Temu Watch #5: Logistics, marketing, AI and the question 'when will Temu break even?'
Contents
Things that caught our attention
Hou Yi, the founder and CEO of Alibaba’s Hema (Freshippo) supermarkets, who ‘retired’ in March, has registered a pet food business that looks much like his old venture. Ed summarized the news on LinkedIn.
Alibaba has merged its domestic and international e-commerce businesses. The synergy between the two businesses might give Aliexpress a boost. Ed discussed the news on LinkedIn.
Introduction
Last week, in Temu Watch #4, the first part of our quarterly-ish Temu update, we shared the latest insights into Temu’s attempts to improve the quality of products sold through its platform. We also looked at the latest developments in its semi-managed business, the sales model in which merchants send goods to overseas warehouses and are responsible for delivery to consumers.
In this second part of our update, we will examine the latest developments in Temu’s logistics, marketing, and advertising strategies, competition with Amazon, current profitability, and expectations for the future. We will also share some insights about the ways Temu applies AI.
The first half of the report, covering logistics and marketing, is available to all readers. The second half is only available to paid subscribers. If you want to stay updated on Temu and other China tech topics, consider supporting us and getting a paid subscription.
Cheers,
Ed Sander – Research Editor
Logistics
Let’s first look at the latest developments in Temu’s logistics.
Warehouses
Temu is actively expanding its warehousing facilities around the world. Currently, it has nearly ten warehouses overseas in the United States, and it is expected to increase this to 13 - 14 by the end of the year, of which three will be self-built warehouses. In addition, Temu has expanded its warehousing facilities in countries such as Canada, Vietnam, the United Kingdom, Germany, Spain, and Japan to better support its global business operations.
Canada only needs one warehouse to meet the demand. At the same time, Vietnam has set up two warehouses, which can not only better serve the Southeast Asian market but also deliver goods to Southeast Asian countries by land transportation. The logistics of the US market are mainly transited through Vietnam. This is because Vietnam has obvious tariff advantages. The tariffs of most commodities are between 3% and 5%, and some commodities can even be tax-free.
Goods shipped to the United States from Vietnam have two primary sources: one comes from Chinese e-commerce companies in Vietnam, and the other is shipped from Guangxi, China, to Vietnam and then transferred to the United States. This strategy improves logistics efficiency and effectively reduces the cost structure, especially in the US and Southeast Asian markets.
Temu's logistics strategy in the United States has several significant advantages. First, it fully utilizes the warehousing facilities in the United States, providing convenient return and exchange services and effectively reducing logistics costs. Second, Temu provides merchants with flexible options. They can use warehouses recommended by Temu or choose approved third-party logistics services. Many professional companies choose cooperative warehouses recommended by Temu, indicating that these warehouses may have certain advantages in efficiency and reliability.
There are two main types of warehouses in the United States. The first type is a strategic warehouse managed by Temu's official partners, such as Koukouyi and Wanyitong. Logistical service provider SF Express is also vigorously expanding its international business this year by establishing overseas warehouses, especially for Temu semi-managed services.
The second warehouse type is the merchant’s own warehouse or a platform cooperative warehouse connected through an API interface. There is also an official self-operated warehouse that theoretically exists, but its operation's details are unclear.
Rest of World recently reported that some small merchants are using Chinese immigrants in the US who offer their living rooms and garages as warehouses to cross-border sellers on Temu, TikTok, and Amazon. These mini fulfilment centres help deliver orders, examine returns, and sell excess inventory to local stores. [1] While fascinating, this probably only accounts for a small share of the semi-managed business.
In 2024, Temu planned to invest about RMB 2 billion to expand overseas warehousing facilities, mainly through leasing and cooperative operations. These overseas warehouses will undertake multiple functions, including processing returns and transit and cooperating with brands to obtain commission income. Temu’s goal is to set up 40 to 50 overseas warehouses in 20 countries, but this plan may be postponed until the first quarter of next year. Among these warehouses, the number in the United States will be the largest, while the number of warehouses in other countries will be between 1 and 3.
