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.
Amazon versus Temu
Amazon has continued to take countermeasures against Temu. For instance, Amazon reduced its commission for beauty products, goods under $15, and clothing from 7% to 5%. In a future article, we will discuss Amazon Haul's low-cost store, but we want to share some other insights here.
There are some significant differences between Temu and Amazon in merchant profit models and profit margins. Temu claims merchants can profit without additional fees, but profit margins are usually difficult to exceed 10%, and some even have difficulty reaching 5% (see our Temu Watch #4 report). In contrast, some Amazon merchants have achieved more than 10% profit margins through targeted advertising and hot-selling products. Still, some merchants have invested much money but have not achieved good results.
E-commerce platforms aim to achieve at least 20% GMV growth by launching new products yearly. In this regard, Temu has shown significant advantages. With the same number of suppliers, Temu's new product listings are dozens of times those of Amazon. This advantage may significantly impact Temu's future market share and GMV growth.
Amazon and Temu have significant differences in product listing process and time. Due to the many new entrants in the cross-border e-commerce market, Amazon's product listing speed is relatively slow, while Temu can complete the listing faster. Specifically, Amazon's products must go through multiple steps, from development to listing, and the entire process takes about 50 to 60 days. In contrast, Temu's listing process is straightforward and only requires samples to be sent to Dongguan, which can be completed within 3 to 5 days.
One expert shared: “A notable feature of Temu is its fast speed, excellent sales performance, and accurate push content. The speed and number of new products listed on the shelves far exceed Amazon. Temu is so popular because it continues to add new sellers, products, functions and colours, and its performance is far better than other platforms.”
Meanwhile, Amazon's recent business performance has not been ideal. The company's activity results have failed to meet the expected goals and have not satisfied most sellers and suppliers. In addition, Amazon is also facing challenges in product development. Due to the impact of the pandemic, the company's new product development and listing progress of its own product line have been significantly delayed. These factors combined have put pressure on Amazon's overall business development.
Another essential difference is that Amazon has strict product quality and compliance requirements, while Temu is relatively loose. In addition, Temu performs well in handling procedures and logistics and is very efficient.
Temu's cargo processing speed also varies under different operating modes. In the semi-managed model, the processing speed is relatively fast, similar to Amazon's overseas warehouses. Faster listing speed and simpler processes may attract more suppliers to choose Temu, while Amazon's strict quality requirements may attract suppliers and consumers who pursue high-quality products.
The Fulfilment by Amazon (FBA) model has lower warehousing and distribution costs but higher platform commissions; the Fulfilment by Merchant (FBM) model has higher warehousing and distribution costs; and the Temu model has higher costs for fines (see also our Temu Watch #4 report) and returns and exchanges.
One expert said about price differences between the two platforms: “Temu's product prices are usually 30-40% lower than Amazon’s and can even be as low as 50-70% during promotions. In 2024, Temu's product variety is richer than in 2023, with a variety of quantities and styles and a wider price range. Especially in clothing and home furnishings, Temu has lower prices than Amazon and more choices.”
AI and Big Data
Emerging cross-border e-commerce platforms such as Temu rely more highly on low prices and high traffic than traditional e-commerce platforms. They also use Internet data to grasp customer needs and accurately conduct targeted promotions. Temu has a deeper insight into end users and suppliers, can more accurately match product needs, and provides comprehensive support to merchants to help them improve their performance in various categories (see also Temu Watch #4).
Cross-border e-commerce platforms actively use data analysis and artificial intelligence technologies to optimize operations and supply chain management. Temu uses multi-angle and multi-dimensional data analysis methods to introduce products and fully exploit China's supply chain advantages.
Temu also uses cutting-edge AI technology to compare prices in multiple regions, including 1688 (Alibaba’s wholesale platform) and manufacturers in Southeast Asia, India, South Asia and China. This AI can accurately calculate the cost of goods, automatically analyse mould types, identify standard and custom moulds, and evaluate components' price composition, such as internal circuit boards.
The platform currently advocates improving the quality of goods and supporting high-quality merchants. Still, it no longer approves excessive price competition and guides merchants to avoid unfair competition (see Temu Watch #4). 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.
