When Will the CCP Stop the Music for Pinduoduo?

Jason M. Kingdon
28 min readMay 1, 2021

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Last Updated: April 27th, 2021

Chinese consumers have flocked to Pinduoduo, Inc.’s (PDD 拼多多) social e-commerce model. With its new arm, Duo Duo Mai Cai (DDMC 多多买菜), PDD has made a foray into the grocery market in an attempt to move upmarket. But in a crowded space with heavy subsidies involved to attract customers, how long can the party go on before the money runs out — or worse, the government steps in?

PDD is now arguably the largest e-commerce concern in China, with 788 million annual active buyers across its various platforms in 2020, placing it ahead of rival Alibaba.[1] PDD has more than 50% market share of the social e-commerce space with its secret sauce being the Community Group Buying (CGB) model.[2] Its social elements leveraged its mini-programs in WeChat (MAU of 1BN+) and the gamification of its in-app offerings to cater to previously untapped lower-tier markets and price-conscious consumers. This impressive growth is attributable to covering rural areas offering “group-buying features that encourage social sharing.”[3]

After bringing the previously analog Chinese concept of Community Group Buying online, PDD successfully created a streamlined logistics network allowing for faster transfer of information, benefiting all parties involved. This new demand aggregator model, which sends real-time demand to the supply side, spawned the Consumer-to-Manufacturer (C2M) model. The C2M demand forecasting that powered CGB allowed PDD to effectively bestow benefits on both its end-users and backend suppliers. The platform also gave manufacturers direct insight into consumer behavior and helped them customize their products.

One caveat to Pinduoduo’s strategy is that user traffic doesn’t directly translate to revenue. When you look at the financials, Alibaba’s $62 billion in Chinese retail business during 2020 far outstripped PDD’s $8.6 billion that year.[4] Meanwhile, net loss at PDD totaled $1 billion in 2020 after the e-commerce upstart escalated its subsidy war against its rivals — including the new “battleground” of fresh produce delivery, which took off during the COVID-19 pandemic.[5] And even though Wall Street is bullish on the growth of PDD via the publicly traded equity’s new grocery arm, questions abound on whether the party will last if PDD takes away its punch bowl of subsidies, in addition to concerns around the big government-shaped elephant in the room.

How it Began

The company was initially founded by Zheng Huang (黄峥), an ex-Google software engineer, in early 2015 as Pinhaohuo (拼好货), a platform whose model consisted of buying fruit in bulk and selling it to consumers.[6] Joining him were some of his former colleagues, including current members of PDD’s management team like Qin Sun (孙沁), Lei Chen (陈磊) (first CTO, now CEO), Zhenwei Zheng (郑振伟), and Junyun Xiao (肖俊云). By September 2015, Pinhaohuo had become China’s top free app and was receiving over 100,000 orders per day.[7] In 2016, Pinhaohuo merged with Pinduoduo, and the combined company thenceforth no longer engaged in direct sales starting January 2017, but operated under a pure online marketplace model.[8]

PDD has become one of the fastest-growing new e-commerce platforms that provide buyers with value-for-money merchandise and fun and interactive shopping experiences in China. Since its founding, its user base has seen exponential growth. In January 2016, the number of users on the platform was around 10 million, while by the end of 2018, the number of annual active users reached 419 million, representing 40-fold growth in three years.[9] Accompanying the rapid user base expansion was even more remarkable growth in gross merchandise value (GMV — total value of merchandise sold over a given period through a customer-to-customer exchange site). Starting with a last-12-month GMV of 21 billion RMB in the first quarter of 2017, PDD experienced a CAGR (compound annual growth rate) of 375% in GMV in a two-year period, achieving 472 billion RMB by the end of 2018.[10] In the first quarter of 2019, its GMV surpassed Jingdong (京东), another e-commerce rival, and it became the second-largest e-commerce platform.[11] By the end of 2019, the platform saw its last-12-month GMV exceeding the 1,000 billion RMB threshold for the first time, representing 113% YoY growth.[12] As of June 2020, the platform saw its annual active users reaching 683 million and GMV approaching 1,270 billion RMB.[13]

PDD envisioned itself as a combination of Costco and Disneyland, combining the former’s “value-for-money” with the latter’s “entertainment.”[14] It pioneered the innovative Community Group Buying model, which is in line with its unique value proposition. The combination of social elements and fun features in its app has successfully appealed to value-conscious consumers, especially those in lower-tier cities, and made it one of the fastest-growing e-commerce stars.

