Can Temu challenge Amazon or become the next Amazon?

We came across a recent article on Temu, and thought some of the insights on Temu’s strategy are actually quite interesting. As the late-mover which managed to shake up the Chinese ecommerce market dominated by Alibaba and JD.com, Pinduoduo (and now Temu)’s development offers very useful lessons to all of us in the ecommerce ecosystem and beyond.

You can refer to Momentum Works’ “Who is Temu” report for structured analysis and insights about the company and read our book “Seeing the unseen: behind Chinese tech giants’ global venturing” for more case studies, analyses, and reflections.

Momentum Academy has also conducted a number of sharings and workshops on Pinduoduo / Temu’s culture, its key success factors, people and organisation practices. If you are interested in bringing such learnings to your organisation, please contact [email protected].

We have translated some snippets of the article. Some of the language can be quite crude but that’s quite typical for Chinese business reporting. Read on!

 

Will Temu repeat the success of Pinduoduo?

In the past, Pinduoduo opened up the ‘sinking markets’ (下沉市场 i.e.:  mass, lower income segments of the population) in a territory traditionally dominated by the two giants – JD.com and Alibaba, by onboarding a large number of white-label merchants and “customers outside Beijing Fifth Ring Road” (五环外 i.e. rural) and using “¥100 billion subsidies” (百亿补贴) to promote its brand. Now, Pinduoduo has grown into a leading ecommerce company with a market value of nearly $90 billion.

Meanwhile, Temu’s rise is seen as a replication of Pinduoduo overseas, except that Temu’s competitors are SHEIN and Amazon. Temu has attracted small and medium-sized merchants who left Amazon and, under the current high inflation environment, Temu has caught the attention of “sinking market” consumers for being “good value for money”.

However, behind Temu’s “low price” strategy, it has inevitably attracted some criticisms from both merchants and consumers about profits and quality. With Amazon towering over everyone, Temu is also flexibly adjusting its strategies – recruiting brand partners, improving product quality, and attempting to shake off the stereotype of low price equaling low quality.

Pinduoduo has already paved the way for Temu. It took Pinduoduo more than five years to surpass Taobao in terms of mobile DAU. When will Temu, which is less than a year old, be able to compete with Amazon?

Pinduoduo has been a challenger to Alibaba in China (For more refer: Who is Temu report)

 

How does Temu work with sellers?

In order to attract merchants, Temu’s “all-inclusive” policy (i.e.: Temu handles everything from uploading products to the website, managing pricing, customer service, marketing and fulfillment) and “zero onboarding fee, zero commission, zero rent” create a very low barrier of entry for small and medium-sized merchants and factory owners.

After merchants apply to join in the backend, they need to provide their business license and photos of the company’s actual operations, such as storefront or warehouse photos, and fill in the store name and link, product images, and quotations, and then wait for the review. The review time is usually 1-2 weeks.

“Try to inflate your sales figures or make your warehouse appear larger in order to increase the likelihood of passing the review process.’ 

Although the barrier to entry is low, merchants do not have the power to set prices. Temu is responsible for product pricing, marketing and customer acquisition, as well as fulfillment (which is provided by partners). As suppliers, merchants only need to stock their goods in the warehouse, forming a “merchant → platform→ overseas consumer” transaction chain, with Temu ultimately earning the difference between the purchase and sale prices.

Compared to Temu, the barrier of entry to sell on Amazon is higher – merchants need sufficient profit margins to support the cost of entry: Merchants need to pay a monthly rent of $39.99, FBA (Amazon’s warehouse and logistics services) fees, as well as operational and promotional expenses. Amazon will also charge a commission of 8%-15% depending on the product categories.

According to a long term Amazon seller, “A product that costs ¥13 can be sold for around ¥140-150 on Amazon, with a profit of ¥50 after deducting logistics, warehousing, and marketing costs.” A large profit margin is necessary in order to open a store on Amazon. This also means that small businesses with smaller profit margins and lower average order value are better suited for platforms like Temu.

The emergence of Temu has indeed attracted a large number of small businesses who have or are preparing to open stores on Amazon.”

 

How does Temu handle cross-border logistics?

International logistics is a high cost element for cross border merchants. Temu, however, does not charge merchants for logistics expenses at the beginning, which is tempting for small and medium-sized businesses.

