How Temu’s semi-managed model could change everything …
How Temu’s semi-managed model could change everything …
… and how it is just a stepping stone to something bigger
Image from a May 2024 Temu U.S. e-mailing.
Introduction
When we started writing about Temu one and a half years ago, few people were paying attention to the new Chinese webshop. How have times changed? In the past few months, we have been getting weekly interview requests about the topic. The world has woken up to Pinduoduo’s cross-border e-commerce platform.
Still, we notice that there is a lot of misunderstanding about Temu in the mainstream press, and many reporters are not well-informed about its parent company, Pinduoduo. And that’s where the danger lies because we see the same dismissal of Temu’s platform as when Pinduoduo launched in China. Eight years later, Pinduoduo, arguably China’s second-largest e-commerce company, has conquered significant market share from Alibaba. In recent years, Alibaba and JD have tried launching Pinduoduo clones like Taote and Jingxi with little success. In 2023, these giants started focusing on offering inexpensive goods on their main platforms. As they say in China: ‘First they laughed at Pinduoduo, then they studied Pinduoduo, now they want to be Pinduoduo’.
We decided to do another update about Temu since there have been many developments in recent months, especially around their implementation of the semi-managed model. What is it? How could it change things? And is it just a stepping stone to something bigger?
For this article, we've meticulously analysed over 20 expert interviews from our partner, Six Degrees Intelligence. The outcome is a comprehensive report, brimming with insider knowledge and depth, that you won’t easily find elsewhere. We trust you'll find it enlightening.
Note: to avoid repeating ourselves, this report picks up where our latest December report on Temu left off. Therefore, we assume you are familiar with our previous reports on Temu:
Temu - Pinduoduo's Cross-Border E-commerce Platform (December 2022)
Temu: from $0 to $3 billion in 10 months (June 2023)
What’s up with…? - Part 1: Temu (December 2023)
The first section, which delves into Temu’s current KPIs, is accessible to all subscribers. However, the remainder of the report, including the exploration of the merchant situation, the semi-managed model and Temu’s profitability, is a premium offering exclusively for our paid subscribers, emphasizing the value we place on your continued support and interest in our work.
Freya Zhang and Ed Sander, Research Editors
Rui Ma, Consulting Editor
(click on the images above for information on the Tech Buzz China team)
The current state of Temu
Let’s first have a look at Temu’s recent performance.
Customers
Temu has attracted many middle-class and low-income consumers in the US. Based on a survey of credit card data, Earnest found that about 18% of U.S. households have shopped with Temu since its launch. [1] American consumers account for about 40% of Temu’s global customer base.
Globally, Temu has 480-490 million users, and it aims to reach 600 million users this year.
The total number of Temu users in the U.S. is 150 -160 million, and it has about 80 million monthly active users, of which 50 million make monthly purchases.
In Europe, the monthly active users are 40 - 50 million.
The average usage time on Temu has reached 19 minutes (compared to 11 minutes on Amazon), showing the app's improved stickiness. The US usage time has reached 23 minutes (Amazon 18 minutes, Walmart 14 minutes). [2] In the UK, usage time reached 21 minutes versus 8 minutes on Amazon. [3]
The mobile app of Temu is mainly used by women between 18 and 28 years old, accounting for almost two-thirds of all users.
In the first half of 2023, 55% of all app users had annual incomes under $50,000. In the year's second half, 50% had annual incomes between $50,000 and $100,000. The income class of Temu app users is generally lower than that of Amazon.
While this profile might be true for app users, Temu’s most loyal U.S. shoppers have proven to be Baby Boomers and Generation X. Bloomberg reported: “Boomers 59 and older were the most loyal, placing about six orders over 12 months, twice as many as Gen Z shoppers aged 18 to 26, according to Attain, which mines credit card data from a panel of 6.5 million consumers.” [4]
Source: Attain [4]
Decreasing the weight of the US Market, building the global market
Temu and SHEIN are estimated to account for 1% of the U.S. e-commerce market, while Amazon accounts for 38%. [5] Temu’s growth in the US has slowed down in 2024, though. This is a deliberate strategy since Pinduoduo expects policy headwinds (e.g. trade protection) and wants to reduce its reliance on that market. To improve profitability, the company has shifted to paying more attention to quality of growth than expanding scale.
Google Trends: U.S. searches for ‘Temu’ since its launch in September 2022.