Major platforms also learn innovative methods from each other. Amazon imitated Temu's pricing strategy, adopted its artificial intelligence evaluation system, and launched a similar refund policy without returning goods. They even reduced their commission rates and are conducting A/B testing to obtain more data, planning to implement these new strategies globally.
The key to cross-border e-commerce is to improve the efficiency of the supply chain. Platforms such as Amazon, Temu and Shein will eventually need to integrate the supply chain, with goals ranging from innovation and cost savings to regulatory compliance. These platforms rely on a large user base and focus on marketing through social media. TikTok and Temu are good at using gamification activities to promote, including providing discount coupons and organizing group purchases. Amazon has also begun to cooperate with Facebook, Instagram, and TikTok for social media promotion, intending to let consumers understand the pros and cons of products.
Temu is constantly learning and improving, successfully solving inventory problems, improving distribution efficiency, and reducing operating costs. Temu has the lowest fulfilment costs among all platforms, and its order processing costs are only 60-70% of those of other platforms. Even if it is loss-making in logistics, its actual fulfilment costs are still lower than its competitors’.
Platforms also provide merchants with detailed market analysis and product information, significantly reducing the need for product development and data analysis. Large sellers can obtain more accurate data than traditional consumer surveys through the platform's data-sharing plan and save 30 to 180 days.
Temu excels in intelligence. It can understand and predict merchants' needs and provide forward-looking analysis and data summaries. It can recommend specific sales products to merchants and provide in-depth analysis of categories, brands, and price ranges. When connecting with merchants, each business team can develop personalized core strategies.
Profitability
Under the fully managed model, the AOV is about $40, while under the semi-managed model, the AOV is about $65.
Under the semi-managed model, the gross profit margin in the second quarter was about 33%.
Under the fully managed model, the logistics cost per order is about $9 to $10 and is mainly composed of a $1 warehousing fee, a $3 - $3.5 last-mile delivery fee, and a $5 trunk transportation fee (air freight).
Due to the large volume of orders, logistics costs in the United States are slightly lower, about $6 to $7. Last-mile delivery and warehousing costs are difficult to reduce.
Starting in the third quarter of 2024, Temu has taken measures to control costs and improve efficiency, with the goal of keeping the loss rate of the fully managed business within 15% by the end of the year.
Regarding Temu’s merchant structure, about 200 major sellers contribute 30% to 40% of the total merchandise transaction volume.
In terms of improving profitability, in 2024, Temu focuses on increasing commodity prices while reducing subsidies. It also made an important decision to remove items priced below $3 to increase overall profits. In addition, Temu adjusted the product categories, reducing the number of low-priced items and increasing the combination sales of multiple items.
Temu implemented several strategies in the fourth quarter to prevent inventory shortages, including locking prices and stocking up inventory three weeks in advance. These measures helped alleviate logistics pressure and cost increases during the peak season.
At present, the overall loss rate of the fully managed model is about 13%. Specifically, in the third quarter of 2024, the operating loss rate of the fully managed business in the United States was 16%, while the loss rate of the semi-managed business was between 11% and 12%. Temu expects profitability to improve in the fourth quarter of 2024 by adjusting semi-managed pricing and optimizing logistics.
Due to their small scale, the semi-managed business is still loss-making in some countries. In theory, the semi-managed model can bring 15-18% profit. In the next few quarters, Temu expects that the main changes in the fully managed and semi-managed models will be reflected in advertising and subsidies. These adjustments aim to improve the company's overall profitability and the performance of the two models.
In the US market, Temu’s goal is to break even for the fully managed and semi-managed businesses. For this, the semi-managed business must account for more than 45%. The semi-managed project in the United States is progressing smoothly, while the progress in Europe is slower.
There are challenges and opportunities to achieve break-even in the US market. First, due to the long-term contracts, the growth of logistics costs is limited, with an average increase of only about 1%, and some routes may reach 2%, which is a key factor in achieving break-even by the end of the year. Regarding the risk of additional tariffs, the increase is not expected to be too large, and the tax rate of many commodities may only increase by 5%-10%.