Mini-Programs

The launch of WeChat Mini Programs proved to be a critical moment for PDD since WeChat’s tremendous traffic offered PDD a more sophisticated, built-in extension of the native distribution channel and enabled PDD to continue to grow its user base. Following the launch of its WeChat mini-program in May 2017, Pinduoduo grew its mobile monthly active user base (MAU) by 11 times, from 33 million in the second half of 2017 to 538 million just three years later.[15] By June 2020, it had over 133 million MAU accessing the platform through the mini-program, making it the sixth-largest mini-program and second-largest online shopping Mini Program by MAU.[16] The overlapping number of users of its native app and its Mini Program was estimated to have reached 75 million.[17] The mini-program has also been an important channel to direct traffic to the app.[18]

Amid the backdrop of increasing penetration of online transactions, and aided by the improving WeChat ecosystem, a greater number of transactions are expected to be conducted through mini-programs.[19]According to Tencent’s report, WeChat mini-programs MAU were expected to exceed 900 million in 2020.[20]

Gamification

Pinduoduo’s games and incentive schemes are designed to encourage social sharing with friends and family, promote product buying, and foster spending more time in the app, which effectively lowers user acquisition and retention costs. The “price slice” (砍价) functionality is a novel way to acquire users at a lower cost. This feature incentivizes users to invite friends to click on a product, and each time they do, the price decreases a bit until zero. (Exhibit 1 shows the in-app page of the “price slice” game, along with that of three other games.) Every time existing users click, the price decreases by 2–5 RMB; every time new users click and install the app, the price decreases by 13–15 RMB. Fifteen (15) RMB is a small price to pay compared to the 200–300 RMB new-user acquisition cost typically paid by e-commerce platforms.

Additionally, mini-games inside the app make it “sticky” and drive daily active use. In May 2018, Pinduoduo launched Duo Duo Orchard, a game where users grew virtual trees inside the app.[21] The more purchases, friend-group interactions, plus time spent in-app, the faster the trees grew. When the trees were fully grown, the user was shipped a box of fruit. One month after launch, an average of two million trees were planted per day. The game had 11 million daily active users by June 2019 and 60 million by December 2019.[22]

One of PDD’s newer games is Duo Duo Piggy Bank. Users can receive free products shipped to their address upon completion of a series of tasks. Players are required to complete tasks such as browsing products for 30 seconds, completing a team purchase, or logging on for a few consecutive days, among other things, to get extra “fuel.”

These gamified features all involve completing in-app tasks that optimize for frequent visits to the platform and promote product browsing. Every interaction builds up to a purchasing event. PDD built commerce directly into its games to capture more value by monetizing its user base’s time, ergo the games are an integral part of the monetization model.

Social E-commerce

Community Group Buying is not a new concept. Local grocers would aggregate demand within a township or village and make group purchases for the community in order to receive a wholesale price. PDD brings this CGB online through “social e-commerce,” which is the use of social networks in the context of e-commerce transactions that use recommendations, social interaction, and user-shared pick lists to drive sales. Platform users share product information and initiate team purchase options. Buyers send out information among a circle of social connections. Based on trust, receivers of the information join together to purchase the product that meets their needs.

On the company side, social e-commerce is considered a cheaper way to acquire new users and increase user engagement, and hence achieve higher a conversion rate and user retention. PDD’s social e-commerce model relies on traffic from Tencent’s WeChat, the network effect of users, and their desire for high-quality products at a low price. However, because of their reliance on “social proof” to acquire customers, PDD platforms must factor in the importance of word of mouth and maintaining a good reputation. On traditional e-commerce platforms, user feedback is one-sided — users can only judge the quality of a product based on reviews posted by strangers. In social e-commerce, however, users can get feedback, positively or negatively charged, from their friends and relatives. As a result, PDD as a social e-commerce player is at higher risk for the vicissitudes of the ever-mercurial consumer.

Consumer-to-Manufacturer (C2M) Model

Thanks to the desire for personalization and, more importantly, consumers seeking value for money, coupled with technological advances in big data and AI, manufacturers now better understand consumers and can cater to their demands. This new model, called Consumer-to-Manufacturer (C2M), has platforms like PDD streamline data to manufacturers, thereby allowing the manufacturer to develop products in a much shorter time and significantly increase efficiency within the production process.

C2M is a business model where the platform and end producers cooperate with each other to organize production and marketing. The platforms collect and sort customer information and analyze these data to get a clear picture of customer needs. Then, they send the analysis to end producers who make products accordingly. The C2M model allows for direct interaction between end producers and end customers. It can help to lower the cost of sales, and thus lower prices and attract more customers. Moreover, it can help manufacturers to better understand customer needs, better cater to individual and personalized needs of niche customers, and thus create deeper-seated connections with customers.

