Temu Watch #4: Challenges for the semi-managed model and product quality
Content
Things that caught our attention
After delivering their China Retail Innovation study tour, Tech Buzz China’s Ed Sander and K5 Future Retail’s Sven Rittau set down in Shanghai to review the tour and discuss topics like ecosystems and live commerce. You can listen to the podcast here.
A few months ago, Ed interviewed Vincent Nys about his findings regarding Temu’s data security. After the interview was published on Tech Buzz China, Ed and Vincent were invited to a panel discussion hosted by the Belgian Chinese Chamber of Commerce to discuss various insights into Temu. The recording is now available on YouTube.
Meituan’s lightning warehouses are seeing explosive growth. Ed summarized a report by Latepost on LinkedIn.
Luckin Coffee is planning to expand to the United States. Ed summarized the news on LinkedIn.
Introduction
In March 2024, Temu launched its semi-managed business. In this operational model, merchants ship goods to overseas warehouses, and Temu sells them on behalf of the merchant. This model reduces Temu's logistical costs and enables it to sell more bulky goods that don’t fit in a small package transported by air freight. It also prepares Temu for potential import tariffs on its fully managed shipments from China and improves consumer delivery times.
In May, we explained the semi-managed model in more detail and updated you about its progress in August. In this new episode of our Temu Watch series, we give you another update about the model's performance.
We will also update you on Temu’s sales figures and regional developments and examine how Temu has adjusted its penalty system for merchants and is taking measures to improve product quality.
The sales figures and regional developments are available to all subscribers, but the rest of this report is accessible to our paid subscribers. If you want to stay updated on Temu, consider supporting us and getting a paid subscription.
We will publish Temu Watch #5 next week, examining developments in Temu’s logistics, marketing, profitability, and outlook in greater depth.
Cheers,
Ed Sander – Research Editor
GMV & Regional Markets
Let’s start with some updated market statistics.
Temu's fully managed services in the United States, Europe, Japan and Southeast Asia are expanding rapidly and have significantly improved operational efficiency.
Temu's total merchandise transaction volume in the first quarter reached US$11.3 billion, and the second quarter was expected to be between US$13 billion and US$15 billion.
Temu performed well in the third quarter of 2024. The number of returning customers increased significantly, and the average order amount increased slightly. The total merchandise transaction volume in the third quarter reached $18 billion, comparable to the total order volume for the whole of last year.
Looking forward to the fourth quarter's growth potential, the platform's GMV is expected to reach $25 billion to $28 billion.
In terms of market expansion, Temu added Latin America and Southeast Asia in 2024. This move aims to reduce dependence on a single region further.
Temu's performance in various markets around the world presents different characteristics. By the end of October, the North American market had achieved double-digit month-on-month growth, but its share of sales had dropped below 40% from more than 50% at the beginning of the year. This is consistent with the strategy Temu formulated at the beginning of the year to reduce the share of US GMV.
At the same time, Temu's performance in the European market has shown an upward trend. Its GMV share has increased from about 20% at the beginning of the year to more than 35%. This is mainly due to Temu 's strategy of actively expanding the European market this year.
In the Asian market, the share of global GMV of Japan and South Korea is about 10%. In emerging markets, such as Brazil and Southeast Asian countries (such as Thailand, Malaysia, the Philippines, etc.), Temu's GMV share is less than 10%.
Temu's global expansion strategy focuses on the US, European, and Latin American markets, as well as market opportunities in Japan, South Korea, and Southeast Asia. But in each region, Temu faces different challenges…
Asia
Temu's initial attempts in Southeast Asia have achieved good traffic and orders. Temu's promotion efforts in the region are much smaller than those in Europe and the United States, and it has not yet launched large-scale new user subsidy promotion activities.
Although Indonesia is difficult to enter due to governmental policies, Malaysia, Thailand, and the Philippines may become key target markets for development. However, these countries might follow Indoneasia’s example and also take action to prevent their domestic manufacturing industries from being affected by competition from China. Temu has, therefore, adopted a cautious strategy in the region.
When expanding these markets, Temu needs to follow the relevant regulations of cross-border e-commerce and adapt to the habits of local consumers. Next year, Southeast Asia's 312, 712 and 618 shopping festivals are expected to become essential promotion opportunities for Temu.
