Source: Temu commercial
Contents
Things that caught our attention
In recent weeks, we kept seeing news items and social media posts about how China supposedly has become the ‘coffee empire of the world’, primarily based on the number of stores. We think some essential context is missing: Cotti Coffee has opened over 6,000 stores since it started a little over a year ago. Luckin Coffee has been speeding up to stay ahead. But especially with those Cotti stores, it is questionable how well they are doing (our research indicates ... not so well). Proclaiming China the ‘coffee empire of the world’ also fails to acknowledge that the average Chinese really doesn’t drink all that much coffee. To get beyond the hype, check out our September article on Cotti and stay tuned for an update in January.
A few weeks ago, Rui shared her insights on super apps during an online seminar of Oxford University. We have created a short 8-minute video of her contribution, which can we watched here.
Introduction
Our most popular deep-dive on one of the most important topics this year was our June report on Temu. Pinduoduo’s cross-border platform has been making waves worldwide and has surprised competitors and analysts alike with its fast rise.
A lot has happened since we last wrote about Temu, so we decided to do an update. This will be the first in a series of newsletters in the coming weeks in which we look back at some of the topics we wrote about in 2023 and trace the developments since.
The general statistics section of this Temu update is available to all readers, further analysis from Chinese tech media and expert interviews from the Six Degrees Intelligence database is accessible to paying members only.
We want to thank all of you for your trust and for staying with us in 2023 while we implemented this new iteration of Tech Buzz China. While writing the articles is more a labour of love than a true source of income for us, all of you who sponsor us with a paid membership have helped keep at least a few lights on and continue this service. If you’re not a paying subscriber, why not give yourself a subscription for Christmas? ;-)
Have a wonderful holiday season, and stay safe!
Freya Zhang, Ed Sander & Rui Ma
(click on the images above for information on the Tech Buzz China team)
What’s up with … Temu
Follow-up to: Temu: from $0 to $3 billion in 10 months - June 23 2023
First, let’s start with some updated statistics.
Note: some of the statistics in this newsletter might conflict because they are from different sources. Since Pinduoduo does not publish official data on Temu, it’s hard to determine any specific figures' accuracy.
Statistics
In October, Latepost [1] and 36Kr [2] published updated figures on Temu, Pinduoduo's (PDD) cross-border e-commerce webshop:
Sales
In the first half of 2023, Temu had $3 billion in GMV. Sales in Q3 2023 exceeded $5 billion. In September, single-day GMV had reached $80 million.
Temu aims for a 2023 GMV of $16 billion, equal to SHEIN's 2022 GMV in the US market. This target was later adjusted to $14 million, but some experts think it could actually be as high as $20 billion.
Temu’s monthly order volume grew between 100,000 and 200,000 in August and September.
In July, Temu’s 7-day and 30-day retention rates had reached 18.5% and 13.5%, surpassing eBay, Wish and Shein and approaching Amazon.
Shein mainly sells clothing with an AOV (average order value) of $80. Temu sells department store products with an AOV of $30-50. Temu’s AOV in the US has increased from $35 to $50.[36Kr claimed it was $37, corresponding to 5-6 items].
With the launch in more countries, the share of the US in Temu's sales had dropped from 60% to 40-50%.
Coverage
In September, Temu launched in 10 new countries, bringing the total to 47. [The total at the time of writing is 48]
In September, one year after its launch, Temu had 120 million users (half of which were outside the US). According to Data.ai, Temu had 61 million MAUs that month. [3]
60% of Temu’s sales originate in the US. 9% of Americans have shopped on Temu. [According to LatePost, this percentage had grown to 15% by December. [4] ]
Temu's app has been downloaded 200 million times in 47 countries, partially driven by the ‘price cut’ gamification. This user-get-user gamification creates part of Temu's growth, as it did with PDD 5 years ago; this is reducing customer acquisition costs. But as we’ll see in this newsletter, that strategy has not been sufficient.
Promotion
Temu’s budget was increased from RMB 20 billion (set at the start of the year) to RMB 23 billion to cope with the expansion to new markets.
Temu's 2023 marketing budget is $2-3 billion.
Before the Super Bowl commercial in February, Temu was spending $100 - $150 million on marketing each month.
In August alone, Temu spent more than $300 million on advertising.
Since July, daily advertising costs on Facebook and Google have reached tens of millions of dollars, forcing Shein to increase its daily budget to $8 million.
Temu has been buying up as much online traffic as possible, especially from Google and Meta, regardless of costs and ROI. It ranked first in the download list of every country it launched in.
Around May, Google and Meta no longer had enough traffic to allocate to Temu, which therefore increased spending on Twitter, Snapchat, Line, etc.
When US order volume growth slowed down, Temu moved marketing expenses to other markets and sped up launching in other countries. With the shopping season in Q4, Temu was expected to increase spending in the US again.
Top 5 downloads in Jan-Nov 2023 by region. Source: SensorTower [5]
Logistics
Temu shipped 1.6 million packages per day, mostly to the US. This volume is close to Shein’s level at the start of 2022. Temu expected a volume of 2.2 million packages per day by the end of 2023.
The first leg of logistics, from merchants to a Temu warehouse, costs $1 and is split between Temu and merchants. The second leg, from a Temu warehouse to an overseas transhipment warehouse, costs $4-$5. Domestic delivery in the destination country costs $3-$4.
After the warehouse capacity problems following Temu’s Super Bowl commercials, Temu expanded to 26 warehouses and tightened logistics processes.
Temu used to ship 50% of its parcels through J&T (Jitu), but with the increase in order volume, Temu expanded to 20 logistical service providers, and J&T’s share has dropped to 10%.
Shipping time to the US has dropped from a max of 15 days to a max of 10 days; the majority is delivered in 7-8 days.
Products
Temu is using 90,000 suppliers to provide over 1 million SKUs. 55% of suppliers also sell on the Pinduoduo and Duoduo Maicai (PDD’s community group buying division).