In terms of fully managed business, Temu is now building a forward warehouse system to deal with supply chain and customs clearance issues. Merchants still prepare goods in the Guangdong warehouse. Then Temu will allocate part of the inventory directly to the forward warehouse based on data and ship directly from the overseas warehouse after a consumer places an order. [4a]
According to 36Kr [4a], Temu's fully managed shipping capacity has always been a challenge, and forward warehouses may be able to resolve some of the problems of insufficient shipping capacity. Temu initially used the market bidding method to buy shipping capacity, but problems arose during the peak season, resulting in the inability to keep up with the contract. "The sky-high price of charter flights from China to the United States during the peak season was caused by Temu. The freight fee for one plane was 10 million, which is 3-4 times the daily price." A logistics industry insider told 36Kr. So, since this year, Temu has supplemented its shipping capacity by cooperating with shipping companies to charter flights. [4a]
To cope with possible operational pressures, Temu also purchased two aircraft in the second quarter, each costing tens of millions of yuan. In addition, it invested RMB 200 million in automation. By increasing the level of automation, Temu expects to reduce labour expenses and improve work efficiency.
According to 36Kr [4a], Temu also rents an entire floor in Alibaba’s Cainiao Hong Kong Smart Port eHub and uses it as an export port for some air cargo. The parcels leaving Hong Kong are transferred from the cargo collection warehouses in the Greater Bay Area cities, and the port processing, transhipment, and distribution are completed in Hong Kong. “The eHub is only 500 meters from the airport apron, and it only takes more than ten minutes to deliver the goods to the plane. Hong Kong has sufficient flight density and route coverage, which is an important advantage.” [4a]
Temu has implemented a strategy of separating warehousing and distribution and selected small Chinese-funded logistics companies, which saves about 20% of costs compared to major market players. However, due to its service advantages in remote areas, it still relies on such major logistics companies for part of its business.
Last year, Temu successfully saved 5% of costs through such segmented transportation, but these savings have been offset by the increase in business volume and air freight costs this year.
Sold on Temu, fulfilled by Amazon
Many merchants that adopt the semi-managed model continue using Amazon’s FBA (Fulfilment by Amazon) warehousing and distribution services. They ship directly from Amazon’s warehouse to customers on other platforms, which is a widespread phenomenon. However, this practice could be affected by changes in platform policies.
A major advantage of choosing an FBA warehouse is that it can provide services to multiple platforms simultaneously, which increases merchants' flexibility and efficiency. In addition, FBA warehouses offer a 90-day storage period, which is more advantageous than third-party warehouses. These factors make FBA warehouses an attractive option.
Marketing
In 2023, Temu adopted a very aggressive marketing approach, costing up to US$40 per sale. Compared with 2023, Temu adjusted its marketing strategy in 2024.
Temu invested about $1.6 billion in the year's first half. Total marketing expenditure in 2024 is expected to be controlled within $3.5 billion, excluding subsidies, and the full-year budget is $4.3 billion. However, some sources claim it will be as high as $5 billion. Regarding fund allocation, the US market will receive an injection of US$2.5 billion, and the rest of the funds will be allocated to other markets.
In 2024, Temu launched marketing activities around important e-commerce festivals, including summer promotions, the Back to School season, and Black Friday.
In 2024, Temu paid more attention to quality, efficiency, CPA (cost per acquisition), and ROI. Temu has introduced a new advertising effectiveness evaluation system, requiring the return on investment within 30 days to reach 0.4 or more; otherwise, the relevant activities will be adjusted or cancelled. Temu no longer simply pursues the increase in the number of users. In the US market, due to the slowdown in the growth rate of new users, the company’s current focus is on improving the activity of existing users. The cost of acquiring new users and maintaining active users in North America has decreased.