Google Trends: Worldwide web searches for ‘Temu’ in the US since its launch in September 2022.
Temu intends to decrease the US market's share of total sales to approximately one-third. This share had already fallen to 57% in Q4 2023 and currently stands at about 40%. Temu is actively acquiring customers in other markets to expand its global influence. The share of sales in Europe was 35% last year but has fallen to 30% as new global regions have been added.
Although it is a highly competitive market, Temu hopes to increase Southeast Asia’s sales share to 20% by increasing marketing resources.
When it launched in 2022, Temu planned to open in 100 markets, but this was later adjusted to 50-60. At the end of 2023, Temu paused the expansion to new markets. There has been a long period of hesitation in opening new markets because of doubts that it would bring incremental growth or only be a burden. But recently, it accelerated again. At the time of publication, Temu was active in 65 countries.
When Temu opens a new market, it adjusts its business strategy according to opening-up conditions and product compliance requirements. In the US, it faces IP challenges, including counterfeits and infringing on brands. Temu has established dedicated legal, compliance, and intellectual property teams. Many lawsuits are filed in the US each month, but most remain unresolved.
In 2024, Temu plans to further develop in Asia and Africa but might also have to pull out of some markets. At the end of 2023, it launched in 8 African markets, but only Cameroon proved successful, and it had to close down in the other seven markets. In January, Temu launched in South Africa, but orders were expected to have long shipping times of up to 20 days. [6] Following a familiar pattern, only weeks after Temu launched, it became the most downloaded app. Buffalo International Logistics, which handles orders from Temu and SHEIN in South Africa, could not handle the tsunami of packages. It was reported that delivery was delayed for one week. [7]
The costs per region can differ significantly. In the U.S., Temu faces the highest costs for subsidies, advertising, and fulfilment, while in Europe, costs are relatively low. In Asia Pacific, especially Southeast Asia, they are even lower.
Other KPIs
Partially driven by Black Friday, Temu’s GMV reached $8 billion in Q4 2023, roughly the same as in the previous three quarters together. [8]
GMV reached $15-$16 billion in 2023 (although some estimates have it as high as $18 billion). Losses in 2023 ranged from $8 - $9 billion, higher than expected.
The effective order share is 65-70%, meaning Temu faces challenges with cancelled or returned orders.
In January 2024, daily GMV was $80 - $100 million. While the first quarter is usually a slow season for e-commerce, Temu is expected to maintain the level of GMV it had in Q4 2024 at $7-8 billion.
In March, Temu’s global daily GMV was nearly $100 million. Close to TikTok Shop but lower than SHEIN’s $120 million. [9]
The Average Order Value (AOV) across the whole platform was $26 - $28, while it reached $40 in the US (up from $30 at the start of 2023), $30 - $35 in Europe, and $20 - $25 in Southeast Asia, Japan, and South Korea. Temu implemented a ‘free shipping above $30’ policy for existing customers. This has increased their average order value as consumers add more items to avoid shipping fees.
The target for AOV in the U.S. is $50 (comparable to SHEIN’s current AOV), while subsidies will remain 30%, like in 2023.
Temu hopes to increase order frequency. In 2023, the average monthly order was less than 2 (only 1.1, according to one source). The goal is to increase this to 2.5 this year and reach an average of 30 orders per customer over the whole year.
Some experts mentioned a 2024 GMV target of $30 - $36 billion in 2025. This is, however, considered a conservative goal, and based on the current momentum, 2024 could even reach $40. The company wants to reach $100 billion and be profitable by 2027.
Other recent sources claim Temu has a sales target as high as $60 for 2024 and $140 billion for 2027. [8]
Some of these GMV growth targets are conservative since Temu has faced fierce competition and policy uncertainties. Increases in investments have also yet to result in incremental growth.
In February 2024, Temu invested an estimated $21 million in five Super Bowl commercials (three during the games and two afterwards). This was Temu’s second appearance after the legendary 2023 Super Bowl adverts. It also invested $10 million worth of giveaways and $5 million in coupons and points. [10] Popularity and search volume rose after the commercials. However, it did not translate into significant numbers of new users or GMV. Downloads also did not reach the expected numbers and were down 13% compared to those after the 2023 Super Bowl ads [2].
