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Santa Claus from China

By: Alexander Graf

Until January 2023 my ecommerce world was still in order. Common sense among ecommerce veterans was: in most established markets Amazon or a similar to Amazon business model was winning due to its excellence in all three main online retail pillars: price, assortment, and availability. If you want to beat Amazon & Co you have to become better than them in ALL three pillars. This view changed when I started to understand the impact of Temu’s business model which came on top of the already disruptive SHEIN.

The retail industry in Europe is only just beginning to understand the impact of those models, so I looked for some input from the US market as those models use even more resources to enter the US. But I was shocked at how much the US market still needs to learn. With arguments that were used 15 years ago to contradict the undeniable demise of department stores, Sears and many others in the early years of Amazon, ecommerce veterans are now playing down the potential impact of Temu. But let’s start with the reasons why we are witnessing the next phase of ecommerce now.

In March 2023, @Joe Kaziukėnas of Marketplace Pulse, published an article that described the three stages of retail in regards to Chinese production.

  • Phase 1 (1980s) was Made in China: western buyers purchase products manufactured in China and put them in the market in the US.
  • Phase 2 (up until today) was Sold by China: products manufactured in China are sold directly by Chinese retailers in the US via western platforms such as Amazon. More than 50% of Amazon’s offering today is directly managed by Chinese producers/retailers.
  • NEW Phase 3 (moving forward) is Marketed by China: Chinese players are no longer reliant on Amazon & Co. Why do they still need an aggregator that adds 50% to the price to cover space and logistics? The Chinese are dispensing with these intermediaries and marketing their products themselves, primarily via TikTok and their own apps (SHEIN, Temu) and beating western competitors on the most important factor: price.

In phase 3 of retail, customers are not relying on the “middle man” infrastructure anymore. They are more or less directly communicating with the producers, which leads to a retail world that can be described best as factory to consumer (F2C). This world comes with many advantages that the old retail world, including Amazon, cannot offer. Some of those are:

  1. Radically reduced costs since production capacity can be aligned with demand. For example, 3,000 – 5,000 new SKUs are created for SHEIN per DAY since manufacturers have a channel where they can test new products within hours and see if demand picks up before production is even started. This also leads to a much bigger selection of products.
  2. Radically reduced costs as logistic touch points are minimized: instead of touching the merchandise many times in different global, regional and local warehouses, orders are centrally orchestrated in China including the final package which is shipped directly from the importing warehouse to the customer.
  3. Radically reduced costs for sellers on marketplace fees compared with western platforms. This includes ads, listings, revenue fees etc.
  4. Offering a true discovery commerce experience that leads to 45 minutes or more spent per day on their ecommerce app. Meanwhile Amazon and Walmart are expecting their customers to type in a keyword in order to show their buying intent.
  5. Leveraging trade loopholes, that lead to minimized customs fees and VAT spend. According to @Tracy Wen Liu at Wired, “Temu currently takes advantage of a trade loophole that allows for duty-free shipments up to $800 into the US.”

How can that be, while SHEIN and Temu are importing hundreds of millions of packages to the US per year as @Josh Zumbrum described in his Wall Street Journal article?

After researching and participating in the global ecommerce market for over 20 years this is by far the craziest thing I have ever seen. Compared to this, even the rise of Amazon looked rather slow. Temu is breaking up with “best price, biggest selection and fastest shipping” and replacing it with a “much bigger selection, much better price and slow shipment” paradigm that customers are adopting in such a rush that I am asking myself if Amazon’s multi-billion investment in fast shipment logistic infrastructurewas maybe a stupid move.

Who needs that in a F2C dominated world? Even with a better handle on import custom fees and a level game on the VAT side, Temu’s products would be 30-50% cheaper than the same products on Amazon. Who wouldn’t wait a few days to secure this discount? Is this understood? From what I could read so far on the topic, I am not so sure.

Reuters’ @Arriana McLymore writes that Temu and SHEIN are “drawing millions of window-shoppers to their websites this holiday season, but they far lag market leader Amazon.com where it counts – turning those visits into actual sales.” This view is referring to a market that is very similar to the “sold by China” and not “marketed by China” phases I mentioned earlier. We are now in the platform economy, where selling products is just a measure to collect even more consumer data which then could be offered through marketing programs to sellers. We know from TechHQ’s @Dashveenjit Kaur that Temu is the “second most popular e-commerce app in the US, behind only Amazon Shopper.”

Temu is gathering data quicker than Amazon which is why Temu’s parent company, PDD Holdings, overtook online giants like Alibaba only five years after its foundation. And to be honest, Temu is turning these visits into lots of sales, leading to $5-10 billion in revenuein the US alone in 2023 – only one year into the business.

Reuters also writesthat Temu is “successfully taking on U.S. dollar stores including industry leader Dollar General.” I disagree that this revenue comes mainly out of the dollar store’s pockets. According to the article, as of November 2023, “Temu accounted for nearly 17% of market share in the United States within the discount stores categories.” This revenue comes more from Amazon than from dollar stores already. It’s one of the oversights I am experiencing in those discussions, that experts only see “cheap stuff” on Temu, but in reality almost everything we can move by hand comes from Chinese manufacturers these days including the high quality merchandise, like your new smartphone, drone, battery powered LED lamp, etc.

@Tracy Wen Liu has another point saying that the main limitation Temu faces is not the counter offer of Amazon or Walmart, but limited logistics capacity. Sellers allegedly “aren’t able to ship their products because there isn’t space.” Analysts are also concerned that due to low prices, Temu “may struggle to turn a profit” and another articleestimates that Temu is losing $30 per order. I don’t necessarily agree with this estimation. I believe it would be closer to losing $10 per order, although with two million orders per day processed in December, that still amounts to a big loss.

But isn’t there more to consumer decision making than just price? @Julia Waldow at Modern Retailwrites that for brands looking to compete on price, “there is little hope. But price is just one of the variables.” While it’s true that Temu is also “changing the way advertising is conducted,” my recommendation is to really look into potential retailers’ unique selling points and adapt quickly.

The retail market lost ten years during Amazon’s reign, still believing more curated assortment (less) and offline service (stores) will convince customers to finally come back. If they do the same now in a F2C world, this is just a guaranteed path to defeat. F2C is here to stay and by mixing it with a true approach to discovery commerce, all search based commerce approaches might run into a problem.

Please ignore for a moment the negative economic and ecological impact of a Temu/SHEIN dominated retail industry in the US and Europe. Here are the questions I am asking clients in strategy meetings to help understand the impact this kind of marketplace is having on their businesses. What is changing now and how are you affected by…

  • An upside down supply chain where products can be created and shipped within days.
  • Discovery driven commerce where customers don´t need to actively search anymore but are truly inspired.
  • A world where every business model that needs to make money based on a product margin eventually pays high fees to the platform that owns customer access.
  • Where the speed of development (app, product data, etc.) renders every board meeting decision useless as at the time the problem statement is agreed on, this specific problem is not relevant anymore.

When we started our Spryker platform I quickly adopted the quote “innovate or die.” It never felt more relevant than now. Santa Claus from China is knocking – 13 million actually.This is the number of sellers active on PDD Holdings.

When starting to analyze Temu over a year ago I thought it would be another passing brand. Now it’s started phase 3 of ecommerce. Now even well developed platforms look like old slow moving giants in comparison. Regardless of how we feel about this change, we need to accept that it’s something businesses will need to adapt to.

What do you think? Am I too pessimistic? What do you believe the future holds for Temu and other marketplaces of tomorrow?