Temu uses a three-part logistics system: First-mile transportation in China → international shipping → last-mile transportation in the United States. In China, merchants send goods to the Temu warehouse in Guangzhou, and the products are then shipped directly from Guangzhou to overseas by a third-party international logistics partner, such as J&T Express. The products are then delivered by local logistics partners in the US, such as UPS.

 

Temu runs on a consignment retailer model (For more refer: Who is Temu report)

 

However, four months ago, Temu made changes to its logistics policy. “Starting at 12 o’clock on December 12th, under non-JIT (pre-sale model), delivery fees will be shared equally between the merchants and the platform.”

JIT pre-sale model was launched in November 2022 to avoid warehousing issues affecting shipping efficiency. In other words, sellers only send their products to Temu’s official warehouse in China within 24 hours of receiving the actual sales order (instead of stocking up products in the warehouse in advance). 

The change in logistics policy means that the shipping fee of the first-mile logistics in China will now be shared by Temu and the merchants; whereas for the last-mile logistics in the US, the standard delivery fee will apply to all orders (regardless of order value). They will also increase the minimum order value threshold for express delivery, and will not announce the delivery time limit. 

Most of Temu’s Standard shipping options are free, while Express shipping costs $12.9. For orders above $129, free shipping applies. Most deliveries take 8-10 days, and Temu offers a $5 discount for orders taking more than 16 days. On Amazon, “free shipping” is only available to Prime members, who pay a monthly fee of $14.99. For non-members in the US, shipping for a single piece of summer clothing costs nearly $6. 

For most consumers, Temu’s logistics speed is comparable to that of most cross-border ecommerce platforms, and there are additional subsidies for deliveries taking longer than expected. Therefore, consumers who don’t need their products urgently are naturally more inclined to choose Temu over Amazon.

 

How will Temu attract brands to challenge Amazon?

In comparison to Temu, Amazon’s high barrier of entry and operating costs seem to be more suitable for brands and merchants with higher profit margins. It also caters to consumers with a relatively higher consumption power. However, it is less friendly to small and medium-sized merchants and the “sinking market” consumer group – this has opened up opportunities for Temu. 

Just like in the Chinese ecommerce market in the past, when Alibaba focused its resources on Tmall brand merchants, Pinduoduo took advantage of the opportunity in the sinking market. Currently, the US ecommerce market lacks a leader in the mass / low-price market, and Temu’s entry fills this gap.

But it is not easy to challenge Amazon or become the next Amazon. Temu is rapidly growing and adjusting its position.

According to Pinduoduo’s early experience, the issue of ‘bad product quality’ is the result of introducing a large number of white-label merchants in the early stages of the platform. Therefore, Pinduoduo attracted brand merchants with the “¥100 billion subsidies” in 2019. Now, Temu’s strategies are the same.

After about 7 months since Temu went online, it started to introduce KA (Key Account) merchants, announced the requirements for KA merchants, and set up a dedicated department to connect with well-known domestic brands in China, brands registered on Amazon and independent websites to address the needs of merchants one-on-one. Currently, brands such as Xiaomi, Lenovo, Anker, Deli, Pisen, and MOBIGARDEN are on Temu. 

In addition to mature brand merchants, Temu also encourages more Chinese manufacturing companies to go abroad. At the beginning of its establishment, Temu established the “2022 Duoduo Going Abroad Support Plan” （2022多多出海扶持计划）. In March 2023, the special team went deep into 100 high-quality industrial belts in China. Temu also provides integrated solutions for merchants to help Chinese manufacturers defend their rights in overseas markets. 

In mid-March, at the Global Cross-border Ecommerce Exhibition held in Shenzhen, Temu’s brand investment director Jia Xuan (稼轩) called on Chinese brand merchants join in. He said that Temu is not selling at low prices but is meeting the needs of users at different levels. He welcomed sellers who were building brands or had existing brands to join. Compared to Amazon, Temu merchants do not need to buy traffic, the marketing costs are low, and the platform’s consignment model will also reduce barriers to entry. 

In fact, although Temu is known for its low prices, its initial quality control was clearly stricter than that of Pinduoduo: Temu requires some categories of products to be sent to its Guangzhou Panyu office for review before sending to the warehouse for stocking. Today, Temu’s average order value has increased from the initial $20-25 to over $35.

Now, Temu’s growth path is no different from Pinduoduo’s in the past. The story of Pinduoduo’s victory may be happening right now with Temu.