Latin America
While attracting investment in the US market is relatively simple, there are more challenges in Latin American regions such as Mexico. Currently, only basic promotion activities are being carried out In the Brazilian market, but it will become a focus of attention next year. Temu needs to balance the newly launched fully managed and semi-managed businesses. This balance is crucial to its success in the region. By 2025, Southeast Asia and Brazil are expected to become the main drivers of Temu's GMV growth.
Middle East
Political instability and customs clearance issues in the Middle East have led to air and sea transport obstructions, making cross-border e-commerce businesses face many difficulties. The region's logistics conditions are unstable, and cargo loss occurs from time to time, which undoubtedly increases business risks.
Despite the strong market demand in the Middle East, Temu still faces problems such as slow delivery and the risk of lost goods in the region. To solve these problems, the region must introduce warehousing facilities, optimize the standardized process of fulfilment and delivery, improve road conditions, improve transportation, and build a sound information system.
Europe
The European market has high operating costs, low user willingness to pay (in advance), and a fierce competitive environment with platforms like Shein and Alibaba. Low-priced goods and counterfeit products have led to restrictive measures in several countries, including France, Spain, Italy, and Germany, including fines and advertising removals.
In addition, Temu faces challenges such as tax policies, product restrictions, and frequent user complaints in the European market. Together, these lead to the dilemma of low customer acquisition efficiency and high costs.
A unique challenge of the European market is that local merchants are widely distributed and tend to operate independently.
The rest of this report, which includes an update on the semi-managed model and Temu's measures to improve product quality, are available to paid subscribers.
Update on the semi-managed model
The revenue of the fully managed business has exceeded $30 billion in the first nine months, and the full-year revenue is expected to reach US$40 billion. In contrast, the semi-managed business has only achieved close to $4 billion in the first nine months, which is still a considerable distance from the annual target of US$20 billion.
Still, the importance of semi-managed in Temu's overall business is gradually increasing. In July and August 2024, its proportion of GMV reached 25% and 30%, respectively. The ratio is expected to increase further to 40% by the end of the year.
Since mid-to-late August, the order volume of the semi-managed model has achieved a month-on-month growth of 10% - 20% every week. The number of merchants in most categories has become saturated, and the company is conducting more detailed category recruitment.
The main reason why new merchants are reluctant to adopt the semi-managed model is that they feel insecure.
In Q3 2024, the semi-managed model faced the problem of inventory shortages. Most semi-managed merchants usually keep a low inventory level due to concerns about inventory risks. Under the semi-managed model, merchants have difficulty managing inventory and can usually only stock one-fifth of the actual demand. Even large sellers dare not stock large quantities due to the possible risk of losses, resulting in few merchants fully adopting this model. This lack of inventory has seriously affected the platform's operational efficiency and user experience.
Although the fully managed business of the Temu platform faces competition and rule changes, it remains relatively stable, and its overall performance is acceptable. In contrast, the semi-managed model faces problems such as low sales, large profit fluctuations, and frequent changes in policies and prices, which affect merchants' willingness to invest.
A manager of an e-commerce platform focusing on acquiring and growing Amazon Marketplace businesses was more sceptical. He claimed that Temu 's semi-managed model GMV ratio was increasing at a slower rate and is expected to remain between 15% and 20%. Although the global market size was expanding and the net value of Temu's semi-management model was also increasing, its proportion remained unchanged. This is because the number of merchants and commodities under the semi-managed model remains limited.
The growth rate of semi-managed GMV is directly related to the number of sellers. The growth rate will slow if the number of sellers stagnates or decreases. However, whether it is a fully or semi-managed model, inventory risks always exist, and unsaleable goods are difficult to handle through other channels.
The net profit margin of semi-managed services is about 20%, while the net profit margin of fully managed services is only about 5%. However, the fully managed model does not require much inventory and can be launched within 15-20 days, while the semi-managed model requires 90-120 days of preparation. This also forces merchants to bear the risk of price fluctuations. This difference also affects the choice of merchants, and those operating small commodities usually choose to use fully managed services.
Trade conflicts and delivery times are the primary considerations when choosing a semi-managed service. Since semi-managed services have higher risks in logistics and turnover, fully managed services are more suitable for market testing. Although Temu's shared data is unclear, its sales performance can be evaluated through small batch shipments of fully managed services.
One merchant said: ”For the semi-hosting model, we are currently taking a wait-and-see attitude, mainly because our current profit is not ideal and there is a lack of motivation. Our net profit margin of the semi-trust model has gradually dropped from more than 25% at the beginning of the year to 11%, and it is expected to continue to decline. Maintaining operations won't be easy if this profit margin falls below 10%. In addition, the capital turnover speed of the semi-trust model is slower, with a cycle of more than 50 days, while the cycle of the full-trust model is less than 20 days. However, we will not completely abandon the semi-managed model so we can expand quickly when policies or mechanisms change in the future."