In the first three days after the Super Bowl, downloads increased by more than 50%; in the following three days, they remained 20%—30% higher. Compared to January, February saw a 10%—15% increase in orders. However, the commercials did not result in long-term user engagement or revenue growth.
Globally and in Europe, Temu now only ranks second to Amazon as the competition is more scattered than in the US. Since Temu has the potential to become the second biggest player in some major markets, this will definitely impact other (cross-border) e-commerce platforms. Temu will strongly influence the order volume and growth potential of smaller players. The impact on Amazon will be more limited since its business structure and strategic layout enable it to remain more stable and less influenced by market fluctuations.
Still from the 2024 Super Bowl commercial.
Customer retention and repurchase
According to Earnest data, more than 28% of Temu’s early adopters were still buying on the platform 16 months after making their first purchase. That number is double the retention of Walmart and Target and about half that of Amazon. [1]
According to calculations by Lipsman, Temu’s ‘stickiness’ (the ratio of daily users divided by monthly users) rose from 9% in September 2022 to 20% in October 2023. [10] However, at the same time, Morgan Stanley claimed that the number of US households shopping on Temy declined 20% between September 2023 and January 2024. [12]
The 30-day retention rate in the US is 20% or more and remains relatively stable. However, changes in retention rates outside the US can be more significant.
In the past six months, the percentage of repeat customers has reached 45%. While this isn’t as high as Amazon’s 70%, it is gradually increasing. When Temu primarily focused on gaining new customers in the first half of 2023, the repurchase rate was only 30%.
While the repurchase rates for beauty care products are relatively high, the repurchase rates for large-ticket items and clothing are relatively low. Purchase frequency is also related to pricing, with lower-priced products being purchased more frequently. This is especially true for clothing; consumers buy these products weekly or monthly for different social occasions.
Repurchase rates in the US and Europe have been declining. The reasons are:
There has been increased competition with Amazon and SHEIN, which have reduced prices. Temu’s prices (after subsidies) are usually 40-50% lower than those on Amazon, and for clothing, 20-30% lower than on SHEIN.
Since September, Temu has cancelled ultra-low-priced items (products under $3 or even $1), which significantly affected repurchase rates. Temu also removed low-priced items, raised prices, and reduced subsidies, which impacted the repurchase rate of ‘hot-selling items’. These items had a short lifecycle and saw large sales changes within a month, making inventory control difficult.
Logistics
Temu has warehouses in Guangdong, Yiwu (where 50% of all orders ship from) and Hong Kong and ships from Guangzhou, Shenzhen, Hong Kong and Shanghai.
Every day, the number of outsourced packaging and sorting staff for Temu can reach 10,000 - 30,000. There are also more than 10,000 overseas customer service people.
Temu and SHEIN have significantly impacted the air cargo market, boosting the prices for air freight from hubs like Guangzhou and Hong Kong.
Temu’s daily cargo volume has reached 4,000 tons, while SHEIN’s is even higher at about 5,000 tons. AliExpress’s daily cargo is 1,000 tons, and TikTok’s is approximately 800 tons. While Temu’s market share in the US has been stable, AliExpress and TikTok are growing rapidly.
At the end of 2023, Temu tried sea freight for two months but found that even express shipments still took 12 days to reach the US customer, compared to 8-11 days by air freight. Temu also tried to bring 30%-40% of its best-selling products to the US, but due to slow delivery and out-of-stock situations, this approach proved to be unsustainable. Moreover, rapid changes in the market bring great uncertainty to stocking goods overseas. Temu did, however, reduce air freight costs by using tail warehouses and signing contracts with three major airlines.
In January 2024, Temu and Jitu also changed their cooperation. Jitu no longer provides ‘end-to-end’ logistics but focuses on the last mile delivery, allowing Temu to find the most efficient service provider (minimising costs and maximising timeliness) for each leg of the transport. [11]
By sending small parcels, Temu can avoid 10%-20% import tariffs in the US because they stay under the $800 threshold of the de minimus rule. Considering the enormous volume of packages (one-third of all packages arrivingTherefore the rule has come under fire.