The overlap in product categories between Temu and Shein is 30%. The overlap in customers is only 5%. Still, Temu is trying to improve its fashion offering and is promising apparel merchants a 20-25% margin.
Prices of products on Temu tend to be 75% of the price on SHEIN. But they are expected to even out over time as Temu gradually ends its subsidies.
Organisation
Temu recruited 2,000 employees (some sources claim 4,000 people are now working at Temu, of which 1,000 work in ICT). Temu also employs 50,000 outsourced sorting workers.
Many employees shifted from Duoduo Maicai to Temu, including 20 of Duoduo Maicai’s 30 provincial and district-level managers. Duoduo Maicai had 2,000 employees and 20,000 outsourced sorting staff.
Profitability
Profits from the Pinduoduo app finance Temu for now. PDD also shifted marketing budgets from the domestic market to international markets.
Temu’s overall loss rate was around 40% but had already improved to 30%-35% in the US. Marketing expenses and logistics form the highest portions of the losses. A Temu order costs about $32, including $8-9 in logistics costs.
The platform is prepared to suffer losses for three years.
Pinduoduo Holding’s Q3 revenue almost doubled (93.9% YoY) compared to last year, while net profit increased 47%. At almost RMB 68 billion, revenue is still only one-third of Alibaba’s. Still, combined with Alibaba’s disappointing quarterly results, PDD overtook its competitor in market value at the end of November. Moreover, the result was almost RMB 14 billion higher than analysts had expected. Temu specifically had performed RMB 4 to 7 better than expected. [6]
PDD has not shared any specific details on Temu, but Goldman Sachs estimated that approximately 28% of the company's revenue in Q3 2023 could be contributed by Temu. That’s a lot compared to the 8% that the Global Digital Commerce Group contributed to Alibaba’s revenue, as reported at the time of the company’s 1-6-N split up. [7]
Temu sales in recent months have been driven by the back-to-school season, Thanksgiving, Black Friday/Cyber Monday and Christmas. [8]
Temu’s GMV in the US increased by 29% MoM in November. The user growth also picked up thanks to the promotional investments around Black Friday. [9] According to data by SimilarWeb, Temu was the fastest-growing multi-category retailer on Black Friday, with traffic up 84% compared with Amazon’s 2%. [10] Note, though, that during 2022’s Black Friday, Temu had only been active for three months.
On Cyber Monday, US consumers were spending $30 on average on Temu, up $9 from the year before, according to Attain Partners. They spent $49 on Shein, the same as in 2022. In comparison, average transactions at Walmart dropped by $4 to $49, those at Target decreased by $3 to $44, and Amazon purchases were $1 lower at $36. [11]
According to Data.ai, Temu surpassed popular apps and ranked second in global downloads during the first three quarters of 2023 while being first in the US, UK, Australia, France and Germany. It ranks second in usage time in the US, ahead of Walmart and eBay. [12]
(Note: the section below is only available to paid Tech Buzz China subscribers)
Market expansion
In 2023, Temu sent 16 first-level managers overseas to help develop new markets. They are responsible for solving compliance issues, reducing costs, and optimising logistics. Many came from the Duoduo Maicai community group buying division, where managers of top-performing provinces would take over the operations of lagging provinces. This ‘horse racing’ approach is also used in Temu. For instance, in the US, a team of over 100 is divided into an A and B group, which is sub-divided into 13 product categories. The group with the best performance, e.g., the number of new merchants, gets rewarded. [6]
Europe
In the UK, Germany, Spain and The Netherlands, Temu had captured about 4% traffic share from multi-category retailers, while in France and Italy, this was almost 8%, according to figures from SimilarWeb. In the UK and France, it has become one of the top 5 multi-category retailers in terms of traffic. If we add up data for these countries for the period September 23rd to November 23rd, Temu was the 3rd largest e-commerce player in terms of visits. [13]
In the UK, Temu shows the following performance: [13]
Installed on 25% of Android devices
Around 3.5 million downloads per month in the July to November 2023 period
Around 2.5 monthly sessions in the same period
11% of Amazon, 16% of Argos and 15% of eBay users also visited Temu in the same period.
Users skew more towards older (35+), female (56%) consumers within the shopping category
Temu users in the UK overlap most with Amazon, Shein, AliExpress and Wish.
Temu’s conversion rate in the August 23 to October 23 period is almost 5%, higher than Wish (<3%) and AliExpress but lower than Argos and eBay (~5.5%).
Compared to other e-commerce platforms in the UK, Temu generates more traffic from social media (15%) and paid search (36%). About half of AliExpress, Amazon and eBay visits are direct visits. This is only 29% for Temu, showing that it still needs to build up visit habits among users.