Second, in the US market, it will further reduce the sales of goods priced below $5 and focus on promoting goods priced between $5-10 and $10-15, which can increase order values and merchants' profits. At the same time, Temu will ensure that merchants' net profit margins remain above 5% because it is difficult for merchants selling products priced between $3 and $5 to achieve this profit level.
This increase will help improve profitability, making the overall profit performance in the fourth quarter better than in the third quarter. To achieve this goal, it plans to implement several strategies. Temu will launch promotional measures such as ‘more purchases, more discounts’ to increase order values and maintain merchant profits. Due to economies of scale and the strategy of reducing low-priced goods, Temu expects the average order value in the US market to exceed $45 (up from $40 in the third quarter). In contrast, the European market is expected to exceed $36.
Regarding pricing strategy, from the second to the third quarters, the platform's prices were not much different from those of other small platforms but still slightly lower. Temu has optimized costs to the limit in logistics and transportation and can no longer reduce expenses further. Looking forward to the growth potential in the fourth quarter, the platform's total merchandise transaction volume is expected to reach $25 billion to $28 billion.
Looking ahead
The current situation of the cross-border e-commerce market can be viewed from several aspects. First, policies tend to support high-quality merchants in response to increasingly fierce international competition (see our Temu Watch #4 report). Second, the entire domestic industry in China has stabilized, but the competitive pressure in overseas markets is increasing. Temu initially was in the low-price strategy stage. After implementing the semi-managed model, its customer unit price has increased, and it is working on introducing overseas brands to enrich its product line.
In terms of competitive advantages, Temu has demonstrated unique strengths. Although its customer base overlaps with Shein, there are still some differences between the two. Meanwhile, AliExpress is disadvantaged in the competition due to Temu's precise marketing and low-pricing strategies. Many traditional e-commerce platforms find it difficult to match these. Temu’s pace of development has been very rapid. It achieved what other platforms would have achieved in five to ten years in just two years.
Although Temu's growth rate has slowed, it maintains double-digit growth month-on-month.
Trump’s trade policy will likely impact cross-border e-commerce development significantly. His administration may impose new restrictions on Chinese e-commerce platforms. Goods below $800 may be taxed, although the specific implementation time has not yet been determined. In addition, the US government may adjust its overseas warehouse policy, restricting or prohibiting large e-commerce companies from setting up warehouses in the United States, which will significantly impact Temu's logistics system.
If the United States raises tariffs by 60%, it will significantly impact Chinese cross-border e-commerce companies such as Temu, Shein, and TikTok. If the small package tax-free channel is closed, product prices may rise sharply and lose their original price competitiveness. Sellers may leave these platforms or turn to FBA and pass on tariff costs to consumers by raising prices.
As discussed, a feasible strategy to deal with this situation is to ship goods to Southeast Asian countries such as Vietnam or Thailand before distributing them. Although this method will increase logistics costs, the overall cost will only increase by 3% to 4%. Many industries have set up electronic factories in Vietnam or Thailand, mainly for packaging and warehousing. This method can ease the pressure brought by tariffs and has little impact on merchants and consumers.
Given the uncertainty in the US market, the proportion of fully managed business in the US is expected to decline significantly by 2025. In the first half of 2025, the semi-managed business in the US market aims to achieve 60% of GMV, and the goal by the end of the year is to reach 80%. The fully managed service would only apply to a few low-tax categories or goods that can still be shipped directly from China to consumers.
Due to the fierce competition in the European market and the active expansion of multiple platforms such as AliExpress, Temu needs to quickly increase the proportion of semi-managed business to increase revenue, reduce losses, and achieve early profitability.
Temu also plans to gradually implement the semi-managed model in second-tier markets such as South Korea, the Middle East, and Latin America and third-tier markets such as Southeast Asia. At present, the semi-managed business has achieved a certain degree of profitability, and the overall profit performance for the whole year mainly depends on its development in the United States and Europe.