The two core characteristics of C2M include organizing production based on consumer need and eliminating intermediate steps between production and the end customer. In practice, C2M is best for products where customers care about quality and individualization — i.e., products that have a long tail, like clothes and furniture. If a product already meets the needs of consumers without customization, then implementing C2M would not create any competitive advantage.

C2M differs from common business models in that it skips the intermediate steps such as brand owners, selling agents, distributors, wholesalers, etc. Therefore, it can help to save a lot of intermediate costs. Proposed and pioneered by “Biyao Marketplace” (必要商城) CEO Bi Sheng (毕胜) in 2013, the C2M model emerged within the context of “the industrial Internet.”[23] It is a “reversed” mode of production, where production is driven by customer needs. In order for it to be viable, cost savings must be higher than the additional variable costs incurred from tailoring individual products.

Thanks to Big Data and artificial intelligence, the C2M model can make production lines more automated, customized, efficient, and flexible. It is an industrial customization model. By taking advantage of powerful computer systems that can do data exchange anytime, the C2M model is able to customize producer selections and production processes to customers’ order requirements and make personalized products. Hence, this model is referred to as “the Fourth Scientific and Industrial Revolution,” following the generalization of steam engines, electrification, and automation.

Market Appetite for C2M

On March 8, 2021, International Women’s Day, the year-over-year increase in order volume of C2M personalized products exceeded 370%.[24] The Chinese middle class is expected to grow, and as it does, market capacity for customized and personalized products will grow as well. According to analysts, this industry has the potential to scale to a trillion-yuan market by 2022.[25]

Capitalizing on this, Alibaba founder Jack Ma promoted the concept of C2M in September 2018, and Alibaba soon began implementing C2M practices on its e-commerce arm, Taobao (淘宝) with the launch of its “Everyday Factory” program in November 2018.[26] By the end of 2019, Alibaba had officially designated C2M as one of their key strategies, launching the “Super Factory” Program.[27]

Not far behind, in December 2018, PDD established a “New Brand Initiative” to help merchants launch their own brands.[28] This represents the company’s attempt to implement its own C2M capabilities. It launched 106 of these “manufacturer-owned brands” in 2019, and aimed to create 1,000 more in 2020.[29]

In July 2020, PDD launched a wholesaling platform, “Duoduo Wholesale,” for its merchants to power their supply chains and procure goods for resale.[30] The launch of the new feature is in line with the increasing demand of the merchants. According to its 2019 annual report, Pinduoduo has accumulated more than five million active merchants which makes wholesale demand a natural need for this large group of the platform’s users.[31]

How Community Group Buying Works

The idea is simple: “Pin” with a discount. Buyers can make group purchases by visiting the platform or through social networks such as WeChat and QQ. Orders placed by 11:00 PM each day will be delivered on the next day after 4:00 PM to pick-up locations.

Users are encouraged to share product information on social networks and invite their friends to form a shopping team to enjoy the more attractive process available under the CGB option. All group buys require an upfront payment that will be refunded if the minimum group size is not met within 24 hours.[32] This reduces the friction of initially committing to a purchase, while essentially committing buyers to work together to reach the target.[33] In this way, users become unofficial recruiters for the platform, keeping PDD’s cost per acquisition lower than that of its competitors. However, if the team cannot be formed successfully, users must choose the individual purchase option, which entails a higher price.

To facilitate the group purchase function, PDD boasts a simple, feed-based mobile app interface with large product images, encouraging exploration-based shopping, which differentiates itself from traditional search-based e-commerce platforms. Leveraging the feeds-based interface and low-price positioning, PDD creates a “treasure hunt” shopping experience that encourages users to keep discovering new deals, in addition to regular search-based shopping.

Duo Duo Grocer AKA Duo Duo Mai Cai (多多买菜)

Fruit and agriculture remain a core pillar of Pinduoduo’s business.[34] Agricultural GMV surpassed 65 billion RMB (14% of its total GMV) in 2018, making PDD China’s largest agricultural e-commerce platform.[35] The agricultural business grew 109% in 2019, to 136 billion RMB, with over 12 million direct and indirect agriculture suppliers reaching 240 million buyers (41% of the active user base) with a repurchase rate of over 70%.[36] In the first quarter of 2020, orders of apples, cherries, kiwis, oranges, and strawberries all increased over 120% year-over-year. Rice, wheat, cooking oil, meat, dairy, and vegetables averaged a 140% increase.[37]

According to the Ministry of Commerce, the total addressable market in 2019 for agricultural goods sales in China was 8.1 trillion RMB, while only a paltry 7% of these sales were taking place online.[38] Because of the many intermediaries within the distribution process, supply chain and perishability issues abound before reaching end consumers. It is estimated that there could be as much as 105% added costs and 37% food wastage across the chain for vegetables.[39] Yet, PDD’s team-purchase model aggregates long-tailed interest into sizable and coordinated demand, connecting sellers directly with consumers to disintermediate away the unwanted costs. Given the large addressable market and need for farmers to find outlets to sell their products, agricultural initiatives seem to be an effective and appealing option for farmers, consumers, and the platform.

