue, and 40 billion yuan ($5.7 billion) in adjusted net income in fiscal year 2022.

It's expanding into overseas markets via Temu

Pinduoduo is close to the ceiling on its expansion in China, with a base approaching 1 billion users. So it's turning its attention overseas to keep growing, with the U.S. market as its launchpad.

As the new guy in town, Temu -- Pinduoduo's U.S. operation -- has a brutally simple strategy: offer unbeatable prices on a wide selection of products. Leveraging the experience and the supply chain of its parent company in China, the start-up could have just what it takes to stir up the competitive landscape in the U.S.

And to give new users the peace of mind to make their first (and subsequent) purchases, Temu offers a variety of discount vouchers and free shipping deals -- some customers even get their first purchase for free. And it provides a full refund for damaged or lost packages, 90 days for free returns, and protection on fake products.

In other words, it lets overseas customers enjoy what Chinese users experience on Pinduoduo's platform. So far, there are early indications that U.S. consumers love the newcomer. Temu has consistently ranked among the top-three of all app downloads in the Google Play Store and Apple App Store in the first quarter of 2023.

Still, it's early for Temu, and it has much to improve upon before becoming a serious challenger to incumbents like Amazon or Walmart. For example, it takes 7 to 15 working days for customers to receive their orders on Temu, which pales compared to Amazon's free one-day or same-day delivery. And the platform has had to deal with counterfeit and low-quality products.

In short, there are early signs that Temu is gaining traction in the U.S. despite the limitations in areas like shipping time and product quality. Meanwhile, its early success in the U.S. could help it enter new markets like Australia, New Zealand, and Canada.

What does it mean for investors?

Before Pinduoduo's founder and CEO Colin Huang stepped down in 2021, he wrote that Pinduoduo aims to be a global company. At that time, the young Pinduoduo had just proved its business model in China but had yet to reach its current market strength. It would take another year before it launched Temu in the U.S. Today, Temu has demonstrated early success in replicating Pinduoduo's China playbook overseas.

Whether it can establish itself as a serious competitor to the likes of Amazon and Walmart remains to be seen. Still, Pinduoduo is on its path to becoming a global company and certainly one of those to watch in the coming years.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Lawrence Nga has positions in Alibaba Group and Pdd. The Motley Fool has positions in and recommends Amazon.com, JD.com, and Walmart. The Motley Fool has a disclosure policy.