Asia
Since our June article, Temu has expanded into many new countries, including several in Southeast Asia (The Philippines in August, Malaysia in September), Japan (July), South Korea (July) and South America (August). Before launching in the US, Temu had already considered launching in Southeast Asia first but decided against it because of the fierce competition in that region. [4] But in June, Temu began surveying its merchants about their activities on competitive webshops in these markets (Lazada, Tokopedia, TikTok, Shopee, Rakuten, Lotte, Gmarket, Unit808, etc). [14]
In Japan, e-commerce penetration is relatively low, with online shopping only accounting for 8% of merchandise sales in 2020. Japanese are also 40% less likely to shop for daily necessities online compared to the average in 39 countries. Nevertheless, the success of Shein must have made Temu interested in this market. [15] Temu had already been testing in the country since November 2022, 7 months before it officially opened. It had already accumulated 66,000 downloads by then. [16]
Within three months, Temu’s downloads surpassed those of Shein and AliExpress, which had been active in South Korea and Japan for several years. [4] As it had done elsewhere, Temu soon dominated the app stores in the shopping category in Japan and South Korea. From July 1st to November 2nd, Temu spent 101 days on #1 in Japan and 65 days on #1 in South Korea, according to Data.ai. Shein respectively had 17 and 0 number 1 positions in the same period. [17]
But that’s just the downloads, and a closer look at Temu’s statistics in Japan paints a different picture. As we will see with the Trustpilot reviews of Temu later in this article, most Japanese rate the app with either one or five stars. [18] Besides complaints about product quality, one of the problems seems to be that Temu did not select specific products for the Japanese market, simply copying the SKUs of the European and American markets. And for some products, Shein, AliExpress, regular domestic shopping festivals and even offline discount stores are actually cheaper than Temu. [16]
On August 26th, Temu quietly launched in The Philippines, using its regular high discounts and free shipping launch tactics. The country seemed an obvious first choice in Southeast Asia because of its developed cross-border fulfilment infrastructure, large e-commerce market (3rd in GMV in Southeast Asia) and the option to launch an English website because the target audience speaks that language (as it does in Malaysia). [19]
Philippines e-commerce sees the fastest growth in all Southeast Asian markets, with a compound annual growth rate of 20%. In the region, its population of 120 million people is second only to Indonesia. The median age in the country is 25, young people are willing to spend, and the penetration of smartphones among them is 90%. By 2023, GMV of The Philippines and Vietnam are expected to be in the top 3 in the region. [20]
Air freight costs to The Philippines have recently decreased from RMB 75 per kilo to RMB 38, making the country a more interesting market for Temu. [21] The logistics partner for The Philippines was once again J&T Express, and the delivery time ranged from 5-10 days. [22]
Still, the Southeast Asian market might prove challenging for Temu because of the high logistical costs brought about by the region's fragmented geographical units and limited income that would result in a low AOV. One theory for Temu’s interest in Southeast Asia is that Lazada and Shopee have successfully implemented the fully managed model there (see our previous Temu report for more information on this model). Temu’s expansion could, therefore, be seen as a must to retain high-quality merchants. If Temu can continue to compensate for the loss of margins under its bidding system with higher volumes, merchants can be retained. [21]
Promotion
When PDD launched Temu, it initially used the same “social contagion” (社交裂变) approach as it had done with Pinduoduo in China. This approach incentivizes users to share the app or its content with their social network, thereby quickly growing the number of users at relatively low acquisition costs. This approach worked well for a while, but before long, the US user began showing reluctance to ask others to download the app. The average number of downloads triggered by referrals was only 2 in the US, while it had been 10 in China. [23]
Americans were more inclined to share the app with strangers on social media. Consumers were also more receptive to promotional videos for low-priced products. Temu shifted strategies and began running thousands of adverts in the Meta network, leading to a new growth burst in January 2023. Then, it started looking for something resembling the Chinese Spring Festival Gala to boost the platform. That’s how the Super Bowl commercials came to be. [23]
Despite internal debate about whether such an expensive advert was the right thing to do, senior management decided it was an opportunity not to be missed. Saatchi & Saatchi created an advertising plan for Temu, and the slogan ‘Shopping like a billionaire’ was born. After it was knocked into shape, the video didn’t match Temu’s diverse assortment of daily necessities, emphasising women’s clothing instead. But it was too late to change it, and it aired on February 12th. [23]
Temu’s commercial overemphasised apparel. Source: still from commercial.
Temu acquired 20 million new users at an average cost of RMB 7 per new user (slightly less than $1). These acquisition costs are normally $21. The Super Bowl ad had been ten times as effective as normal ads. [23] Temu is now considering doing another Super Bowl ad in 2024.
The advert was so successful - 45% more downloads and 20% more DAU - that it created warehouse capacity problems, as we described in June. Temu sent a signal by sharing that it would invest RMB 20 billion in advertising that year and wanted to surpass Shein by September 1st. That goal was already met four months earlier. The budget was later raised to RMB 23 billion. [23]
From February to July 2023, Shein placed 2,200 adverts on Facebook. Temu had placed 9,400. [24] Starting in July, Temu’s daily advertising spend on Facebook and Google surpassed tens of millions of dollars. Shein followed and increased its daily budget in August to $8 million. [23] According to research firm Moffett Nathanson, Temu and Shein accounted for one-third of Meta’s revenue growth, or nearly $3 billion, in the first nine months of 2023. [4]
According to SensorTower, from September 2022 to November 2023, Temu's global downloads exceeded 300 million times. Temu’s advertising spending in the US market reached $510 million between January and November 2023. From January to November 2023, Temu spent more than $200 million on the Facebook platform, accounting for 39% of total expenses. [5]
In the first two weeks of November, Temu doubled its ad spend, while Shein increased theirs by 60%, according to SensorTower. [11]
Merchants
Temu can count on the cash flow support of the main Pinduoduo platform and also follows the strategy of its domestic brother: create low barriers for merchants to join, attract large numbers of merchants, and then force merchants to bid against each other. It then puts the products with the lowest price on the platform to attract large numbers of customers and show the merchants the results of their continued investment to retain them. [6]
When Temu launched in September 2022, it focused on quickly increasing the number of merchants. It recruited all kinds of merchants: OEMs (Original Equipment Manufacturers that manufacture products that others have designed), ODMs (Original Design Manufacturers that design and manufacture for clients or sell their own white-label products) and OBMs (Original Brand Manufacturers that design, produce and market their own branded products).
The ODM type of merchants will become Temu’s primary target because they offer affordable prices and have independent design and development capabilities. OEM merchants offer even lower prices but lack innovation and development capabilities; they normally get told exactly what to make by their clients.
OBMs represent cross-border brands with international trademark registrations and a sales foundation abroad. Their styles and product quality are normally very good, but their prices are relatively high for Temu. Therefore, you’ll currently find relatively few OBMs on Temu. However, Temu wants to compete with Amazon and plans to introduce products in different price ranges. OBMs may, therefore, become more important as they can provide higher quality for certain customer groups.
Some merchants on Temu also operate their own independent websites. They normally joined Temu to offload inventory, especially those active in the clothing sector. In these cases, Temu might require them to provide 1,000 - 2,000 products at a 20-40% lower cost price in exchange for traffic support. To avoid pricing conflicts with their own websites, these merchants tend to put products with poor sales performance on Temu and use Temu’s prices on their own websites.
