Premium special: Pinduoduo Q&A

A Chinese Characteristics exclusive

Hi Folks,

Last month I asked premium subscribers for their question on Pinduoduo’s strategy and products. I thought I’ll give you a sneak peak to what the premium subscribers received. My analysis is footnoted throughout the passage.

Overall, I think Pinduoduo’s key future themes come through in the exchange. They want to be the world’s biggest grocer by providing their own agri-focused logistics infrastructure and anticipate and direct demand through a consumer-to-manufacture model.

State of Chinese Cloud Part III will be out later this week for premium subscribers.


How do you think about the Chinese market for e-commerce evolving in the coming years? 

In the future, the term “e-commerce” will become an anachronism, a relic of an era when there was still a strict distinction between what is online and what is offline. The boundaries between the virtual and physical are collapsing. In China today, it is almost impossible to conduct a strictly offline or online transaction.1

What that means for “e-commerce” is that new businesses and forms of interaction and engagement will emerge. Some forms have yet to be imagined, some have already taken root like gaming, livestreaming and augmented reality. For example, it would have been unimaginable 10 years ago that millions of people will hop into strangers’ private cars or attend concerts by computer-generated idols but here are we today. As a 100% mobile platform, we are well-positioned to ride these new shifts in user behavior without legacy concerns.  

That said, even as commerce continues to evolve, we believe what will remain unchanged is the desire for fun and good value for money. We have described our business model as “Costco + Disney”2 and we believe that it will remain relevant. I mean,  we can’t imagine people wanting to overpay and view shopping as a chore. 

What's Pinduoduo’s future investment strategy for agricultural produce to achieve your target of being the biggest grocer in the world? How can PDD become a value-adding player in agriculture relative to the existing supply chains? 

Our goal is to make good quality and affordable groceries from all over the world available to our customers in China. We are already the largest marketplace for agricultural products in China and are on the way to becoming the biggest grocer in the world.  

To achieve our goal, we have committed substantial resources to overcome hurdles at various points of the agricultural value chain from growing, transporting to selling. The aim is to help farmers increase quality and production while minimizing loss and wastage so that we can have a more sustainable agriculture and food system. 3

In terms of specific initiatives, at downstream, we are improving market access for farmers by connecting them directly to our almost 800 million consumers. We are promoting digital inclusion by training more e-commerce talent so that they can help their communities take part in the digital economy.  

In the midstream, we are developing a new proprietary logistics information infrastructure system suited to China’s unique agriculture landscape that can lower costs and speed up delivery while maintaining quality. We have applied to patent a cold chain logistics network system that seeks to minimize the loss and quality degradation of agricultural products and other perishables during transportation. Lastly, in the upstream, we are working with universities and research institutes to develop agricultural technology that can improve productivity. 

How does PDD see its business model evolving from the asset-light 3P marketplace model it started out with?  

PDD started as an asset-light marketplace operator, or 3P model when it was founded in 2015 and it has served our customers well as we were able to tap into the best-in-class capabilities of various partners in the eco-system. That said, we are trialling a small 1P business to temporarily fill in the supply gap for some products while we look for merchants that can offer them on our marketplace. As of Q4, the 1P business is less than 1% of the total GMV. We have no plan to grow this 1P business and expect this line item to remain a very small percentage of total GMV.4

On the other hand, we see the surge in grocery demand and a gap in the infrastructure needed to fulfil the need for fast and affordable deliveries. That’s why we have taken the decision to invest in developing an agri-focused logistics infrastructure platform that will reduce waste, lower costs and speed up delivery for agricultural products. We have filed for dozens of patents for this logistics info system, which is designed to deliver fresh produce in optimal conditions at compelling prices and within 24 hours.5

We see Duo Duo Grocery service as a natural extension of our main business, connecting local farmers and distributors with local consumers. We have been increasing the number of agriculture producers and regional distributors and expanding the number of pickup points. We will make a substantial investment in people, technology, potentially capital assets to build up the infrastructure.  

As PDD is moving up the consumer value chain through attracting bigger and more established on to their platform, what is the value proposition to get brands onto the platform? 

Our focus on meeting our users’ needs has helped to drive this virtuous cycle which has accelerated our growth.  