“Meanwhile, the profitability of our sales on Temu's fully managed model has changed significantly in the past year. Last year, the net profit margin exceeded 13%, but it has dropped to around 7.5%. This downward trend is expected to continue, mainly due to the intensified market competition and the entry of large sellers, which has led to price declines. The net profit margin is expected to drop from 7.5% to 4.5% in the next 12 to 18 months.”
Despite the challenges, the growth trend of semi-managed businesses is evident and will positively impact the company's future development. It not only increased Temu's GMV but also promoted the expansion of overseas business and the formation of more efficient quality management and after-sales service models.
Regional differences
Regarding the development of different markets, the US market has performed outstandingly, with the number of semi-managed SKUs reaching 1.5 million, while the number of fully managed SKUs is 2 million. The European market has also made considerable progress, with the number of semi-managed SKUs being about 1 million. In contrast, the number of SKUs in emerging markets such as Japan, South Korea and Mexico is relatively limited.
In the European market, the proportion of semi-managed business is expected to reach 40% next year, and in the US market, this proportion may even rise to 50% to 60%.
Semi-managed services in Europe are going through a critical expansion phase. Temu is expanding from five major countries to a broader region, with plans to cover about 20 countries in the first half of next year. However, Temu must carefully manage this expansion speed to ensure coordinated development with fully managed services.
Temu has also taken slowdown measures in some regions due to compliance issues. Although it has set high goals for semi-managed services, the progress of merchant recruitment has not met expectations. The company's senior management has personally participated in the merchant recruitment activities to speed up the progress.
Semi-managed services still have policy and compliance risks. When expanding international business, the company faces specific legal and operational obstacles. For example, in Mexico, business progress has been slow due to compliance with regulations and tax issues. Some countries prohibit the establishment of overseas warehouses or only allow them under certain conditions, such as the warehouse area being within 30,000 square meters.
Semi-managed merchants
Since the launch of the semi-managed model in March, Temu has prioritized recruiting merchants who want to sell through this model. It has tried to recruit merchants who already sell on Amazon and factories that have done well in the fully managed model and want to consider setting up local warehouses.
90-95% of the recruited semi-managed merchants have already conducted business overseas, and most have overseas warehouses. The other category has proven more challenging to convince …
Temu used the infamous ‘horse racing mechanism’ and had multiple recruitment teams compete, regardless of product categories. For a while, most site traffic was diverted from fully managed to semi-managed products, and many Temu staff members for the fully managed model were moved to support the semi-managed business. In September, the semi-managed team was moved from Panyu, Guangzhou, to Shenzhen, the city with the largest number of Amazon merchants worldwide (about 100.000). [1]
According to people close to Amazon, the Temu investment team has contacted at least half of the approximately 400,000 Chinese merchants on Amazon. Seven or eight different Temu employees even contacted some merchants. [1]
Those willing to try selling on Temu will get help dealing with the inventory of unsold goods at lower fees than Amazon. Merchants can also get more traffic support and avoid the fierce price comparison of the fully managed model, thus obtaining higher profits. [1]
The international e-commerce market has complex relationships and characteristics between different types of sellers and platforms. Taking the US and European markets as an example, semi-managed merchants are composed of:
50%-60% are merchants engaged in cross-platform business (using multiple marketplaces)
30%-40% are foreign trade companies
10% are local brands operated by Chinese
5% are domestic brands such as Midea and Xiaomi
Successful international trade sellers usually adopt a multi-channel sales strategy. This explains why there is an overlap of about 30% between large foreign trade sellers on Temu and large Amazon sellers. Amazon's large sellers mainly focus on online sales, while large foreign trade sellers have a more comprehensive range of business. Merchants who continue to operate on Amazon are still important resources.
The number of merchants engaged in pure trade on the Temu platform has decreased significantly. Companies with factory resources, production capacity, and supply chain advantages have more competitive advantages. However, some large foreign trade sellers can control logistics costs between 8% and 10%, significantly enhancing their survival and market competitiveness.
Regarding platform competition, the major e-commerce platforms compete fiercely for semi-managed merchants, but the overlap in fully managed merchants is relatively low. At the same time, platforms are also actively competing for Amazon's large foreign trade merchants. Traditional e-commerce giants like Amazon also actively expand their semi-managed businesses to cope with market changes.