As far as sales proportions are concerned, ODM products account for 40%, independent webshops for 30%, OEM for 20% and OBM for 10%.
By October 2022, Temu’s focus shifted from the quantity of merchants to the quality of products and training and developing merchants. A year later, the focus has shifted to payment, meaning merchants need to meet standards for the success rates of goods and develop products according to consumer needs.
At the end of 2022, Temu had a few thousand merchants (despite referring to the millions of Pinduoduo merchants on the Temu website). At the end of 2023, their number is expected to surpass 200,000 and grow to 300,0000 - 400,000 in 2024. The overlap with the Pinduoduo platform is limited; few PDD merchants are invited to sell on Temu.
About 10% of Temu merchants are also selling on Amazon. Despite the fully managed model - see our June article on Temu and our recent article on TikTok Shop for more information on this model - that should be a USP for merchants without cross-border skills; Temu actually wants more merchants that have experience in selling abroad. In the fully managed model, merchants provide the product, product details and pictures. A good understanding of cross-border markets helps to provide good content and be more successful on Temu.
Merchant’s attitudes towards Temu have changed. In the early days, they wanted to try it or specifically aimed at reducing surplus inventory. A year later, some of them have seen the potential and have developed products specifically for Temu. Others have found making money on the platform difficult and have left. The retention rate of merchants is about 50%. Around mid-2023 stories of merchants that were struggling on Temu were getting more common in the Chinese tech media.
In its early days, Temu invited many merchants selling on Amazon to join the platform. The net profit level on Amazon is normally approximately 33%. On Temu, it would be much lower, so some merchants have already withdrawn from Temu because of losses suffered.
In Temu’s bidding system, merchants will be notified of requests for price reductions. If they agree, they will lose margin. Moreover, merchants that agree to a price reduction also need to pay the price difference over goods that have already been sold. But if they refuse, the order will go to a competitor while his previously supplied goods remain in Temu’s warehouse, and sales will be put on hold. If these goods remain in the warehouse too long, Temu will start charging warehouse fees or ask the merchant to return the goods at his own cost. The total loss could be greater than with a price reduction. [25]
It’s not just the pressure to lower prices that has made merchants leave the platform. They also have no control over product returns and refunds, which are decided between the consumer and Temu. Cash flow can also be a problem. The payment term of Temu starts on the day after delivery to the consumer. Still, before the product reaches its destination, it must go through quality inspection and warehousing. As a result, the total cycle can take 50-60 days. [25]
In October, Jiemian reported that Temu was planning to charge merchants a 0.5% service fee per order, a normal business practice in e-commerce and relatively low compared to other platforms. This new rule was included in the ‘customer service outsourcing agreement’ that merchants must sign. The service fee is not refunded when an order is refunded. [26]
As if meant to counter the many complaints shared between merchants on Xiaohongshu, a series of articles appeared in the Chinese tech and retail press in September praising Pinduoduo for helping small companies sell abroad. Close inspection showed that although not 100% identical, some of these articles shared the same texts in some paragraphs and case studies about the same Chinese SMEs. As such, PDD’s PR department likely had a hand in these, and the articles were ‘sponsored’.
In the beginning, when Temu was still short on merchants, middlemen could buy goods from factories (e.g. on 1688.com) and resell them on Temu with a profit. But now that factories are selling directly on Temu and 1688.com is used as a benchmark, reselling is hardly possible anymore. Especially now that Temu has also started to let merchants pay for some shipping costs (to the Temu warehouses) and sometimes even warehouse costs. [27]
At the end of the day, three types of merchants can do well on Temu: [25]
Factory-type merchants who have strong control over the supply chain and can offer the lowest price.
Merchants that can accept high inventory, long payment periods (2-3 months) and have strong capital.
Merchants that have models and exclusive products that cannot be found on 1688.com (and therefore are not pressured as much by the bidding system).
The monthly production capacity of core Temu merchants is 100,000 - 200,000 pieces, while the capacity of mainstream merchants may reach 400,000 - 500,000 pieces. Most businesses have just tens of thousands of pieces as their monthly capacity.
On Amazon, 63% of merchants come from China and Hong Kong, and only 35% from local US sellers. But that’s still interesting enough for Temu to also want to recruit more local merchants in overseas markets. However, the company isn’t sure if it can find enough qualified local sellers offering goods that are both high-quality and inexpensive. For now, it is not a priority and few overseas merchants are on the platform. [28]
Merchants deal with three types of staff members at Temu: buyers, quality inspection and operations assistants. The buyers screen the products they need on the product to ensure they will ship quickly when put on the shelves. They analyse the product supply price, market competition and whether the product advantages align with the platform’s direction. After approval, they apply for a stocking order. [43]
When the goods arrive at the warehouse, quality inspection personnel will conduct testing according to the regulations in different countries for different products. Operation assistants analyse data and pay attention to product views, shopping cart additions, click-through rates, etc. They feed this information back to merchants so they can keep up with trends and make adjustments. [29]
Temu guides merchants in product development to ensure they can offer what the market needs. In its early days, Temu provided subsidies and traffic to merchants to reduce their operating costs and help them grow quickly. But this year, subsidising slowed down. Merchant recruitment is no longer only aimed at increasing their numbers but also at product categories and actual sales.
In July 2023, Temu launched a Slack-like communication tool called ‘Whalek’ for Temu merchants, featuring instant messages, voice and video calls, and calendar functions. The app resembles Knock, an app used by Pinduoduo merchants. [30] The name Whalek is probably a reference to Temu’s legal name, Whaleco.
Source: Google Play
Products & quality control
Earlier this year, Temu reportedly offered more than 2 million SKUs in the US and is expected to reach 4 million by the end of 2023.
While Temu looked like a Shein-clone when it launched, its assortment is now concentrated in clothing accessories and department store goods: clothing, pet products, electronic products, household products, accessories, underwear, socks and other products. Prices are generally lower than on Shein and other cross-border platforms.