Doubling down on PDD’s commitment to solve the inefficiencies above, Duo Duo Mai Cai (DDMC) represents an initiative by the company to tap into grocery CGB. According to PDD’s official website, “Duo Duo Grocery is thus a natural extension and complement to Pinduoduo’s agriculture business, shortening the fulfillment time for fresh groceries from 3–4 days to less than 24 hours.”[40]

It started as a trial launch of a grocery platform in Wuhan (武汉) and has now expanded to over 300 cities.[41] The operating model builds on CGB, which involves an online order and next-day delivery to a community pick-up station (门店). The theory is that DDMC will enable PDD to further acquire new users in higher-tier cities who spend 3.2 times more per transaction than the average user.[42]

Despite attempting to win higher-paying clientele, DDMC seems best suited for countryside use. According to a testimonial by a provincial user on Zhihu (知乎), DDMC is most convenient in a small town or rural area.[43] Larger cities have direct competitors that provide last-mile delivery, while DDMC still requires a pick-up station. There are also apps that specialize in selling fruits. The user was drawn to the app as products on DDMC are cheaper than in her local markets. Because of the rural area’s weak logistical network and poor supply chain, shipping costs are increased, which is passed along in higher product prices.

The potential success of DDMC will hinge on two key factors: forecasting and sourcing. That is, forecasting demand for a product, and fulfillment within 24 hours thanks to existing infrastructure.[44]

Supply Chain

PDD’s C2M supply chain is highly digitized. Compared to traditional supply chains, which use a multi-stage distribution model, PDD cut the number of layers of distribution and thus helps producers save on transportation and storage costs in addition to lessening the impact on the environment.[45]

The supply chain has a three-part flow[46]:

1. PDD collects orders online

2. It then delivers orders from the platform’s Regional Distribution Center (RDC) to pick-up locations in various communities

3. Customers go pick up their orders.

While its C2M model shortens the supply chain as much as possible, large order volumes from PDD’s group buying feature incur costs. Otherwise, high costs from transportation and shipping are greatly reduced thanks to its streamlined supply chain. PDD has also never stopped optimizing its supply chain. PDD strictly reviews any partner factory qualifications. The company also does undercover sampling of a factory’s products and has dedicated personnel who manage product experience.

Examples of how supply-chain optimization has benefitted manufacturers include two factory-first napkin brands: KeXinRou (可心柔) and ZhiHu (植护). PDD gave these sellers data-driven tips on product offerings and market positioning, based on spending habits and preferences of consumers in various geographical locations. For instance, PDD would use Big Data to help sellers analyze potential niche markets, and then provide them with a product model that could fill the niche market. The seller would then produce it in small batches, and PDD would provide some traffic to test the product. PDD advised KeXinRou to produce napkins that are 3kg per package. This minor adjustment enabled KeXinRou to sell 3 million yuan’s worth of napkins on the first day of its debut.[47]

On the consumer side, PDD pushed through the napkins at .01 yuan per unit, which was only 40% of the prevailing market price.[48] This was done through the “hot sales” (爆款商品) function and by sourcing raw materials from the Liwen Group (理文集团) paper mill,[49] all while not compromising quality for price.

As of September 2020, PDD partnered with China Post (中国邮政) and JiTu Express (极兔速递) to handle its logistics.[50] This is risky as it outsources management of the cold chain in the grocer space that requires just-in-time delivery.

Regulatory Pushback

In response to regulatory pushback, PDD seems to be distancing itself from the practice of grocery community group buying, which has come under scrutiny by the government at the end of 2020 and into 2021.

On March 17, 2021, PDD’s founder and ex-CEO Zheng Huang resigned from his roles in the company to pursue research in biotech and life sciences.[51] On the same day, PDD posted a blog on its official website claiming that DDMC is not community group buying, the difference being that CGB relies on a “group leader” to organize purchases while DDMC does not depend on community leaders to attract users because of its large user base.[52]

These claims belie the fact that PDD’s grocery arm is not acting any differently than traditional community group buying. DDMC has been widely recruiting group leaders (团长) since its launch. Further, when DDMC and four other grocery businesses were fined by the State Administration for Market Regulation in March 2021, all pronouncements labeled the violators as CGB businesses.[53] Since the fine, PDD has removed the DDMC button from its homepage. Customer service has been cited saying:

DDMC is one of PDD’s business sectors which is currently still expanding in various large cities, please stay tuned. Currently, not all users have access to the DDMC entrance on the PDD app. If you are not seeing it, you can go to WeChat, open the DDMC mini-program, turn on location services and check if DDMC is available in your area.