Considering the risks in policies and other aspects, Temu is currently not expanding advertising on a large scale in the United States. In the second half of the year, Temu planned to maintain a stable ad delivery strategy. It would mainly carry out regular event promotions without providing large-scale subsidies. This strategic adjustment reflects Temu's new direction of focusing more on efficiency and sustainability in marketing.
Due to the fierce price war in the Southeast Asian market, although Temu’s marketing investment in the region in 2024 is substantial, the effect is not significant, so this market is relatively low on the priority list.
In 2024, Temu took several measures to optimize its global marketing strategy and expand market coverage. Starting in the third quarter of 2024, Temu significantly increased its global marketing activities. Specifically, from June, Temu's advertising volume in major regions such as North America, Latin America, and Southeast Asia increased by 10% to 20% per month.
Indeed, Temu's advertising spending has changed significantly in 2023 and 2024. In 2023, Temu's monthly advertising expenses mostly remained between $120 million and $180 million but rose in October and November, reaching $260 million and $240 million, respectively. Entering 2024, Temu's advertising strategy has undergone significant adjustments. Advertising spending in August and September was $268 million and $269 million, respectively, and in October, it surged to $400 million. Advertising spending in November 2024 was expected to remain at the high level of October but could fall back to between $150 million and $200 million in December.
Nearly 50% of advertising is concentrated in North America.
Google Search ads would take 35% of the budget and Meta (Facebook and Instagram) 30%.
Temu uses data analysis to determine the budget allocation for each channel. About 40% of the total budget is allocated to brand promotion, and the rest is used for conversion-oriented advertising.
Meta and the four little dragons
Temu is one of the early adopters of Meta's advertising technology and is currently one of Meta's closest partners worldwide. Last year, 30% of Meta's advertising revenue came from advertisers in mainland China, making China one of Meta's most important markets.
Meta has listed Temu, Alibaba, ByteDance, and Shein (known in China as ‘the four little dragons going overseas’) as direct customers, allowing them to sign contracts directly without agents. Last year, although Temu had a sufficient budget, its advertising needs were not fully met due to the agent's limited credit line. Direct cooperation will provide Temu more flexibility in credit lines and payment terms.
To promote business development and strengthen cooperation, Meta has arranged a team of 20 people to be responsible for direct interaction services with these Chinese customers. This direct cooperation model can meet Temu's needs and help Meta further consolidate its position in the Chinese market.
It is worth noting that Meta is not the primary advertising platform in Southeast Asia. Advertising volume in Japan, South Korea and Southeast Asia is relatively limited. If the advertising strategy in these regions is adjusted next year, Temu may consider choosing other advertising platforms like Google and Douyin and local platforms like Line and Yahoo.
Applovin
This year, Temu has been spending a significant portion of its marketing budget on mobile advertising, marketing, and analytics platform AppLovin. AppLovin has some unique advantages over Google and Meta. First, AppLovin often outperforms Google and Meta, especially in terms of advertising strategies on mobile devices. Although AppLovin's coverage is not as good as these two giants, it performs better in click-through rate, conversion rate, and cost-effectiveness.
AppLovin generated $100 in GMV for every $8 spent, while Google and Meta needed to spend $15-20 to achieve the same effect. However, AppLovin needs to spend more than $20 during non-peak periods to achieve $100 in GMV.
AppLovin's ability to analyze mobile data is more robust than Google and Meta, which is another significant advantage. Google’s and Meta’s customer service also seems more bureaucratic. Based on these advantages, AppLovin is expected to gain some market share from Google and Meta.
Promoting Semi-Managed
In March, Temu launched the semi-managed model in North America, followed by Europe. It mainly serves furniture and home appliance companies. These merchants are mostly from Foshan and Jieyang (both in Guangdong province), and they get external traffic support through semi-managed services (see our Temu Watch #4 report). For example, an Amazon furniture merchant who opens a store on Temu can get Meta or TikTok advertising fee support.