While Shein performs better in clothing and fashion, Temu is better in department store categories, where Temu surpasses Shein in product diversity and price competitiveness. In October, shoes, clothing and accessories accounted for 30% of Temu’s sales but were 60% at Shein. [4] Temu plans to introduce more high-priced products like dresses, light wedding dresses, and nightclub apparel. It is also researching other categories for possible additions.
To increase the AOV and decrease logistics costs, Temu is stimulating merchants to make products smaller in size or larger in quantity. [2]
Temu tries to ensure product quality through strict quality control and has a dedicated team for monitoring product quality and handling related issues.
To work around the challenges of low margins some merchants have been taking drastic measures like labelling 32 GB memory cards as 256 GB or replacing lithium batteries in a car vacuum cleaner with unsuitable and unsafe alternatives that caused injuries and damages. In such cases, merchants received fines between RMB 2,000 and RMB 147,000 and their goods were taken offline. In February 2023, Temu issued "Rules for Handling Commodity Quality Accidents" stipulating that the merchant needs to compensate Temu RMB 10,000 in case of quality problems. [31]
In June 2023, Temu added a new rule stating it could unilaterally decide to return goods from the warehouse to the merchant at the latter's cost. Some merchants claim that quality control is now very strict, and goods get returned if the slightest defect is found. [31]
Temu is also improving its compliance requirements, with senior executives directly sending staff WeChat messages about stolen images and patent infringements. Like Amazon, Temu implemented a system that favours images with shooting meta parameters over those that do not have them. It assumes that the ones without were copied from the internet and will remove the matching products automatically. [6]
Because of the high return costs, Temu puts a lot of emphasis on product review standards and ensuring the pictures match the goods so customers get what they expect. [6] Temu will compare the product pictures with the actual product to ensure consistency. When stains, colour differences or damage is found, the goods will be returned to the merchant. If Temu finds that 20% or more of the samples are defective, the merchant must pay Temu a compensation of RMB 1,000 per item/order. For each consumer complaint, they pay a penalty of 5 times the declared price. Temu even added a rule that it can dispose of any goods in its warehouse at will without notifying the merchant. [32]
But judging from the many online complaints one can still read and watch about products bought on Temu, many shoddy goods slipped through …
Temu review scores on Trustpilot in December 2023. Consumers tend to be either very positive or negative in their opinion about Temu.
One Tech Buzz China team member bought nine items on Temu, 3 of which were not the desired quality. After asking for a return on the app, the costs were refunded within one day without any return shipment being necessary.
Rising prices
Temu’s pricing strategy has been shifting over time. In its early days, it gave merchants high margins, especially for products like gloves and headphones. But as time passed, Temu started to benchmark prices against those on Pinduoduo and Alibaba’s 1688 wholesale platform. On the consumer side, Temu started with substantial subsidies, up to 30%, especially for new, popular products. But these subsidies have gone down over time. Since 2023, Temu has shifted its strategy of attracting consumers by subsidising products to subsidising traffic.
When determining prices, Temu first reviews the merchant's price and checks if gross margins are between 15% and 30%. OEMs normally get 15%, while OBMs skew towards 30% to compensate for their R&D investments. Temu then uses the merchant’s supply price as a benchmark and multiplies it by 2.2 to determine the final selling price (SHEIN’s price is said to be 2.5 - 3.5 of the manufacturer’s price). Operational, marketing and logistical costs are all considered in this calculation. It also compares pricing to other platforms.
Losses at Temu have reduced, and the development trend is positive. While the merchant price decreases, the consumer price increases, and Temu’s margin improves. In the early stages Temu’s average gross profit was estimated to have been 10-15%, but it has reached 20-25% by the second half of 2023. Return loss is about 5-6%, personnel and other costs are 3-4%, and return and exchange logistics are 7%. Combined, Temu’s net profit margin is 8-10%.
Prices for the same item in May and December 2023.
Logistics
On the night of the Super Bowl adverts, downloads surged by 45%, and daily active users increased by 20%. The warehouse capacity problems in March that resulted from this were solved by increasing the number of warehouses to more than 30. The sorting staff was increased from a few thousand to tens of thousands. [6] The former general manager of Duoduo Maicai in Guangxi province was sent to Temu to manage all domestic warehouses. [2]
Still, merchants have to compete for warehouse slots because the number of merchants and products also keeps expanding rapidly. Temu’s SKU count has risen from 200,000 at the start of the year to an estimated 4 million by the end of 2023. [33]
In August it was reported that Temu had punished merchants that were using third-party browser plug-in software to claim storage capacity in the warehouses. If they were found to use such tools, their priority would be lowered, and available space would be given to others. [49]
Temu also increased the number of service providers to more than 20. It dynamically adjusts the number of orders per service provider based on indicators like timeliness, delivery rate, breakage, complaints, etc. It set stricter logistical standards for them, like faster updates of shipping data and more speedy transshipments. In Q1 2023, Jitu was still carrying half of Temu’s packages; this has been lowered to less than 10%. [6]
Temu tends to prioritise ‘tail-end flights’, buying the remaining cargo space at a low price when the aeroplane has already reached break-even. It also combines heavy and light goods to fully utilise the volume and load capacity of the plane. Chinese airlines account for roughly 1/3rd of the overall capacity. [8]
Chinese cross-border e-commerce shipments have caused shortages and rising prices in air freight. Prices per kilo from Shanghai and Hong Kong to the US and Europe have risen 25%-75% in the second half of 2023. In the first half of 2023, RMB 1.1 trillion in e-commerce goods were shipped from China, which is 5.5% of the value of total exports. Traditional exporters are now finding it hard to negotiate rates with airlines because so much capacity is used by e-commerce companies. [34]
Temu’s cross-border parcel logistics costs are very low, usually around 60-70 dollar cents. This is based on bulk aggregation of goods that get split into individual packages after arrival. [8] But with the success of cross-border e-commerce, prices are rising. The activities of Temu and Shein didn’t just increase the prices of advertising space but also those of cross-border logistical fees since they were using so much capacity. [23]
