Amazon e-commerce siege war

Hello, fellow Olio enthusiasts! 👋

Happy Hump Day and welcome to the 22nd edition of Weekly Olio - your weekly dose of giggles, wisdom, and a sprinkle of intrigue with our tantalizing thought piece (yes, we're talking about Publisher's Parmesan here). 🤭

A big shoutout to all of you for the fantastic support and feedback. Let's keep the momentum going in the days and weeks ahead! 😊

Now, hold on to your hats as we embark on a journey into the world of Temu in today’s Publisher’s Parmesan. Temu is the America-based online marketplace that's got tongues wagging for its jaw-droppingly cheap products shipped all the way from China. It is the brainchild of PDD Holdings Inc., a Chinese powerhouse known for Pinduoduo.

As we all know, China leads the world in online retail, with its e-commerce firms making global expansions. With two of its major players (Temu and guess the other one! 😛) vying for dominance on the international stage, we can't help but wonder which platform will ultimately rule the e-commerce world.

Will come to that, but let’s first start with the curation.

Oh, and before you continue, it's time for some sponsor spotlight! Don't worry, it's not clickbait, it's just our way of 'feeling the ad-vantage'. So, do click, and help us keep the lights on and the puns rolling! 😀

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The Quote󠀢 💭

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The Short Read 📝

Bangladesh’s food delivery startups struggle as funding dries up - by Rest of World

The changing dynamics of discounts and offers in the food delivery industry, coupled with the lack of investment opportunities for local startups, have posed significant challenges to the sustainability and competitiveness of homegrown players in Bangladesh's food delivery sector.

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The Long Read 📜

How to build a winning paid membership program? - by Connie Chan

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Publisher’s Parmesan 🧀

Amazon e-commerce siege war

Disclaimer: This article was originally published in Chinese by Runze Dai of Leiphone.

Amazon is busy raising its average order value, letting go of the vast ‘sinking markets’ (i.e., lower-income segments of the population) with an average order value of less than $40. For Chinese cross-border e-commerce players, this is a rare opportunity. We feel, that the “Amazon e-commerce siege war” is quietly beginning, and Temu is leading the charge.

1. Temu started by copying SHEIN’s playbook

In May 2022, Pinduoduo had a cunning plan - they set up an office right across from SHEIN's building in Guangzhou. Their aim? To poach SHEIN's employees and suppliers, and they went all out to make it happen.

Temu, Pinduoduo's brainchild, spared no expense in their pursuit. They hired headhunters and offered them crazy commissions, more than double the norm. As if that wasn't enough, they dangled irresistible salary offers, over three times what SHEIN employees were making, to lure them in.

But Temu didn't stop there. They sent their business development team on a mission to woo suppliers from SHEIN. They scoured clothing factories one by one, leaving no stone unturned.

SHEIN had to respond, but it wasn't easy. With tight deadlines, slim margins, and inventory concerns, their sellers were stretched thin. Some factories on the verge of giving up saw Temu as a lifeline and reached out to them.

Temu played their cards right. They promised top-notch services and sellers only had to cover part of the warehousing costs. Desperate to clear out old inventory, many sellers took a chance on Temu and were pleasantly surprised. Within two months, they had moved products that had been gathering dust for years, without breaking a sweat.

Word spread like wildfire in the industry, and small and medium-sized sellers rushed to join Temu. The team at Temu was working around the clock, reviewing and approving seller applications late into the night.

Temu's strategy was simple but effective - using money to buy traffic and attract users and sellers. Their aggressive advertising campaign, including massive spending with Google, made waves. Rumour had it that some employees at Google's advertising department were struggling to meet Temu's lofty sales targets.

In just two months, Temu went from being a curiosity to a force to be reckoned with in the industry. The tables had turned, and SHEIN was now closely watching their rival's every move, as the battle for e-commerce dominance unfolded in an intense showdown between these two giants.

2. Temu then opted for a pivot - from non-standard products to standard products

Temu initially positioned itself as the "overseas Taobao" with a focus on fashion and women's clothing, but it faced challenges. Firstly, the marketing cost of using women's fashion to attract customer traffic was too high, such as the placement during the Super Bowl. Secondly, there was a severe shortage of fashion clothing supply for cross-border expansion, and SHEIN had taken up a lot of low-unit-price production capacity.

After several months, Temu realized that SHEIN's business seemed unaffected, and the overlap between Temu and SHEIN users was only 2%. This meant that Temu needed to pivot in a timely manner.