Merchant margins
In the early days of the semi-managed model, Temu would offer 15% to 20% off on semi-managed products compared to the same items on Amazon. It hoped consumers would get the impression that products were the same as those on Amazon but at a lower price. This brought merchants lots of orders. [1]
Under Temu's semi-managed model, the merchant's cost structure mainly consists of several parts:
Temu used to allow merchants to earn up to 10% profit but recently reduced this profit margin through price reduction strategies. In the past, merchants had very flexible pricing, and profit margins could reach 15 - 25%.
In the semi-managed system, the risk of unsalable goods is closely related to the frequency of price adjustment. On the platform, merchants cannot control traffic distribution, promotional activities, and product weights, and they can only set the supply price. In the supply chain, strong or large competitors may force other sellers to follow suit by lowering the prices of certain goods. Temu adjusted prices approximately every two to three months from the beginning of the year to July. However, starting from July, especially from September to November, the frequency of price adjustments increased to approximately once every half a month.
In addition, automated algorithms and price comparison systems make competition between merchants difficult to control. Temu's rules and pricing mechanism conflict in terms of inventory strategy. The platform's pricing mechanism may force merchants to sell goods at 60% to 70% off; otherwise, they may face the risk of a sharp decrease or disappearance of traffic.
Indeed, since Q3 2024, some semi-managed merchants have found that the platform has begun to treat them like fully managed merchants. Now, the price must be lower than the same or similar items on the entire internet otherwise the product may be removed from the shelves. Under the new price rules, the prices of many products have dropped to 30% to 35% off those on Amazon. [1]
As a result, profit margins fell back to 3 - 5% and have remained there, but the price pressure has eased. In the past, profits fell rapidly, but now goods are directly listed at the lowest price without further cost reduction. Merchants must also pay a deposit of about 10,000 RMB or $1,400.
The platform also launched new promotional activities, requiring merchants to adjust their prices to participate, and the discount may be as high as 50%. The increase in the frequency of price changes is mainly due to the rise in semi-hosted merchants and the adjustment of the platform's overall strategy. Temu pays special attention to price strategy, especially in high-value-added or high-priced goods. The platform's pricing strategy, price adjustment mechanism and communication with consumers are all centred around price. Such frequent price changes may profoundly impact the supply chain and market competition.
Although more than 80% of merchants are profitable, the profits are generally low. Temu noticed that the net profit of merchants with their own factories is about 7%, while the net profit of merchants with rented factories is between 3-5%.
Semi-managed products
T-shirts in the fully managed model are usually priced between $15 and $20, while similar products in the semi-managed model are priced around $25. This price difference reflects the differences in operating costs and service levels between the two models.
Small and light goods (such as cosmetics and electronic accessories) account for one-third of semi-managed business, while medium and large goods account for two-thirds. However, the future development trend is more inclined towards large goods.
Intellectual property goods, perishable foods and high-value goods (such as jewellery) tend to be shipped locally to optimize logistics and reduce risks.
Food, daily necessities and high-frequency consumables have performed well in sales, and these categories are more competitively priced on Temu than on Amazon.
Due to pressure from public opinion and government anti-dumping measures on specific clothing categories in the US market, clothing sales are not as good as before.
Looking ahead, Temu will focus more on diversified SKUs, including high-end small household appliances, to meet the needs of different consumers. This strategy will help it adapt to market changes and remain competitive.
Brand Recruitment
Now that foreign trade merchants on the Amazon platform have been recruited, Temu will pay more attention to introducing foreign local brands. At the same time, Temu is also actively signing cooperation agreements with well-known Chinese brands that intend to expand overseas markets, which gives them pricing autonomy to promote their international development.
The expansion of the semi-managed business is partially due to the internationalization of many Chinese brands, including well-known brands such as Midea and Xiaomi. Temu has signed contracts with more than 30 large brands with annual sales of RMB 100 million to RMB 1 billion, a significant increase from 10 brands in June. Temu plans to attract 100 large domestic brands of the same size to join by the end of the year.
About 10% of SKUs currently have independent pricing rights, mainly controlled by some local brands registered in the United States that are operated by Chinese or Vietnamese. In addition, there are several large Chinese brands going overseas, totalling no more than 15% of SKUs. For those merchants with pricing autonomy, Temu earns revenue by charging a commission of 1% to 3%, while other goods are calculated based on gross profit. This model provides Temu with a source of income and merchants with a certain degree of flexibility.