In November, it was reported that Temu had started cooperations with maritime shipping companies Matson, Zim, CMA CGM, Maersk, and COSCO Shipping Lines. Demand for global air cargo was growing by 9.5% in 2023, while supply only grew by 5.7%. As a result, air freight prices continue to rise, putting pressure on cross-border e-commerce companies. Meanwhile, the global vessel utilisation rate had dropped by 6% to 76% from 2022. [35]
Through express boats, Temu hopes to solve the problem of rising air freight costs: using maritime shipment can reduce costs by 30-60%. Air freight from Shenzhen to the west of the US can cost RMB 30-40 per kilo, while transport by ordinary freight boat costs RMB 5-6. Matson charges RMB 12, but considering Temu’s volume, it might have negotiated a better price. Matson can also transport relatively fast: from Shanghai to Long Beach in 11 days. [35]
Using maritime shipments will also allow Temu to sell more bulky goods like home furnishing. That would help increase the number of product categories and the average order values. [6] Fast maritime shipping will initially account for 10% of the total volume and focus on best-selling and stockable goods. Most longtail goods will still rely on air transport. [8]
Currently, Temu building US warehouses for domestic distribution is not attractive for Temu. It couldn’t use the tax-free exemption for consumer orders up to $800 per day since it would become an importer and have to pay corresponding taxes. So Temu is both benefiting and being limited by this de minimis rule. It’s unlikely the regulations will change; requiring taxation of all goods would create an enormous US customs backlog and create problems with the timeliness of tax collection. [8]
Temu does have a US warehouse, but it only deals with returns. Because of high return rates caused by unconditional returns, the local warehouse helps with secondary sales, repackaging and reselling goods. It thus avoids having to return goods to China. [8]
Temu is planning to build warehouses in Mexico to deliver goods to the US. It would reduce costs and improve its delivery performance. It would also not be charged tariffs, and the Mexican government might even provide subsidies. [8]
Who is hurt by Temu?
Temu’s main competitors are unbranded or white-label products, such as Dollar General, Sunlight, Wal-Mart’s Great Value, and Amazon’s AmazonBasics, etc. [8] This tells us something about who will be hurt most by Temu’s success.
While Shein and Amazon might be the first companies that come to mind when asked this question, one of Temu’s biggest impacts can be found offline among dollar stores like Dollar General and Dollar Tree. These companies were founded in 1939 and 1986, are both among the Fortune 500, both have a market cap of around $27 billion and are top 20 US retailers. They have 19,500 and 16,000 offline US stores, respectively. 60% of Dollar Tree’s products are produced domestically; the rest is imported mainly from China, Mexico, and Vietnam. [27]
Between September 2022 and November 2023, Temu has conquered 17% of the market share of dollar stores, especially at the expense of the aforementioned two market leaders.
The product categories on Temu overlap more with these dollar stores than with Amazon, as do their customers. Earlier this year, Morgan Stanley described Temu’s customer profile as 62% female, 38% male, with 55% having annual income below $50,000. In 2017, the CEO of Dollar General described the dollar store customers as women from dual-income families with annual pre-tax income of $40,000; stable employment, but salary growth fluctuates; disposable income is about 2%, which is $800 per year; very sensitive to price changes; may own a smartphone and probably doesn't have Amazon Prime. [27] Buying more conveniently online at a low(er) price will appeal to this group.
Temu vs Shein
After the Super Bowl adverts, Shein noticed that Temu’s GMV was explosively growing, and the overlap in visitors grew from low single digits in 2022 to high single-digit percentages. Shein started listing products that were popular on Temu and began comparing prices. As Temu’s GMV began to approach that of Shein in the US, the sense of urgency at Shein grew. It worked hard at growing the number of non-clothing products, which increased from 20% to 40% of its sales. It has required merchants to offer the same prices as on Temu; if not, they will look for alternative merchants or give limited subsidies. [36]
There are different opinions on exactly when it happened, but Temu overtook Shein somewhere in the middle of 2023. In May, an analysis by Bloomberg Second Measure showed Temu having 20% more sales than Shein. [37] According to credit card data, Earnest Temu surpassed Shein in June 2023. [48] The distance between the two has only grown; in November, it saw almost triple the sales Shein had. [37]
However, Shein is keeping its eye on profitability and has not gone into a full-out price war with Temu. Its profit is expected to be $2.5 billion in 2023, an increase of 150% compared to 2022. Its GMV in 2023 is expected to reach $24 billion, a 40% YoY increase. [36]
While the customer overlap between Shein and Temu used to be only 5%, Temu has likely made further user growth of Shein’s marketplace much harder. Meanwhile, the two are exchanging court suits about anti-competitive practices. In May, Shein accused Temu of “willfully and flagrantly infringing Shein’s exclusive and valuable trademark and copyright rights” and “impersonating [the] Shein brand on social media, trading off of the well-known Shein trademarks, and using copyrighted images”. [38]
In July, Temu filed a complaint about Shein forcing exclusive dealing arrangements on clothing manufacturers. As of May, Shein required all of the estimated 8,300 manufacturers supplying Shein or selling on its platform to sign exclusivity agreements preventing them from selling on Temu or supplying goods to middlemen that sell on Temu. According to Temu, these manufacturers represent 70-80% of factories that can supply ultra-fast fashion. [38]
In October, Shein and Temu requested the court dismiss their two legal cases. But the hatchet didn’t stay buried for long …
In December 2023, Temu filed another lawsuit against Shein. They claimed that Shein’s actions had worsened into ‘mafia-style intimidation’ of merchants: detaining them, stealing their accounts and passwords and forcing them to leave the platform. Infringement of intellectual property rights was also back on the list of alleged offences. [39]
Shein wasn’t the only target of Temu lawsuits. It filed a lawsuit against 20 US websites that imitated Temu’s domain name for ‘cybersquatting’ and offering unauthorised coupon codes. Temu accused these sites of “trademark infringement, unfair competition and false designation of origin” and promoting phishing and online fraud schemes. [40]
Earlier this year, the price of Temu in certain categories was found to be 53-80% of Shein’s, and during Black Friday in 2022, it was as low as 50% of Shein’s. Do realise that this was during periods when Temu was still heavily subsidising. As of February 2023, Shein had placed 2,200 adverts on Facebook. Temu had placed 9,400. [24] By October, a product sold on Shein for $40 can be found on Temu for $30, with a higher profit margin. [1]
Temu vs Amazon
In 2022, products from Chinese suppliers accounted for 70-80% of Amazon’s products. The GMV of Chinese sellers reached $201 billion, accounting for 26%. [1] Considering how dependent Amazon has become on Chinese companies, the impact of Temu would come from both the customer and merchant side.