SHEIN had certain advantages that were difficult to match in the short term. It had a large number of loyal users who had been with SHEIN for up to ten years, and a 90-day repurchase rate of up to 60%. SHEIN also had a highly regarded supply chain system within the industry, which was difficult to replicate. Many attempts to copy SHEIN's success failed because they lacked the large order volume to support it. Additionally, SHEIN had formed strong partnerships with suppliers and logistics providers, such as Zongteng Group, which had been a loyal partner for many years.

In contrast, Temu was a newcomer in the US market, which was already challenging. Temu's attempt to recruit high-salaried employees from SHEIN did not yield the expected results, as most of these employees were in execution positions and did not participate in decision-making. Temu realized that daily necessities priced at a few cents had extremely high sales and did not require extra marketing costs, and this category was the foundation of Pinduoduo's success in challenging Amazon's dominance on standard products.

As a result, Temu shifted its focus to household and personal care products, gradually increasing its average order value to $40. To increase the repurchase rate, Temu used various methods, such as including promotional pamphlets directly in the shipping packages, which resulted in a high repurchase rate of 50%. Through massive subsidies and burning to test out product categories, Temu's first-order conversion rate reached 10%, far exceeding the industry average of 2%.

However, behind its apparent success, Temu had paid a significant cost. Some analysts estimated that as of Black Friday last year, Temu was losing $30 per order.

3. Temu leveraged human nature to test its partners

Temu adopted a strategy similar to DuoduoMaicai (Pinduoduo's fresh grocery subsidiary in China). DuoduoMaicai is known for its ruthless cost control measures, including simple product selection criteria of "delicious and cheap", giving money directly to third-party intermediaries for supplier management, saving on rental costs by having provincial business leaders work in the warehouse, and other cost-saving measures.

Essentially, Temu's approach includes burning and subsidizing aggressively in the early stage to attract sellers, cutting operating and customer acquisition costs in the later stage, and ultimately achieving profitability.

Amongst this, one of Temu's strategies is to leverage human nature, particularly greed, by creating an atmosphere where joining Temu is portrayed as a way to get rich quickly. They publicize success stories of sellers who have made significant sales on the platform, which attracts more sellers to join.

Temu also controls costs through its system. They have implemented a special bidding system for sellers that encourages lower prices to increase traffic and sales volume. They also have a pricing system with logistics providers where prices only decrease and do not increase within a month, and price reductions are retroactively applied to unpaid items. While this saves costs for Temu, it may raise concerns during peak seasons when logistics prices typically rise across the industry.

Temu's contracts with partners are reportedly inflexible, with no exit mechanism and many obscure clauses that transfer risks, including force majeure, to the partners without assuming any responsibility. This has led to complaints and protests from partners who feel manipulated and oppressed.

However, Temu has also made some adjustments in response to partner feedback, such as allowing price adjustment frequency akin to industry standards and showing more flexibility in certain areas. Despite the challenges and controversies, Temu's strong organizational ability and execution have allowed them to implement their strategy effectively.

4. Temu still claims to be a startup

Under Abu's leadership, Temu has a strong combat spirit and high effectiveness. Abu is known for her personal involvement, often working long hours from 8 am to midnight, which sets an example for her team. The Temu team, which was established in early 2022 with 200 people, has now grown to nearly 1500 people, including core members from DuoduoMaicai, who are often referred to as the "God of War" in the industry, such as Abu, Grape, and "Winter jujube".

Pinduoduo, despite being a trillion-dollar company, still positions itself as a startup. The organizational structure of Pinduoduo is flat, with daily decision-making responsibilities shared among Colin Huang, Chen Lei, and Abu, while others are responsible for implementation. This management approach ensures high consistency in strategic direction and efficient execution, which has been a key factor in Pinduoduo's success in the grocery/ fresh business.

DuoduoMaicai, and subsequently Temu, follow a "small central and large local" management model, where provincial leaders have a high degree of autonomy and can mobilize resources flexibly. This autonomy allows for quick decision-making and efficient execution, similar to the "culture of autonomy" advocated by Duan Yongping during his time at BBK. This flat management style and autonomy among employees have allowed Temu to complete the development of its platform in just over half a year.

The three-level management system at Temu, with Abu as the first level, "Winter jujube" and "Grape" as the second level, and category managers as the third level, along with lower-level employees, keeps internal communication costs low and improves work efficiency. Temu minimizes internal meetings and uses concise written summaries for reporting, which further enhances its efficiency compared to traditional internet giants that often have multiple layers of information alignment among departments.

5. Temu follows an endless internal competition

Temu's strict internal competition mechanism, known as the "horse racing" approach, creates a sense of fierce competition among employees. Projects are assigned to different teams, and the abilities of each team are judged based on their final results, with the losing teams being eliminated. Even high-level executives like "Grape" and "Winter Jujube" are at risk of demotion if their team's performance does not meet the company's expectations.