Temu is also attracting more small and medium-sized brands and brands with independent websites in the United States. These measures may significantly impact the platform's merchant structure, as Temu tends to support large sellers and new products with potential. These changes are also expected to improve user experience, including faster delivery speeds and better product selection.
In terms of international brands, Temu planned to introduce 500 in Q3 2024 and aim to reach 1,000 to 1,500 by the end of the year. Although the company hopes that in the future, Chinese and foreign brands will account for half of the market, there are still many challenges to achieving this goal.
Dealing with merchant concerns
As we’ve seen, merchants face multiple challenges and risks on Temu that significantly affect their inventory management and pricing strategies. First, due to production cycles, shipping times, and safety stock requirements, merchants need to ship inventory to the United States 90 days in advance, making them reluctant to purchase large quantities.
Second, Temu usually requires sellers to accept the price the system recommends, which may be close to the cost price or even result in losses. As a result, large sellers usually only reserve 30% of the inventory required.
Temu is aware of these difficulties and promises to make improvements in the future. They provide more detailed transportation and warehousing information, add specific overseas warehousing and distribution services, and bear part of the costs for large merchants. In addition, Temu has introduced a new policy to provide merchants with technical support to help them connect their warehouse software with the API of the ERP system.
However, Temu's low-price sales strategy has led to vicious competition among merchants, harming the platform's overall growth indicators. Although the platform no longer advocates price wars, competition between merchants remains fierce. Temu also tends to allocate more traffic and orders to merchants with lower prices.
Temu constantly updates and adjusts its operating rules, and large sellers need to pay close attention to these changes and make corresponding adjustments. Temu has also implemented more precise refund and return policies to address consumers' excessive use of unconditional refund and return policies. They use big data, artificial intelligence, and user information analysis to identify and ban fraudulent users.
Intellectual property disputes mainly occur between merchants, and many Chinese sellers lack awareness of intellectual property protection. Temu recommends that merchants apply for patents before listing products to avoid disputes. Increasing transparency among merchants can help reduce vicious competition and intellectual property disputes, but this remains a critical challenge facing Temu.
Improving Quality
Temu has realized the negative impact of price wars and is trying to improve the quality of products sold on its platform. There are currently two core merchant relation groups in the company, consisting of 200 and 500 people, respectively, and solutions are discussed daily. The platform has tried to reduce the appearance of low-quality and low-priced goods through fines in its penalty system, but the effect has not been ideal.
Temu also found differences in the requirements of consumers in different countries for goods. For example, Chinese consumers are more accepting of quality limits of lower-priced goods, while foreign consumers are more demanding. Therefore, Temu has strict requirements on product details, including packaging and instructions, to ensure that quality standards are met.
Temu is taking several measures to optimize platform operations and product quality management.
Reducing price pressure
The platform currently advocates improving the quality of goods and supporting high-quality merchants (see below) but does no longer approve of excessive price competition and guides merchants to avoid unfair competition. The AI system noticed that the selling price of some goods was already lower than their cost, and Temu believed these products may have potential risks. In cross-border e-commerce, the artificial intelligence supervision system is already very advanced and can effectively identify violations and quality fraud. In the future, such behaviour may face financial penalties.
The platform no longer aims to reduce commodity prices as much as in the past. Various factors caused the phenomenon of lowering prices in the past, and now a consensus has been reached between the platform and merchants. Temu has realized that excessive price reduction may affect the quality of goods, so it has now reduced this behaviour.
It will no longer allow small-scale merchants in the fully managed model to participate in vicious price competition. Instead, it will prefer to support large merchants with daily sales of thousands or even tens of thousands of products. To prevent prices from continuing to fall, Temu is optimizing its traffic allocation strategy and allocating more resources to major sellers. It also uses information technology systems to adjust traffic allocation every two weeks to support new and promising products.
Temu has taken strict measures against illegal merchants. In a meeting with the authorities in August, suggestions were made to deal with problematic merchants in advance. However, the reputation has been damaged; many users have given negative reviews, and fines cannot make up for this impact. Although some merchants have gathered for protests after being fined (see Temu Watch #2), the overall automatic price competition environment is still challenging to change.
According to the aforementioned manager of an e-commerce platform that focuses on acquiring and growing Amazon Marketplace businesses, some low-quality merchants have spread negative comments online, claiming that Temu and Pinduoduo are "black-hearted" platforms that will start "squeezing profits" after merchants develop. However, these negative comments have limited impact on large sellers, who believe that removing low-quality merchants will help the healthy development of the platform, reduce vicious competition, and increase profits.