Temu originally benchmarked itself against Shein, and a dedicated team was formed to go deep into the clothing supply chain. But when this team realised how strong Shein’s supply chain capabilities were, it changed course. Now, Temu’s ultimate goal is to surpass Amazon. [4]
In the long term, Temu strives for the same product richness and price as Amazon. It thinks Amazon updates its assortment slowly and that it carries classic, old and basic models. Temu’s product prices are based on volume, and discounts are based on popularity. Its prices are normally lower than those on Amazon. When Temu launches in a new market, it is common to find prices of non-promoted products to be half or less than those for identical products on Amazon, as shown in our June article. Should Amazon comprehensively adopt the fully managed model, Temu would probably still be cheaper.
Products that sell well on Amazon also do well on Temu, but Shein’s styles don’t always sell well on Temu. Temu’s customer base also skews more towards that of Amazon. Because of Amazon’s strong positioning and a difference in target audience, Temu was initially not expected to hurt Amazon much in the short term. TikTok Shop and AliExpress would be more heavily impacted.
SimilarWeb found that 47% of Temu users also visit Amazon on the same day. However, only 2% of Amazon users will visit Temu the same day. So Temu does not yet seem a major competitor of Amazon. Much more overlap was found with Walmart (8.1%) and eBay (8.2%). Temu also overlapped much more with these two traditional platforms than with AliExpress and Shein. [41]
Nevertheless, Amazon has clearly felt the impact of Temu this year. According to data by GWS, the number of daily active users on Amazon fell from 54 million to 46 million between April and July. It lost 1 million in the UK. Meanwhile, Temu acquired 10 million new users in 2023. The proportion of Chinese sellers on Amazon has also dropped by 6% this year. [42]
Chinese sellers on Amazon have complained about their sales on the US webshop this Black Friday season. Amazon had warned about expected sluggish consumer spending in its Q3 financial report. At the same time, Chinese sellers confirm that Chinese cross-border platforms have seen an explosion of orders during the Black Friday season. All Chinese webshops together are said to have a market share of 10% in the US online shopping market. [42]
Amazon has reacted to Temu by setting up defensive strategies. It started heavily advertising on Facebook and Instagram. It also allowed Snapchat users to buy Amazon products directly through Amazon ads. Amazon even launched a semi-version of the fully managed model, but only takes care of logistics, helping merchants lower logistical costs. If a merchant puts his goods in an Amazon warehouse, Amazon will directly deliver the goods. This is ‘Fulfilment by Amazon’. If a merchant puts them in a third-party warehouse, Amazon can pick up the goods and send them to the consumer through express delivery. Previously, large sellers could only use Fulfilment by Amazon, which was normally 30% more expensive than other platforms. [42]
In June 2023, Amazon decided to exclude Temu from its price comparison system. That automated and manual system compares Amazon’s prices to selling prices on other platforms. If it finds a lower price elsewhere, the corresponding merchant might be punished in terms of traffic (visibility) and sales. Sometimes, it can even remove the product or merchant from the platform. But Temu’s heavily subsidised prices were starting to cause problems with this approach. If strictly enforced, Amazon would lose a substantial part of its offerings and merchants. So Amazon decided to exclude Temu from its system, but claimed its qualification standards ensured that it does not compare or match prices against what it sees as merchandise from questionable marketplaces, including products that might be counterfeit. [43]
Not much later, Amazon started subsidising many products that can also be found on Temu by 20%. [43] Pinduoduo once used its ‘ten billion subsidies’ program to get big brands to sell on its platform. It’s quite ironic that Temu is now forcing Amazon to roll out a comparable program but to keep the small and medium merchants of white-label products on its platform.
Next, Amazon announced that as of August 29th, it would apply lower Fulfilment by Amazon rates for products priced below $10. [44]
Finally, on December 5th, Amazon reduced commissions in some product categories, specifically the ones Chinese webshops are good at. Commissions for clothing priced below $15 were lowered from 17% to 5%, while rates for those between $15 and $20 were lowered from 17% to 10%. This reduction was obviously done to lower the operating costs of merchants on the platform as a strategy to retain them. [42]
According to some people, these changes are not necessarily counterattacks against Temu but aimed at retaining the inexpensive Chinese products it has come to depend on its platform. [1]
Outlook
Temu’s rise has been nothing short of incredible, and even the most cynical started to see its potential impact at the end of 2022.
According to SimilarWeb, in just one year, Temu has become the #2 shopping app and #10 app overall in the US, based on estimations of MAU. Its popularity comes close to Instagram, Facebook and Messenger.
Conversion rate (percentage of website visitors who make a purchase) was estimated to be 4.6% in September, just below Shein (4.7%) but still lower than Amazon (11.8%). [45]
This success is being replicated in other markets. While having 35 million MAUs in the US, Temu already has 130 globally. [46] Temu was the 5th most popular app in the UK, Germany and France in September. In all those countries, only YouTube, Facebook, TikTok and Amazon were ahead of it. [45]
Bernstein analysts estimated Temu’s third-quarter sales to be $1.8 billion. They expect the platform to make an operational loss of $3.65 billion on sales of $13 billion in 2023. According to them, Temu will turn profitable in 2025 or 2026. [37]
Losses at Temu have already been reduced, and the development trend is positive. According to a recent report by Goldman Sachs, Temu’s average loss per order in the US has decreased to $6, while it is still about $18 in other markets it more recently launched in and which are still being heavily subsidised. [4]
While marketing expenses at Pinduoduo are rising because of the investments in Temu, the company has sufficient cash reserves and growing revenue in China to continue financing the growth of its overseas activities.
