If most companies bought five commercial slots during the Super Bowl only to run the same ad five times, it would seem like a waste. When Temu did it this year, it was just a reminder of its business model. The Chinese e-commerce challenger is trying to become a household name among American consumers by focusing on sheer volume rather than quality to increase its market share.
Temu has been a near-constant presence in Americans’ social media feeds and even their routine web browsing for more than a year, promoting the lowest-cost options of everything from shower caddies to camera drones. This has led to strong growth for PDD Holdings (NASDAQ: PDD), Temu’s parent company, whose stock price has risen more than 50% in the past year. For consumers focused on the lowest-price marketplace, Temu has become an attractive alternative to Amazon‘s (NASDAQ: AMZN) e-commerce offerings.
The Legacy of Chinese Challengers
Temu isn’t the first Chinese e-commerce challenger to take on Amazon. When Alibaba‘s (NYSE: BABA) AliExpress service launched in 2010, Amazon’s response was to do — nothing. That’s because there is nothing a U.S. company can do to remain competitive with a Chinese counterpart within the People’s Republic of China (PRC). Ultimately, this trend led to Amazon shuttering its e-commerce division in the PRC in 2019, and in some ways admitting defeat to Alibaba in China.
However, this did little to damage Amazon at the time, as the company’s sales rose 20% in 2019. AliExpress, on the other hand, never achieved real mainstream consumer popularity in the United States. Today, AliExpress fills a niche as a popular platform for “dropshippers” facilitating the resale of large quantities of Chinese goods on Amazon for a generous mark-up.
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Temu specializes in offering the cheapest possible version of every good a consumer can imagine. Between AliExpress, Chinese fashion retailer Shein, and domestic e-commerce company Wish, American shoppers know the reality of “you get what you pay for.” It’s unlikely that Temu will steal much revenue from Amazon, as the two companies approach online retail in fundamentally different ways.
Navigating the Risks
Currently, there exist three major threats to Temu’s longevity and relevance in the e-commerce space. The first is tensions between the U.S. government and Chinese companies, particularly ByteDance and its TikTok platform. The U.S. Senate is reviewing a bill that would force ByteDance to divest TikTok, signaling a renewed willingness to regulate Chinese corporations in the U.S. market. Temu could face similar scrutiny if its practices come under the spotlight.
The second risk lies in Temu’s unsustainable business model. Several analysts estimate the company is losing significant amounts annually due to its unprofitable pricing strategy and lack of necessary infrastructure for expansion.
The third risk revolves around reputation. With a C+ rating from the Better Business Bureau and complaints to the Federal Trade Commission, Temu’s standing has suffered since entering the mainstream e-commerce space.
Evaluating Investment in PDD Holdings
I would unequivocally say no. While PDD Holdings has shown strong performance in recent years, its long-term potential is dubious. American investors are restricted to American Depository Receipts on the New York Stock Exchange, limiting ownership rights. Coupled with the lack of transparency in earnings reports and institutional risks, investing in PDD Holdings is not advisable.
Viktor Zarev has no holdings in any of the stocks mentioned. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool has positions in and recommends Amazon. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.