Compliance
Faced with an increasingly fierce competitive environment, Temu nowadays pays more attention to compliance management to ensure the company's long-term and stable development. In May this year, Temu further strengthened its compliance management because it had become the second-largest e-commerce platform in Europe.
In the same month, the EU listed Temu as a Very Large Online Platform (VLOP) and required it to comply fully with relevant regulations by September. After being listed as a VLOP, Temu needs to increase manpower to handle public relations and organize materials, but this has little impact on its business. In fact, once a platform is identified as a large platform, if it follows regulations, customers and regulators will consider it to comply with local legal requirements. It is worth noting that reputation issues are no longer the primary concern, and Temu only needs to ensure that negative reviews remain low.
Merchant and consumer dispute handling
Significant differences exist in the cooperation experience between different e-commerce platforms and merchants. For example, customer service on short video platforms and emerging cross-border e-commerce can respond quickly, even late at night. In contrast, Alibaba usually takes a long time to respond, and a reply within two days is considered fast. It is inefficient in dealing with merchant issues and sometimes even leaves them unresolved.
When dealing with quality issues, Temu has adopted a flexible approach to solving them through partial or full refunds without returning the goods. This practice improves customer satisfaction and operational efficiency.
From the perspective of merchant types, merchants with factories or integrated industry and trade are more likely to deal with after-sales problems themselves due to their larger profit margins. In contrast, traders' profit margins have been significantly reduced, making competing with merchants in industrial belts or factories difficult.
Refunds for food products are more difficult to process in terms of after-sales service, but the number of disputes is relatively small. The return rate of clothing products is as high as 13%, significantly higher than the average return rate of 8-10% for other categories. Meanwhile, clothing accessories, shoes and bags account for 20% of the total GMV and are the focus of after-sales service. Although the return rate of daily necessities is at an average level, the number of complaints is still high due to the large sales volume.
The adjusted penalty system
You might not think so based on the many complaints about the quality of products bought on Temu, but Temu has strict standards for quality and fulfilment, especially in key periods such as the fourth quarter, when merchants may face high fines, affecting final profits.
The merchant profitability of fully managed services is a major issue. As shown, it generally has low profit margins and often incurs losses due to fines. For example, an item that sells for only RMB 10 could face a fine of up to RMB 50. Adding costs, the total loss could reach RMB 60. This means that 20 to 30 items of the same item would need to be sold to compensate for this loss. Most sellers can achieve a net profit of 4-6%, but dishonest merchants may face huge fines, such as a fine of $3 million for a revenue of $1 million.
Fines are an essential source of platform revenue. For small, low-quality merchants, the fines can be as high as 50% to 200% of their gross merchandise volume (GMV). In contrast, the fine ratio for large, high-quality merchants is between 3% and 5%. The platform determines the amount of the fine based on a quality rating system, but the system lacks transparency.
Although large sellers have the right to view specific data and order records, they usually accept the fine to avoid too many disputes with the platform. This practice reflects the power imbalance between the platform and the merchants and highlights the problems in the transparency and fairness of the platform's fee and penalty mechanism.
Meanwhile, platforms face a significant challenge when handling complaints about delayed delivery in the semi-managed model due to the lack of a precise mechanism for dividing responsibilities.
In the first half of 2024, it was widely reported that thousands of merchants engaged in cross-border e-commerce were punished for violations. In Temu Watch #2, we reported how merchants had started protesting against Temu’s penalty system and had even made their way into Temu’s offices. At that time, changes to the penalty system were announced, but details were scarce. Now, we can share more insights into the changes Temu has made.
First, Temu announced that it would refund some fines from August to December 2023 and some fines given in 2024, but future fines would remain unchanged.
As described in Temu Watch #2, Temu has implemented a quality rating for merchants. The merchant ratings show that 8% of merchants are rated excellent with scores above 90, 12% are rated good with scores between 80 and 90, 50% to 60% are rated medium with scores between 70 and 80, and 10% are rated pass with scores between 60 and 70.