The management shuffling and user interface changes could be interpreted as PDD’s response to the government’s changing attitude towards CGB, and as an attempt to forestall potential regulations. As shown in the People’s Daily article and Southeast Asian media powerhouse KrAsia, the government wants big tech firms to spend resources on developing new technology rather than optimizing CGB platforms to perfectly monetize user traffic.

Competitors

Traditional e-commerce platforms’ interfaces prioritize the search bar, navigation panel, and product catalog, which stretches a long-tail listing to best accommodate search-based shopping. However, PDD shortens the navigation panel to only half of the page, therefore incentivizing exploration-based shopping. Yet different platforms now share a greater similarity in terms of interface (Exhibit 2 shows the homepage of PDD and Taobao’s mobile apps) as Taobao recently tested a feed-based interface as part of its app upgrade. This reflects the trend of integrating Big Data analytics to enhance user experience and increase user value.

However, the most distinct feature of PDD is that there is no such thing as a shopping cart in PDD’s main interface. Together with one-tap payment, this prompts fast impulse buys and reduces friction within the whole decision-making process.

From a backend perspective, a comparative study[54] was conducted by a disinterested user who became a group leader on four major grocery CGB platforms. The platforms included Chengxin Select (橙心优选), Meituan Select (美团优选), Xingsheng Select (兴盛优选), and DDMC (多多买菜). For the user to become a group leader of DDMC, there was a three-to-five-day wait, at which point there he received a terse yes/no decision. This was less efficient than platforms like Chengxin and Meituan. (Exhibit 3 shows all rankings in terms of various criteria.) After the user became a group leader, DDMC provided neither onboarding nor training. While working with the deliverymen, the user-turned-group-leader ranked DDMC last, as the large order volume caused mishandling and incorrect delivery from the courier.

Beyond poor shipping and handling by the courier, DDMC’s products were of the lowest quality. Typical consumer complaints included “products not fresh” and “frozen goods thawed.” The group leader places the onus on PDD as the products “were not fresh when they arrived at the store.” His reasons included a poor cold chain in addition to improper packing and handling:

For example, because of poor packaging, some packages of chilled meat and seafood are broken and leaking. As a result, products look messy and smell. In the warehouse, they put fruits and vegetables in the same area as potted plants causing products to be dirtied with mud. Also, many frozen goods are thawed. I know these problems are common as many group leaders were complaining about it in our group chat. It again corroborates PDD’s brand image of ‘low price low quality.’ PPD could totally have avoided these problems by implementing proper process management, as they are not caused by the suppliers.

On a more positive note, DDMC successfully integrates marketing into efforts better than its peers. From the group leader’s perspective, he noticed that customers were attracted by DDMC’s various “buy x and get y back” and other cash-back promotions. DDMC’s greatest strength lies in its marketing and promotional campaigns. High traffic from the main PDD app also helps group leaders who are not adept at marketing and attracting traffic.

Key Driver: Price

The low price tag (mostly 10–50 RMB) is the unequivocal traffic driver and key differentiator for PDD.[55] Take a simple item sold on the platform as an example: garlic. Back in 2018, the supermarket retail price for 0.5 kg of garlic hovered around 8.0 RMB, while PDD offered 2.5 kg of garlic at 9.6 RMB per order (circa 1.9 RMB for 0.5 kg), 76% lower than supermarket retail price.[56] The costs of sales on PDD mainly consist of 5 RMB for 2.5 kg garlic purchased directly from merchants, a delivery fee of 3.5 RMB per order, a personnel fee of 0.4 RMB per order, and a packing fee of 1.3 RMB per order.[57] The total cost of sales adds up to 10.2 RMB per order, which is 0.6 RMB higher than the selling price.[58]

PDD also uses subsidies to lower the price for goods with a relatively higher average selling price (ASP). In May 2019, it launched the 10 billion RMB subsidy program.[59] On average, subsidized products on PDD are c. 10–30% cheaper than the typical market price.[60] The subsidy program was effective in appealing to consumers in first- and second-tier cities as it lowered the price for sought-after items like the iPhone 11 and SK-II face cream at a respective 28 and 57 percent discount relative to its closest competitors. (Exhibit 4 shows the price comparison for such products on different platforms.) As a result, since mid-2019, a greater proportion of new users on the platform have come from higher-tier cities.