Regarding average consumption, the semi-managed model is about $65, while the fully managed model is slightly lower, at around $40. The semi-managed model takes a higher-end route, with faster delivery, usually arriving within 3-4 days, which attracts more users from other platforms. Temu mainly advertises through Instagram and other social media, promoting small home appliances that are very popular in the US market, such as ovens and air fryers.
Temu planned to increase investment in the semi-managed model in the second half of 2024, mainly focusing on sales and marketing. Advertising would cover both fully managed and semi-managed models but concentrate more on semi-managed products regarding information flow and graphic content advertising. At the same time, Temu promotes semi-managed products through short videos and ads.
Video promos of semi-managed products
By adjusting the on-site traffic allocation, Temu has improved logistics efficiency for the US market. By giving semi-managed a larger share of website and app traffic - according to one expert, as much as 70% was allocated to semi-managed and 30% to fully managed - it shortened the average delivery time. Temu's semi-managed service is similar to Amazon's delivery time, usually taking 2 to 5 days.
Despite lower margins (see our Temu Watch #4 report), there are also some advantages to the fully managed model. For example, the benefits of the Temu platform are reflected in the fast turnover of goods in 15-20 days, the rapid return of funds, and comprehensive platform support. Under the fully managed model, the AI system handles most affairs, and merchants can focus on procurement and delivery. Although the net profit margin is only 4-5%, this model is still attractive due to efficient turnover and comprehensive support.
Planning around Amazon
Temu arranges its promotional activities according to Amazon's sales cycle and seasonal changes in North America and Europe. Specifically, Prime Day is in July, autumn sales are in October, and critical promotional periods such as Black Friday and Cyber Monday are in November. Temu usually conducts sales operations and promotions to varying degrees within about a month before and after these significant events.
Temu invests different resources in promotional activities of various sizes. Significant events such as Black Friday, Cyber Monday and Prime Day require a lot of investment, while for small events such as the Back-to-School season, the promotion efforts are only about 20% of Prime Day. This strategy enables Temu to allocate resources effectively, focusing on essential sales periods while not neglecting other smaller promotional opportunities.
Temu's promotions are not aimed at direct competition with Amazon but are intended to adapt to North America's and Europe's consumption habits.
Year-end promotion
Temu has adopted several strategies to attract consumers and merchants in this year's year-end promotion. Temu was one of the first platforms to start the promotion. Its warm-up period lasted from October 20 to November 1, during which each product category had 1-2 exclusive promotion days, which were carried out in rotation to increase attention. The main discount period lasts from November 1 to December 4.
During Black Friday and Cyber Monday, Temu mainly promotes household goods, clothing and electronic products. Temu will hold these promotions in 82 countries and regions worldwide, focusing on 3C electronics, and provide semi-managed support for merchants and brands in this category. In contrast, Amazon operates in 16 countries and mainly relies on the FBA logistics system to ensure on-time delivery.
Customer acquisition and retention
Temu has adopted different customer acquisition strategies in different regions, significantly impacting its profitability and growth potential. In emerging markets such as Brazil, South Korea, Japan, and Southeast Asia, Temu faces higher customer acquisition costs, about 20% higher than in other regions.
The cost of acquiring customers in Europe is higher than in the United States, and user purchasing behaviour is difficult to predict. Unlike in the United States, where user data is more transparent and consumers can be accurately targeted, in Europe, Temu can only rely on historical data for advertising due to strict privacy protection.
In the US market, acquiring a user costs about $9. The customer acquisition cost (including purchase) has dropped from $38-40 in 2023 to $30-35. At the same time, the cost of reactivating old customers has fallen from $14-15 to $8-10.
To improve customer loyalty and increase the order amount, Temu is working hard to increase the amount of each order in developed regions such as North America and increase the customer's repeat purchase rate.