As we aggregate demand from our users through team purchase, the higher sales volume allows merchants to lower costs and pass on more savings to our users. As this happens on more products, and users continue to have a good experience, they help to spread the word and grow the user base. As users interact more frequently with us, we get a better idea of what users want and can further refine our recommendations and improve the user experience. In the long-term, this accumulated trust attracts users to keep engaging with us. 

In addition, we are helping our manufacturers to understand the consumer needs better and shorten their product feedback loop, enabling new products to reach consumer faster and cheaper through our Consumer-to-Manufacture (C2M) initiative.6  This is a further iteration of reverse and just-in-time manufacturing, which can potentially solve inventory and supply chain inefficiencies that have plagued the retail sector for decades. This could help improve the user experience on our platform. 

We are enabling not only manufacturers but also large brands. For instance, in March 2021, Pinduoduo formed a strategic alliance with major home appliance maker Midea to customize washing machines, with a target to sell 1 million units.7

What's the current product vision for PDD: are you trying to build a super app or a family of applications? How does  PDD view the Chinese consumer tech trends of short video, livestreaming and group community buying?

We have described PDD’s vision as a combination of "Costco" and "Disneyland" (value-for-money and entertainment combined). We are now the largest agricultural platform in China. We hope that in the next stage, Pinduoduo will become the world's largest agriculture and grocery platform, and make groceries sourced around the world affordable and available to our users.8  

Our success lies in capturing the zeitgeist of the mobile internet. We started in 2015 when online consumer behavior was evolving with the proliferation of smartphone adoption. We saw the change in consumer behavior and designed an interactive and recommendation-based model that suited their needs. We tapped into the ethos of the new era of smartphones, social network, gaming, livestreaming and mobile payments to give consumers a brand new user experience that was both fun and interactive.  

On Duo Duo Grocery, we understand that Duo Duo Grocery is sometimes categorized as “community group buying”, but there are important differences. In “community group buying,” the orders are placed by a group - typically neighbours - through a “group leader” who earns a commission for organizing the purchases through WeChat groups. With an active buyer base of more than 780 million, Pinduoduo does not depend on community leaders to attract users for its Duo Duo Grocery service.9 The use of community leaders is more common among platforms that have fewer users and traffic and hence rely on community leaders to enlist new customers.

1

Pinduoduo and other Chinese tech players such as Meituan and Alibaba increasing see a lack of distinction between the online and offline. This trend has moved from the Online-to-Offline tech trend to a space that views the planes as somewhat parallel. I do think augmented reality is the logical conclusion here given the direction of travel.

2

Further to the status - entertainment - utility three-axis outlined in Bilibili deep-dive, we can see that Pinduoduo is operating the duo axis of entertainment and utility. This makes a utility platform more engaging. I’d also argue there are elements of status as well given the social commerce angle. I initially was wondering whether there was more to the ‘Disney’ framing - was Pinduoduo moving into high-end IP? After checking, turns out I was overzealous with my analogies.

3

This isn’t that surprising for Pinduoduo who started by being an agricultural platform, so this is a return to their core competence in some ways. High-frequency purchase items that are hard to transport such as fresh produce can be a moat for the app as 1) it’s not easy to manage the logistics and 2) high-frequency usage is the golden metric in Chinese consumer tech. It is the leading indicator before DAUs and GMVs. High-frequency purchasing is the same reason why Meituan is also interested in Community Group Buying.

4

I thought it was very interesting that they focused on 1P to be a temporary solution to ensure no inventory shortage.

5

Though they are not classifying “agri-focused logistics infrastructure platform” as 1P. Given the amount of IP and hard infrastructure in here, it does feel like a decent amount of capex being invested. This is a pivot from their rhetoric of being asset-light but a moat if they can pull it off.

6

Short description of C2M: the platform aggregates demand and analyses consumer’s spending patterns. These insights are then passed on to manufacturers, who can tailor their products for a better fit to market demand. It is a natural result of aggregation theory. There’ll be a deep dive on this topic later this year, so watch this space.

7

Not clear what brands are getting on-platform apart from traffic, they say C2M insights but technically, Alibaba can also do this.

8

No, they don’t want to become a super app, a break from previous generations who focused on becoming super-apps to own the user. Further to footnote 3, I wonder whether we’re seeing a new generation of consumer apps being deeply function-focused now that the dividend for user growth is gone.

9

Pinduoduo is saying, theoretically they don’t need community group leaders to attract additional traffic to their platforms (unlike Meituan).