In short, it worked. In the first quarter of 2019, only 8.6% of new users were from first-tier cities while a year later, this figure jumped to 16.0%.[61] In January 2019, 37% of GMV came from top-tier cities; by June, it increased to 48%.[62] In the third quarter of 2019, users in first-tier cities bought items with a 3.2 times higher ASP than the average user.[63]

These subsidies have not gone without government scrutiny, however. The rapid expansion and aggressive pricing strategy drew attention from regulators.

Regulation

In Dec 2020, the State Administration for Market Regulation (SAMR) and the Ministry of Commerce summoned representatives from six internet giants — Alibaba, Tencent, JD, Meituan, PDD, and Didi — to announce regulations on the operation of CGB.[64] The so-called “9 Must Nots” guidance[65] included price manipulation (e.g., dumping low-price products), signing monopoly agreements, abusing market-dominant position (e.g., predatory pricing), the concentration of undertakings which eliminate or restrict competition, competing improperly through false marketing or defaming, discriminating against users through Big Data, etc.

Since the meeting in December 2020, there have been fewer inappropriately priced items, such as 0.01 RMB for a dozen eggs, on most of the platforms. Instead, overall pricing has been adjusted lower — i.e. subsidies are spread across more SKUs. In addition, in place of directly selling products below cost, the platforms subsidize the customer instead by offering discount coupons and “red packets” at check out.

On March 3, 2020, SAMR struck again and fined four CGB companies — Chengxin, DDMC, Meituan Select, and Nice Tuan — 1.5 RMB million each, and China Fresh 0.5 million RMB.[66] According to the regulator, the four companies were still dumping products at prices lower than procurement costs, which disrupted market order and violated the legal rights of other operators. In addition, it said all five companies used fake or misleading prices to entice consumers, violating China’s price law.

Although PDD executives were first summoned by SAMR in August 2018 for consumer complaints about counterfeit products and the illegal sale of intellectual property-protected products, this was the first high-profile law enforcement case against the CGB business model after the announcement of the December 2020 “9 Must Nots.” PDD responded by promising an overhaul. It eliminated anything that could be perceived as price dumping and has doubled down on subsidizing customers through discount coupons and “red packets.”[67]

China’s state-owned news outlet, People’s Daily, often referred to as the official mouthpiece of the government, commented on the recent hype in grocery CGB pushed by tech giants:

Recently, tech giants have been deploying huge resources to compete in grocery CGB. These companies are taking advantage of massive user data, advanced algorithms, and vast amounts of capital to gain a competitive edge. Following online shopping, ride-hailing, food delivery, etc., grocery CGB has now become the new hotbed for tech companies.

Gaining access to the downstream market, combining online traffic with offline supply chains, increasing subsidies, providing deep discounts to spur traffic and GMV, saving consumers their trips to grocery stores… this seems like yet another wonderful story of the Internet leveraging innovative business models to change people’s everyday lives. However, these benefits are not without controversy. Grocery CGB could harm the interest of local grocers and fundamentally disrupt their livelihood. This gives us pause to rethink what kind of innovation we can really come to expect from these tech giants.[68]

In a broader sense, Chinese President Xi Jinping stressed the need to promote regulated and healthy development of the platform economy on March 15, 2020, on World Consumer Rights Day.[69] On the same day, SAMR also released detailed rules to regulate online transactions.[70] President Xi has repeatedly emphasized that innovation should be regarded as a priority and that China should strive to achieve more breakthroughs, not margin expansion. Tech giants, which harness the power of Big Data, are expected to be responsible for technological innovation. He emphasized the importance of “the boundless field of scientific and technological innovation and the infinite possibilities that come along with it” as a priority.

Statements and editorials like these hint at the government’s thinly-veiled attitude towards grocery CGB and offer warning signs that stronger regulations against this business sector may be on the horizon.

History Doesn’t Repeat, but It Rhymes

PDD and its competitors would be wise to remember how similar situations led to regulations that ended the market-share rat race between Uber and Didi Chuxing. Both ride-hailing giants were unsustainably burning cash in the form of subsides to attract users away from other players, including state-owned taxi services. In China, national regulation ultimately proved a more dire threat for Uber than simple competition.[71] On July 28, 2016, Xinhua News wrote, “China Grants Legal Status to Ride-Hailing Services,” but legal status in China can be quite enfettering.