In the long run, Temu does not plan to switch to the semi-managed model completely but hopes that the fully managed sales can be maintained at a ratio of 20% to 30% because this model can provide more stable fulfilment services. The goal is to find a balance between fully and semi-managed to ensure the business's overall stability. This balance will help Temu achieve stable growth and risk control in different markets.
Temu insists on maintaining the lowest price on the internet, both now and in the future. Its expansion mainly relies on its AI system (see above), ensuring that similar products' prices are the most competitive. This strategy is different from that adopted by Amazon, which uses an operating model similar to Pinduoduo in China and makes profits by charging commissions, service fees, and advertising fees.
Nevertheless, Temu may need to start considering charging commissions and search advertising fees at some point in the future to balance its long-term profitability needs. But for now, Temu is confident in its growth performance and believes it has performed well. In this way, Temu is trying to maintain a balance in the fierce cross-border e-commerce competition while using its AI system to maintain price competitiveness.
Regarding sales strategy, the platform plans to reduce the sales of goods with higher tax rates, such as clothing and textiles, while focusing on developing new products with unique designs or significant cost advantages. However, there are some uncertainties in the semi-managed model, including the problem of merchants fulfilling their obligations and the challenge of competitors such as Amazon attracting merchants by providing logistics subsidies.
Considering that the growth of new users in the US market has reached its limit, while the European market still has expansion potential, the future growth of fully managed services will mainly rely on improving activity. To balance resource allocation and strategic focus in these two markets, Temu plans to adopt the following strategies:
Select high-quality merchants and continuously improve product quality by reducing low-priced goods and increasing high-value products.
Focus on creating new products with innovative designs or unique advantages and reach exclusive supply agreements with merchants.
The continued development of the business is highly dependent on the retention rate and repeat purchase rate of users. Therefore, Temu wants to effectively improve these rates by improving product selection, improving supply chain management, and providing high-quality services. It also wants to gradually accumulate good word-of-mouth among users, thereby promoting the continued growth of the business.
Further differentiation of operating models
One final thing worth mentioning in this update is that Temu continues to differentiate its operating models.
The fully managed model has been performing well. Still, as shown in Temu Watch #4, the platform faces challenges convincing Chinese merchants to sell through the semi-managed model because merchants are reluctant to put extensive inventories into overseas warehouses. Convincing US merchants to join the platform has also not brought the desired results. U.S. merchants represent less than 1% of Temu’s estimated 300,000 total sellers, Juozas Kaziukėnas, founder and CEO of Marketplace Pulse, said in an interview with Modern Retail. [2]
From the perspective of attracting merchants in the US, after all-out efforts, semi-managed has begun to encounter bottlenecks. Almost all the Amazon sellers that can be attracted have been found in the past six months, and some merchants who have already tried semi-managed are retreating. Some merchants lack experience in product selection and inventory preparation. They are no longer willing to bear the risk of product backlogs, so they have begun to withdraw. An industry insider claimed that in November, semi-managed business in the US showed signs of decline. [4]
Temu is now trying to boost the recruitment of semi-managed merchants by making it easier to join. Before, merchants could only join if they had a unique invitation code. Now, any American brand or individual can register to sell on Temu. Temu claims registration only takes 10 minutes and is reviewed in one business day. [2]
In the promising European market, semi-managed did not fare smoothly either, and recruiting merchants willing to invest has been difficult. Europe accounts for about 25% of Amazon's total sales, therefore there are not so many Amazon merchants for Temu to tap. [4]
Contacts of Tech Buzz China have shared how Temu’s promotions have been received lukewarmly. David Cikanek shared his experiences with Temu’s presentation at the Marketplace Convention in Cologne, Germany. One remark stands out: “Sellers set their prices, but Temu will suggest a “better” (lower) price. It’s up to the seller to approve it, but the process feels clunky.”
When someone asked what would happen if the merchant did not lower their price, the Temu representative answered: “We will not promote this product.”
Ingrid Lommer told Cikanek about the same conference: “Thanks for taking the chance and grilling the Temu ladies on the details – that’s exactly what I was hoping for when I kicked them off my stage after they denied a promised stage interview and put them in a side room for a possible meet-up instead: that someone else would ask all the questions there that they didn't want to answer on stage.”