Furthermore, Pinduoduo follows a strict assessment mechanism for customer conversion, with teams being regularly monitored on their conversion data. Teams with low conversion rates may be broken up and merged with higher-performing teams, and new teams are established to continue the competition. This creates a constant drive for teams to perform well and maintain high conversion rates.

In addition to internal competition, Temu also implements a 721 elimination system, where a certain percentage of employees in each project are eliminated, and not all employees receive full bonuses. This adds further pressure on employees to perform at their best and meet the company's expectations.

Within Pinduoduo, there is also intense competition among different business departments for suppliers, as they strive to secure the lowest prices for products. Despite the seemingly harsh management approach, there are few objections within the company, as Pinduoduo has focused on finding talent who can adapt to the company culture through its management system.

It is important to note that while this approach may seem intense and overly harsh to outsiders, it is part of Pinduoduo's unique corporate culture and management style, which emphasizes competition, performance, and results.

6. Temu seems like a perpetual efficiency machine

Pinduoduo had a unique way of recruiting and managing its employees.

During recruitment, Pinduoduo asked its candidates common questions about their background, such as whether they were locals, the size of their families, and their parents' occupations. They discovered through big data analysis that young people from poor backgrounds with strong financial needs were often more eager for success than some local residents in first-tier cities.

Pinduoduo used this knowledge to screen out qualified candidates and maximize their strengths through internal competition mechanisms. The company offered salaries that were 2-3 times higher than the industry average, making it difficult for employees to leave. In fact, when a salesperson earning 30,000 yuan a month tried to resign, they were offered 60,000 yuan to stay, a common practice at Pinduoduo. For executives, the company even offered rewards of several million or even tens of millions of yuan in the form of stock if a major project met its performance targets.

However, Pinduoduo's management style was hierarchical and focused on adhering to duties. The company emphasized that only hierarchy mattered, not right or wrong. Colin Huang, the founder and leader of Pinduoduo, stated that there was only one leader in a team, and while subordinates could express differing opinions, they could not challenge the views of their superiors. Disagreements between peers were to be resolved by seeking the judgment of a superior rather than creating internal strife.

One of Colin Huang's long-time employees, Abu, was known for closely following his personal will, even replicating his personality, thinking, work methods, and speech patterns. Some people commented that Abu was somewhat authoritarian, and her speech carried a strong sense of oppression.

Pinduoduo's management style also led to siloed departments and a lack of understanding among employees. Different teams and departments operated in almost complete isolation, with little knowledge of each other's work or even each other's real names. Employees were expected to be "efficiency machines," focusing on executing their assigned tasks without much understanding of the broader business or strategy.

7. Temu got the timing right

It was a time of change for the e-commerce industry, and Temu's timing was perfect. Amazon, the giant in the field, was facing challenges with weak revenue and a lack of enthusiasm. They had tried various methods to improve performance, from layoffs to cutting off non-core businesses, and increasing customer spending. However, some in the industry believed that the new CEO was more concerned about financial results than innovation.

Meanwhile, SHEIN, a prominent player in the market, was facing its own struggles. The company had been in a "lonely struggle" for years, and its CEO, Xu Yangtian, was feeling lost and negative about work. There were debates among investors and top management on how to respond to the emerging threat of Temu, a new entrant in the e-commerce market.

Rumours were swirling that Temu had leaked information to the market about the fluctuating exchange rates, and how it could be leveraged for profit. This attracted early sellers who could ship goods from China to the United States and make a significant profit. In addition, Temu benefited from the decrease in cross-border logistics costs, with air freight prices dropping significantly.

Furthermore, Temu had the support of J&T, a logistics company that had quietly expanded overseas, entering markets like the United States and Australia. This partnership provided Temu with a competitive advantage in logistics and fulfilment.

With everything in its favour, Temu made waves wherever it went. It directly targeted SHEIN upon entering the market, taking advantage of the timing, location, and people.

Temu's entry into the global e-commerce market, backed by Pinduoduo and China's robust supply chain, has disrupted traditional players like Amazon. With its unique business model and aggressive expansion strategy, Temu has quickly gained market share in multiple countries, leveraging favourable factors such as timing, location, and logistics costs.

Despite its current size, many insiders believe that Temu will continue to grow rapidly and reach a GMV scale of tens of billions of dollars within a few years. Temu's ambition, supported by Pinduoduo's financial strength and China's industrial capabilities, signals a new era of competition in the global e-commerce landscape.

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