Ironically, the Obama administration introduced the policy in 2015 (raising the threshold from $200 to $800) to stimulate e-commerce and help customs focus its resources on bulk commodities. The de minimus rule especially helped Amazon because, at the time, the company was actively recruiting Chinese merchants on its platform. Ten years ago, there were 15,000 Chinese merchants on Amazon; now, there are 1 million. These merchants would post small packages from China directly to the consumer. Later, Amazon would shift course and promote Fulfilment by Amazon, enabling the merchants to put their goods in an Amazon warehouse in or near the destination country. [13]
When using FBA, merchants would ship in bulk, would exceed the de minimus threshold and would have to pay import tariffs. Meanwhile, Amazon could charge the merchants for logistics services. To encourage merchants to use FBA, Amazon gave products higher search rankings. 89% of merchants ended up adopting FBA. [13]
Policy changes like increased tariffs or longer customer clearance time, which could lead to a longer delivery time, will also force Temu to change its logistics strategy to maintain customer satisfaction. Although it considers the chances of the regulation being fully abolished small, Temu is anticipating a possible change to the threshold value of the de minimus rule. But even without the advantage of de minimus (which is being lobbied for a change), it would most likely still offer significantly lower prices.
Pricing
In Temu’s fully managed model (see our June article on Temu for an explanation of this model), the merchant's gross profit is normally about 20%, but the bidding system (more on this later) in which different merchants compete will reduce that margin. For categories with fierce competition, if a merchant's price is ‘not optimal’ compared to market prices, Temu's backend system will prompt merchants to reduce their prices.
Normally, such price reductions will be between 10% and 15%. So, if a product costs RMB 12, the system recommends adjusting it to RMB 10 instead of RMB 11. However, in some cases, the recommendation can be as high as 30%. If there are no adjustments, the product might be automatically removed from the platform. Preferential policies that were first given to developing categories will disappear, and gross margins will become smaller. At the end of the day, in the fully managed model, the gross margin of a merchant tends to be about 10%.
Temu does, however, give certain product categories that are short in supply, like plus-size women’s clothes, 20-25% gross margin to encourage merchants to list such products. Large factories may also be given greater pricing power or autonomy.
In the fully managed model, the sales price usually is about three times the manufacturer’s price. A product that costs RMB 10 is generally sold for RMB 25-26, giving Temu a gross margin of 60%. But despite this high margin, it will still face a loss because of advertising costs, logistics fees, and overhead. We will explore Temu’s profitability later in this article.
SHEIN is generally priced slightly higher than Temu, but the price difference is not very significant. On Amazon the net margin of a merchant will be higher (maybe 30%) but operating on Amazon requires operating skills and large advertising spending to attract traffic.
While supplier prices have decreased, consumer prices on Temu have been increasing. In the US, the selling price is now 1.5 times that in Q1 2023 and is expected to be three times as high by the end of 2024. Even when discounted, the price would be 2.4 times as high to ensure a gross profit margin of 60%.
Product range
Temu wants to increase the number of SKUs in the US from 2 to 4 million (while increasing the number of merchants to 300,000) and in other markets from 1 - 1.5 million to 2 million (while increasing merchants from 100,000 - 200,000 to 200,000 - 300,000). Since Q3 2023, Temu has been increasing the importance of its 3C small home appliances category, which will be the focus of its growth strategy.
Worldwide, Temu offers 10 million SKUs, which is still very limited to Amazon’s 850 million and AliExpress’ 100 million. [9]
Marketing
For customer acquisition, Temu relied on discounts, ‘red envelopes’ and coupons while increasing brand exposure and attracting potential customers through advertising on various platforms (Facebook, YouTube, Google, etc). In the future Temu plans to hand out more coupons to existing and new customers and reduce these once a shopping habit has been formed.
Of all traffic on Temu, 65% is organic, while 35% is paid. According to Meta’s CFO, Chinese advertisers like SHEIN and Temu contributed 10% of the firm's revenue in 2023. The market has been complaining about Temu driving up the costs of digital marketing. [5]
In 2023, Temu spent an estimated $1.2 billion on adverts on Meta’s network alone. It has also placed adverts in Google Shopping search results for white-label alternatives to well-known brands and has worked with 10,000 influencers. [10]
Temu plans to spend $4.3 billion on marketing in 2024. The increase from $3 billion can mainly be found in subsidies, less in advertising volume.
$3 billion of the total budget will be spent on purchasing traffic to gain more customers.
To enhance customer loyalty and market competitiveness, $1.3 billion will be invested in subsidies (discounts).
$3 will go to the US market. Up to a third of the budget might be allocated to shopping festivals like Black Friday.
Note: the rest of this article is available to paid subscribers only.