New government regulations meant that data Uber collected would fall under the government’s jurisdiction. This came alongside the outlawing of all subsidies. The regulations stated that “market pricing would prevail, except when municipal government officials believe it is necessary to implement government-guided pricing.”[72]

Another warning should be heeded from PDD’s contemporary, Yunji (云集). Like PDD, Yunji is a social e-commerce company that relies on WeChat sharing to generate sales. Yunji uses a decentralized network of paying “members” who sell products through the platform. These “members” differ from PDD’s group leaders only in that “members” receive pecuniary compensation for pushing products through the platform. This model drew scrutiny from Chinese authorities and in 2017 Yunji was fined 1.4 million USD for acting like a pyramid scheme.[73] Yunji now no longer compensates “members” through cash, but instead rewards them with discounts on future products, toeing a similar line as PDD.

Other investigations against PDD are currently underway by Chinese labor law supervision departments, looking into violations of the labor laws, following the death of a 22-year-old DDMC employee who collapsed on her way home from work at 1:00 AM on December 29, 2020.[74] She had been working 13 hours a day and had only two days off in a month, which, according to sources familiar with the matter, is the norm for DDMC employees.[75]

This incident invites unwelcome scrutiny during a time when the Chinese government is increasing control over tech giants and their billionaire founders. According to those familiar with the matter, in a notoriously censored nation, the Chinese government allowed heated discussions to go viral on the internet which spurred a backlash against Big Tech surrounding the death of the DDMC employee.[76] The state-owned Xinhua News Agency also posted a commentary piece condemning the work culture of tech giants. These signs point to increasing scrutiny of China’s tech giants and the potential for more than blog outrage and public pronouncements.

Going Forward

When Zheng Huang, ex-CEO of Pinduoduo, stepped down, his official statement to shareholders expressed both pride and admonishment. In the statement, Huang said that PDD’s success so far had been driven by its improvements in down-market distribution and middle-market supply chain efficiency. However, he suggested that to remain relevant in the long term, the company would need to shift its focus upstream towards innovation in areas such as food tech and biotech.

Although the Chinese government has shown that it does not want to stifle its national champions, it has had a strong regulatory bite with those who it sees as crossing the line. It seems once subsidies run out and the government recognizes Community Group Buying within its grocery arm, PDD may face new hurdles. With low prices and subsidies driving app usage, can PDD survive if it is mandated to take the punch bowl away? In other words, if PDD is forced to sell groceries and other goods at market price, will it continue to be the e-commerce darling beloved by public markets?

Special thanks to Yumeng “Anna” Gao

Exhibits

Exhibit 1 PDD In-App Examples of Gamification

Exhibit 2 PDD and Taobao Mobile App Homepage

Exhibit 3 Group Leader (团长) Ratings of Four Grocer Platforms

Exhibit 4 Price Comparison for the Same Product on Different Platforms

Sources

[1] Zheping Huang, “China’s №1 Shopping App Is in Fact a Game,” Bloomberg, March 30, 2021, https://www.bloomberg.com/news/newsletters/2021-03-30/china-s-no-1-shopping-app-is-in-fact-a-game.

[2] BOCI Research Report, “Pinduoduo — Pin with Fun, C2M to Become the New Growth Driver,” by Michael Meng and Cherie Liu, September 23, 2020, p. 3.

[3] Huang.

[4] Ibid.

[5] Ibid.

[6] Turner Novak, “Pinduoduo and Vertically Integrated Social Commerce,” August 6, 2020, https://turner.substack.com/p/pinduoduo-and-vertically-integrated.

[7] Ibid.

[8] Ibid.

[9] BOCI Research Report, 12.

[10] Ibid.

[11] Ibid.

[12] Ibid.

[13] Ibid.

[14] “2018 Letter to Shareholders,” Pinduoduo corporate website, July 26, 2018, https://investor.pinduoduo.com/news-releases/news-release-details/letter-shareholders.

[15] BOCI Research Report, 18.

[16] Ibid.

[17] Ibid.

[18] Ibid.

[19] Ibid., 19.

[20] Ibid.

[21] Novak.

[22] Ibid.

[23] Akou Liu, “All You Need to Know about C2M,” Jinri Toutiao, July 17, 2020, https://www.toutiao.com/i6850278170894008840/.

[24] Ibid.

[25] Ibid.

[26] Ibid.

[27] Ibid.

[28] Ibid.

[29] Novak.

[30] Zanna Zhang, “Pinduoduo to Enter Supply Chain Services by Launching Wholesale Platform,” Pandaily, August 3, 2020, https://pandaily.com/pinduoduo-to-enter-supply-chain-services-by-launching-wholesale-platform/.

[31] 2019 Pinduoduo Annual Report.

[32] Novak.

[33] Ibid.

[34] BOCI Research Report, 21.

[35] Ibid.

[36] Ibid.

[37] Ibid.

[38] 2020 Pinduoduo Q2 earnings call transcript, August 21, 2020.

[39] Ibid.