As far as customer retention is concerned, Temu performed well in the third quarter of 2024. The number of returning customers increased significantly, and the average order amount increased slightly. In terms of customer loyalty, more than 15% of users made more than three purchases in the quarter, which is higher than most platforms. However, there is still a gap compared with Amazon Prime members' 80-90% repurchase rate.
Advertising in Europe vs the US
In the European market, Temu has adopted a unique strategy. The company's advertising budget here is relatively low, mainly relying on conventional promotions and social media channels for publicity. Temu's European product pricing strategy is also unique, usually pricing products at 2.85 to 3 times its procurement cost. At the beginning of the year, Temu launched a promotion for new customers in the European market to attract an initial user base. Subsequently, the company mainly expanded its influence through word-of-mouth and social media, which is economical and effective.
Temu's total transaction volume in the European market accounts for more than 30%, but the proportion of advertising is only 20%.
Temu's advertising strategy in Europe differs from that in the US market. First, since the traffic cost in Europe is lower than that in the US, Temu's advertising investment in Europe is relatively small. Their advertising is mainly concentrated in three countries: France, the UK, and Spain. The CPM in Europe is 10-20% lower than in North America, and the traffic is relatively small.
Outside the core areas of Europe, Temu usually uses the CPS (cost per sale) model to place advertisements because this method is less expensive. Compared with the US market, Temu pays more attention to promoting through brand promotion in Europe, focusing on showing the use scenarios of products. However, there are also some restrictions in the European market.
Some product advertisements that can be placed in the United States are restricted in Europe, and Temu has adopted a more cautious strategy for advertisements that may cause controversy. For example, advertising for products such as drones and e-cigarettes is prohibited in Europe. In general, the primary purpose of Temu's advertising in Europe is brand promotion, which is different from their strategy in the US market. Market environment, regulatory restrictions, and cost considerations mainly cause these differences.
Meanwhile, Temu has adopted a different advertising strategy in the US. It has significantly increased its advertising funding in the US to maintain high exposure and popularity. This has resulted in higher customer and user activation costs in the US market than in Europe. In fact, due to high traffic prices and many advertisements, the proportion of advertising expenditures in the US market far exceeds that in the European market.
Temu 's advertising structure in the US market also has its own characteristics. Product advertising accounts for 80% of the share, while brand advertising accounts for 20%. In addition, the purpose of advertising is also clearly allocated, with 70% of the ads used to activate existing users, while the remaining 30% is used to acquire new customers.
In the European market's advertising structure, product advertising accounts for 50-60% of the share; the rest is brand advertising. The proportion of customer acquisition advertising is between 50% and 60%, slightly higher than the proportion of user activation advertising.
Subsidizing by Temu
As for the subsidy strategy, Temu plans to maintain the status quo or slightly reduce it and will not increase it significantly. It may provide 25-30% subsidies for newly launched categories, while subsidies for long-selling products can reach about 20%. Merchants do not receive any form of direct subsidies. The benefits are mainly for consumers, such as free shipping for purchases over $30.
Regarding specific marketing strategies, Temu has set a minimum consumer subsidy rate of 20% in the second half of 2024. The discount will be relatively small during July and August, but it will significantly increase promotional activities around Black Friday.
Semi-managed products can also receive higher subsidies. The average subsidy for semi-managed products is between 20% and 30%. Amazon sellers' unsalable products can enjoy up to 30% subsidy support (Amazon and Shein merchants account for 25% and 20%, respectively, of the share of merchants on Temu). In contrast, subsidies for fully managed products are usually between 20% and 25%.
Temu expects the overall subsidies to be reduced to 15-20% in the first half of next year.
Currently, Temu does not charge merchants any commission or promotion fees, but starting this year, each store is required to pay a deposit of 10,000 RMB or $1,400. In the future, a commission of 1.5% to 3% and a technical service fee may be charged.
The rest of this article, including insights into competitions with Amazon, Temu’s use of AI and Big Data, and its profitability and outlook, is available to paid subscribers only.