Pinduoduo does not yet have an internal profit target for Temu. GMV growth rate and market volume are the current core goals. [2] For 2024, Temu has set a GMV target of $30 billion, nearly double the expected 2023 GMV of $14 billion ($2 billion less than it set as a target at the start of 2023). It also plans to invest more in marketing than the $2-3 billion of 2023 and is considering another Super Bowl advert. The budget has already begun to shift away from the US to newer markets. [36] Meanwhile, Shein, which had $29 billion in GMV in 2022, is expected to grow to $40 billion this year, so it is still staying ahead of Temu globally. [4]
If Temu does reach its 2024 target GMV, it is estimated to need at least 40 Boeing 747s a day to ship its goods. [8]
According to data tracked by Guotai Junan Securities Research Institute, Temu could even reach a GMV of $18-$20 billion this year, higher than previous estimates. It expects Temu to grow to $50 billion in two years. [46]
However, considering Amazon’s strong position in the US market, Guotai Junan Securities does not expect Temu to be able to capture more than 1/3rd of the US e-commerce market. Usually, a second-place market share does not exceed 20-25%.
Morgan Stanley described the profile of Temu’s users as skewed towards females, young (58% are younger than 45), and low-income (annually less than $55,000). [37] Guotai Junan Securities does not expect Temu to be able to steal away many of Amazon’s middle-class customers, who are known to have high requirements like fast delivery. To compete, Temu would need to change to an asset-heavy strategy and establish warehouses on the East and West Coast to offer the same service levels. It is unlikely Temu will take that step, partially because of the tax reasons discussed earlier in this article. [46]
Is it just headwinds at Temu? Well, according to some sources, its sales in September were less than in August, and its management had to spend more time on compliance issues. [36] And if recent figures by Morgan Stanley are to be believed, Temu also has a challenge when it comes to loyalty: 44% of Temu’s users are spending less, while only 22% spend more. [37]
In early 2023, Temu had the highest 4-month retention rate of all major US e-commerce platforms. Temu customers spent $72 per month in February, positioned between Amazon’s $182 and discounter Five Below’s $26. [47]
But will Temu be able to keep up such high retention rates?
In July to August 2023, SimilarWeb found that Temu’s 14-day retention rate (visits) was lower than that of Amazon, eBay and Walmart. [41] It also found that Temu’s user count fell slightly in August and September. [45]
No other marketplace has grown as fast as Temu. And no other marketplace had so much money pumped into it in such a short time span. In the short term, Temu seems best positioned out of all Chinese cross-border platforms to be a true challenger of Amazon. While it has started a marketplace with more diverse goods, Shein is still primarily known for apparel. TikTok Shop is facing the problem of a very young user base in the US, as described in our recent article The long and winding road of TikTok. It also depends on impulse shopping, and it remains to be seen if its mall can become a search-based shopping destination (‘shelf e-commerce’). AliExpress’ growth has accelerated, but it remains to be seen if it can catch up with Temu, which overtook it in a matter of months and won’t easily let go of its lead. Out of all four, Temu is also the one with the highest continued internal funding.
The biggest challenge for Temu is probably maintaining the balance between pressuring merchants to lower their prices, which could lead to quality issues and increasing consumer prices. If Temu fails to maintain quality standards it might face the same faith as Wish. It will certainly be able to offer lower prices than Amazon. Still, if Temu fails to retain its customers and grow its AOV, the expensive initiative could fizzle. We bet that if Pinduoduo could do it in China, against many people’s expectations, we should not underestimate its capabilities abroad.
Surely, 2024 is going to be an interesting year.
Sources
For this article, we used expert interviews from the database of Six Degrees Intelligence, a leading global expert network/quantitative research firm in China, augmented with information from the articles below:
[1] 晚点LatePost 2023-10-24 [2] 36氪未来消费 2023-10-25 [3] Rest of World 2023-11-14 [4] 晚点LatePost 2023-12-21 [5] 白鲸出海 2023-12-18 [6] 晚点LatePost 2023-12-05 [7] The Bamboo Works 2023-12-08 [8] 调研纪要 2023-12-03 [9] 晚点LatePost 2023-12-09 [10] Bloomberg 2023-12-11 [11] Yicai Global 2023-11-29 [12] 36氪未来消费 2023-12-05 [13] SimilarWeb 2023-12-20 [14] Momentum Works 2023-06-19 [15] Pingwest 2023-07-07 [16] 白鲸出海 2023-08-22 [17] CNBC 2023-11-10 [18] 白鲸出海 2023-11-30 [19] Momentum Works 2023-08-27 [20] 白鲸出海 2023-08-29 [21] 白鲸出海 2023-11-07 [22] Pandaily 2023-08-29 [23] 雷峰网 2023-10-11 [24] Tech星球 2023-07-31 [25] Huang Tianran World 2023-06-30 [26] Pandaily 2023-10-09 [27] 白鲸出海 2023-12-14 [28] Latepost 2023-07-21 [29] 晚点LatePost 2023-09-12 [30] Tech星球 2023-07-10 [31] 跨境必读 2023-07-25 [32] 白鲸出海 2023-07-20 [33] Pandaily 2023-10-27 [34] Financial Times 2023-12-14 [35] 36氪未来消费 2023-11-14 [36] 晚点LatePost 2023-11-20 [37] Bloomberg 2023-12-11 [38] Techcrunch 2023-07-31 [39] CNBC 2023-12-14 [40] SMCP 2023-10-31 [41] SimilarWeb 2023-11-26 [42] 36氪未来消费 2023-12-07 [43] 白鲸出海 2023-06-27 [44] Li Yizhong cross news agency 2023-07-17 [45] SimilarWeb 2023-10-19 [46] 韭菜拌面补习班 2023-12-15 [47] Earnest Insights [48] Earnest Insights 2023-07-19 [49] 晚点LatePost 2023-08-15
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