[40] “Explainer: the Difference between Pinduoduo’s Duo Duo Grocery and Community Group Buying,” Pinduoduo corporate website, March 17, 2021, https://investor.pinduoduo.com/news-releases/news-release-details/letter-shareholders.

[41] Ibid.

[42] Novak.

[43] Changan Shen, “My Experience Using Duo Duo Mai Cai,” Zhihu Zhuanlan, last modified February 6, 2021, https://zhuanlan.zhihu.com/p/343306046.

[44] 2020 Pinduoduo Q4 Earnings Call Transcript, March 17, 2021.

[45] 2020 Pinduoduo Environmental, Social and Governance (ESG) Report.

[46] “Deciphering PDD’s Supply Chain,” Jinri Toutiao, April 23, 2020, https://m.toutiao.com/is/e2gWm6g/.

[47] Jun Li, “Behind the Scenes of ‘Hot Sales’: PDD’s Optimization of Its Supply Chain,” PEdaily, June 21, 2018, https://m.pedaily.cn/news/432665.

[48] Ibid.

[49] Ibid.

[50] “PDD Used 1 Billion of Subsidies to Break into Community Grocery, But If It Can’t Handle Logistics, That Will Mean Nothing,” Jinri Toutiao, September 4, 2020, https://www.toutiao.com/i6868443774083662344/.

[51] Jack Ellis, “‘China’s Largest Ag Platform’ Reports Bumper Growth, Founder Quits for Foodtech,” AgFunder Network Partners, March 18, 2021, https://agfundernews.com/pinduoduo-founder-quits-to-pursue-foodtech-opportunity-as-company-reports-bumper-fy2020.html.

[52] “Explainer.”

[53] Jingli Song, “Chinese Regulator Fines Firms in Broad Crackdown on Grocery Group-Buying Sector,” KrASIA, March 12, 2021, https://kr-asia.com/chinese-regulator-fines-firms-in-broad-crackdown-on-grocery-group-buying-sector.

[54] “4 Grocery CGB Players: Which Is the Best,” Jinri Toutiao, February 26, 2021, https://www.toutiao.com/i6933424519117963784/.

[55] BOCI Research Report, 16.

[56] Ibid.

[57] Ibid.

[58] Ibid.

[59] Ibid, 17.

[60] Ibid.

[61] Ibid.

[62] Ibid.

[63] Ibid.

[64] “SAMR and Ministry of Commerce Are Regulating CGB,” Chinese SAMR website, December 22, 2020, http://www.samr.gov.cn/xw/zj/202012/t20201222_324567.html.

[65] Ibid.

[66] “SAMR Punished Five CGB Businesses,” Chinese SAMR website, March 3, 2021, http://www.samr.gov.cn/xw/zj/202103/t20210303_326448.html.

[67] Li Tao and Jiaying Yi, “Community Group Buying Faces Increased Scrutiny Since the Beginning of 2021,” Sina Finance, March 5, 2021, https://finance.sina.com.cn/tech/2021-03-05/doc-ikftpnnz2586365.shtml.

[68] “Behind the Controversies surrounding CGB: What Should We Expect from Tech Giants,” People’s Daily commentary, December 11, 2020, accessed via http://www.nbd.com.cn/articles/2020-12-12/1570298.html.

[69] “Xi Stresses Healthy Growth of Platform Economy, Efforts for Carbon Peak and Neutrality,” Xinhua News Agency, March 15, 2021, http://www.xinhuanet.com/english/2021-03/15/c_139812303.htm.

[70] Chinese government website, http://www.gov.cn/xinwen/2021-03/17/content_5593387.htm.

[71] William C. Kirby, “The Real Reason Uber Is Giving Up in China,” Harvard Business Review, August 2, 2016, https://hbr.org/2016/08/the-real-reason-uber-is-giving-up-in-china.

72 Ibid.

73 Thomas Graziani, “What Is Yunji And What Can We Learn from Its IPO,” WalktheChat, May 5, 2019, https://walkthechat.com/what-is-yunji-and-what-can-we-learn-from-its-ipo/.

[74] “Chinese Labor Law Supervision Departments Launch Investigations against Pinduoduo,” January 12, 2021, http://info.ahcar.com/redian/20210112/16455.html.

[75] Ibid.

[76] Laura He, and Nectar Gan, “Pinduoduo under Fire as China Turns on Its Tech Titans,” CNN Business, January 13, 2021, https://www.cnn.com/2021/01/13/tech/pinduoduo-996-work-culture-intl-hnk/index.html.

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Jason M. Kingdon
Jason M. Kingdon

Written by Jason M. Kingdon

1Kin Labs - web3 platform | Sinophile. Harvard Business School '21. Columbia University '16.