The new agreement reached in early 2024 will reduce the fine multiple from 3 - 5 times to 1.5 - 3 times. In addition, future fines will be more specific, listing reasons, such as missing buttons or loose threads. These changes have different impacts on merchants with different rating levels. Merchants with a dynamic quality score of 90 points or more will not be fined. Merchants with scores between 60 and 90 points will face fines of 1.5 to 3 times, but they can use the fast appeal channel. For merchants with a dynamic quality score below 60 points, the platform will implement stricter management measures, including restrictions on inventory and listing new products. In severe cases, they may even be forced to leave the platform.
These policy adjustments aim to improve product quality while also providing more protection and support for merchants who perform well. Merchants with a score of more than 60 generally approve of the new deduction mechanism.
The change directly led to an increase in gross merchandise transaction volume and the penalty rate was significantly reduced from 7-8% to 2-3%. This policy adjustment not only affected the platform itself but also positively impacted suppliers. Incentivized by the new policy, suppliers have taken more proactive measures in inventory management. These efforts have significantly reduced the out-of-stock rate from the original 40% to about 15%. Due to the reduction in penalties, suppliers' profit margins have been expanded, enabling them to adjust production capacity and inventory better, further increasing sales.
Nevertheless, regular fines help eliminate unqualified merchants and thus optimize the market environment. The intensity of fines has been reduced, which may be because some bad merchants have been dealt with or dare not commit infringements again. However, Temu believes rectification efforts should be further strengthened.
‘High-quality merchants’
Pinduoduo has said it would increase support for high-quality merchants while cleaning up low-quality merchants. Temu will continue supporting high-performing merchants from the beginning of 2024 and eliminate those not meeting the standards. March and April were the peak periods for support and cleaning up, and in May, some unqualified merchants were eliminated. Although some merchants are still of low quality, their number has been dramatically reduced.
When Pinduoduo announced its Q2 2024 results, investors were spooked by what Chen Lei, chairman and co-chief executive officer of PDD Holdings, said during the earnings call: "We are prepared to accept short-term sacrifices and potential decline in profitability." PDD’s stock price dropped about 30%. [3][4]
A closer look at what Chen Lei said does, however, shed some more light on Pinduoduo’s plans. "We will invest heavily in the platform's trust and safety, support high-quality merchants, and relentlessly improve the merchant ecosystem." [3a] Pinduoduo obviously realised that it was in a quality reputation crisis and needed to solve these issues for long-term survival. As such, the short-term loss of profitability to maintain long-term sustainability should be seen as a positive development for the platform, merchants, and consumers.
Temu has now adopted different management policies for various types of merchants. It will conduct a detailed investigation if the return or complaint rate increases for high-quality merchants. For medium-quality merchants, a case analysis method is adopted. For low-quality merchants, it implements strict monitoring and may issue warnings or take measures to remove them from the webshop.
Temu has adopted a more rational cooperation model with merchants and is committed to achieving common development. These changes may positively impact merchants and consumers, including improving product quality, improving merchant profitability, and promoting long-term cooperative relationships between the platform and suppliers.
To become a high-quality merchant, the monthly growth rate of commodity transaction volume must exceed 20% month-on-month, and the product quality score must be higher than 90 points. In addition, high-quality merchants' return and refund rate and penalty rate must be less than 15%.
High-quality merchants are not limited to large enterprises or listed companies but refer to merchants that fit the platform's development direction. The platform supports high-quality merchants, including comprehensive guidance, helping reduce costs and increase the sales rate of new products. These measures are conducive to merchant development and improve the platform's overall quality.
To attract more high-quality merchants, the company has lowered the supply price from 85% of Amazon's price to 80%. Merchants like Amazon's premium merchants or merchants with unique products and brands can still enjoy 85% of the supply price.
From sticks to carrots: merchants support
Temu has introduced a series of new policies that significantly impact both merchants and consumers. First, the platform has significantly lowered the threshold for merchants to enter the platform, halving the original deposit of RMB 1,000 to RMB 2,000 to RMB 500 and RMB 1,000. At the same time, Temu has updated the order dispute handling process and increased the number of acceptable complaints for both consumers and merchants. The number of complaints for certain specific product categories has increased to three, while most categories no longer limit the number of complaints.
To improve service quality, Temu provides a fast-track dispute channel to high-quality merchants with excellent performance, especially in the clothing and daily necessities categories. The platform aims to shorten the merchant complaint processing time from one month to less than one week.
In addition to improving the penalty mechanism, Temu has also strengthened merchant training and support. The platform encourages large merchants to guide small merchants and share successful experiences to improve the overall service level.
Besides reducing price pressure, Temu has also been paying more attention to merchants' profitability.