Cikanek: “I was surprised by their logic, too. You try to build a reputation in front of the brands that you're not the big bad guy everyone says you are, and what do you do? You don't answer questions publicly... well, they just proved the point.”
‘Self-operated semi-management model’
Temu also began to develop and test a ‘self-operated semi-management model’. This is because the platform is promoting a new business strategy: it plans to set up warehouses in Mexico and the eastern and western United States and select hot-selling or high-potential demand goods from the supplier's fully managed goods for self-operated sales.
The self-operated model is currently in the testing phase. The purpose of this model is to prepare for the future high-end commodity market and will not affect the existing fully managed business. The self-operated semi-managed service also covers customized goods, adjusting functions and moulds according to official data to meet specific needs. Since the platform's semi-managed merchant recruitment failed to achieve the expected goals, the company decided to integrate the team into the fully management investment promotion, and each promotion manager will be responsible for a specific category or specific item.
Running self-operated sales is not a preferred model within Pinduoduo’s organisation. However, it has been used as a temporary tactic before when the company aimed to get more brands on its app in the domestic market. It appeared in PDD’s financial reports as ‘merchandise sales’.
Pinduoduo sources of revenue
Third-party platform
In one of our previous Temu Watch reports, we mentioned how Temu would probably start an open platform before the end of the year. On November 18th, the Chinese media outlet Latepost also shared that prediction without being more concrete than we have been in August. [3]
According to Latepost, Temu is considering adding a third-party platform where merchants have complete autonomy over the products, logistics, pricing, etc. In other words, a traditional 3P model. Instead of getting a margin by setting the consumer price, Temu will earn a commission (like Amazon). Like AliExpress and Shein (see our recent Shein update), Temu will have three models, offering the suitable model in the right situation. [3]
While Amazon is becoming more like Temu (Amazon Haul), Temu will become more like Amazon.
How long can this continue?
A question we often get is, ‘How long can Temu keep this up?’ A quick look at Pinduoduo’s financial reports shows that despite all of Temu's investments, PDD Holdings' cash reserves continue to grow, probably because of good performance in the domestic Chinese market. As such, our answer would be ‘a long time’.
Still, logically, Temu is striving for profitability in the short term.
Pinduoduo key financials
Pinduoduo cash reserves
Looking ahead, Temu expects that the overall semi-managed and fully managed businesses in the US market will break even by the end of 2024. Following closely, they expect the European market to break even by the first half of 2025. Its global business goal for 2025 is to break even by the end of that year, ideally in the third quarter or mid-year, and to achieve a small profit by the end of the year.
Sources
Temu Watch #4 and #5 have been compiled from an analysis of around 15 expert interviews Six Degrees Intelligence network. The information has been augmented with the following sources:
[1] 2024-11-15 Rest of World [2] 2024-11-21 Modern Retail [3] 2024-11-18 Latepost [4] 2024-11-28 36Kr
Thanks for the useful update! I have a few questions I was hoping you could shed some light on:
1. You wrote "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." A) What's the source of this 15-20 day estimate? B) Is it that the goods sell in 15-20 days once they're shipped to Temu's China FC or that these merchants are achieving an overall inventory turnover of 15-20 days for items they sell on Temu?
2. You wrote "Temu has the lowest fulfilment costs among all platforms, and its order processing costs are only 60-70% of those of other platforms. Even if it is loss-making in logistics, its actual fulfilment costs are still lower than its competitors’." Do you know what was included in this calculation, and which other platforms the 60-70% wsa based on?
3. You wrote that the semi-managed gross margin was 33% in the second quarter, how is that calculated ecxactly? I ask because in other parts of the series the term "gross margin" is used to reference Temu's gross take as a % of GMV. If you mean to say that Temu keeps 33c per dollar of sales and pays the merchant a supply price that averages 67c per dollar, that would be incredibly high for semi-managed given that the merchants are the ones responsible for logistics/fulfillment. Merchant anecdotes reported by Tech Buzz China and others suggest an average semi-managed take rate (gap between supply and consumer price) that's way lower than Amazon for the same items. 33% for FBM would be not be consistent with that.