E-commerce platforms regularly analyse data to predict sales trends for various products and models in the next quarter. Temu provides merchants with sales strategy suggestions, covering product focus, image optimization and pricing. In addition, it helps merchants with cost analysis and bill of materials disassembly and guides in reducing production costs. The platform recommends merchants develop new products that cater to market demand and remove unpopular features to reduce costs. This type of support provided by the platform is more effective than simple freight subsidies and can better help merchants reduce costs.
In recent years, such guidance services provided by e-commerce platforms to merchants have made significant progress and become more comprehensive and efficient. Specifically, by the end of 2022, some platforms began requiring merchants to increase the number of certain types of goods. Then, in the second year, these platforms began to recommend best-selling categories and set relevant listing targets. In 2024, more detailed guidance was provided, covering functional adjustments, pricing strategies, material selection and sales areas, and even providing success rate predictions. These platforms also offer comprehensive sales guidance, including category selection and traffic cooperation, to assist merchants in optimizing operations.
There are significant differences in merchant training and support between different e-commerce platforms. The guidance provided by Taobao University, AliExpress University, and Amazon Program Platform is relatively basic and general, often lacking in specificity and difficult to apply directly to actual sales. Still, this contrasts with some other platforms that do not have similar guidance, which may be due to different management styles and cultural backgrounds.
Chinese platforms usually provide detailed operating procedures and specific guidance, and the implementation of these procedures is strictly monitored. In contrast, European platforms tend to provide basic information and encourage merchants to learn and apply it independently. This difference reflects the management culture of different regions.
Amazon China's merchant promotion team provides limited follow-up support after completing the initial promotion, and it is difficult for merchants to contact customer service. Temu and TikTok take a different approach. Their customer service teams provide 24-hour support and are ready to answer questions for merchants at any time.
Temu's detailed suggestions can significantly improve merchants' sales performance. Although many analysis agencies do not pay attention to this detailed guidance, it is, in fact, Temu's core competitiveness. These changes are expected to significantly impact merchants' operations and sales, helping them better adapt to market demand and improve their competitiveness.
Temu supports high-quality merchants by providing various commission reductions and exemptions and hosting large-scale events and activities. The support budget for high-quality merchants will continue to increase to increase order volume and subsidies for merchants. The platform's commission rate remains unchanged, and Pinduoduo still provides merchants with many subsidies and free shipping services.
Merchants participating in specific promotions or group purchases also enjoy subsidies. In addition, the platform used to charge commissions or technical service fees when the return rate exceeded 30%, but now these fees are no longer charged for returns. These measures are all aimed at optimizing the merchant structure and improving the quality of the platform, thereby promoting its long-term healthy development.
So far, Temu’s measures seem to be paying off. In the current market environment, large merchants have performed particularly well, while small and medium-sized sellers have also achieved varying degrees of growth. The market has almost eliminated merchants of low-quality goods, while suppliers of high-quality goods have achieved several times the growth. The monthly sales of some medium-sized sellers have increased from hundreds of thousands to 700,000 - 800,000.
It is already tricky for medium-sized sellers to maintain single-digit growth by providing low-priced and poor-quality goods. On the contrary, those sellers who follow the requirements can maintain a growth rate of more than 10%. Even more encouraging is that the monthly growth rate of small and medium-sized sellers exceeds 20% on average.
But only time will tell if the friction between Temu and merchants will cease, and this will be the beginning of a beautiful friendship …
Next week, in Temu Watch #5 we will continue our analysis of recent expert interviews examining Temu’s logistics, marketing, AI, profitability and look towards the future.
Sources
Temu Watch #4 and #5 have been compiled from an analysis of around 15 Six Degrees Intelligence network expert interviews. The information has been augmented with the following sources:
[1] 2024-11-19 Latepost [2] 2024-11-15 Rest of World [3] 2024-08-27 Yicai Global [4] 2024-08-27 Momentum Works
Thanks for such a great article, Ed. I just have two quick questions that might help me understand better.
On the table in the merchant margins section, if I sum up all the numbers I get ~68% (32% margin).
1) Is this table relatively current or was it from an earlier exercise?
2) To make sure I do understand it: Of an item listed for US$10 (for example), Temu takes ~40% (according to Watch #3) and out of the US$6 left, the merchant gets 32% (based on the table in #1)? Is this the right way to look at it? I said this because the article mentions that net profit margin is ~3-7%. Can you walk me through the math to get the 3-7% based on that information?
Thanks a lot!