Pinduoduo’s Turning Point

Balancing Merchant Support, Competition, and Long-Term Growth

Introduction

Currently, there is considerable uncertainty surrounding Pinduoduo and its stock, raising many questions. Before discussing the latest quarterly results, I want to take a moment to provide a high-level overview of the company’s development since its listing. If you are already familiar with Pinduoduo, you can skip this part, but it might be helpful to recall how far the company has come to better understand its current position.

After this brief recap, I will analyze what management truly means by this statement from the second-quarter earnings call and what it implies for their business and financial performance.

However, we are seeing many new challenges ahead, from changing consumer demand, intensifying competition and uncertainties in global environment. As a result, we will enter a new phase of high-quality development that calls for increased investments and our profitability will -- affected as a result.

PDD Q2 2024 - Earningscall

Pinduoduo’s Dominating Narratives and Transition Points: A Timeline

2018 - Mid-2021: Rapid Growth, User Engagement, and Agricultural Focus

Dominating Story: Rapid expansion fueled by marketing investments, a focus on user engagement, and the establishment of Pinduoduo as a leading e-commerce platform with strong roots in agriculture.

Key Highlights:

• Heavy marketing efforts to drive GMV and user growth.

• Branding as the “Costco + Disneyland” of e-commerce, providing value-for-money and a fun shopping experience.

• Agriculture positioned as a strategic priority, including the launch of Duo Duo Maicai and other initiatives.

Transition Point: Late 2020 / Early 2021

The narrative begins to shift from pure growth and marketing-driven expansion to a more balanced focus on R&D and agricultural modernization.

Mid-2021 - 2022: R&D and Agriculture Modernization

Dominating Story: A pivot toward long-term investments in research and development (R&D) and modernizing agriculture as a core focus.

Key Highlights:

• Introduction of the “10 Billion Agriculture Initiative” to modernize agriculture and improve supply chains.

• Reduced emphasis on sales and marketing, with profits reinvested into R&D and technology-driven solutions.

• Commitment to creating long-term value through innovation.

Transition Point: Late 2022

The narrative shifts from R&D and agriculture modernization to the broader theme of high-quality development and ecosystem building.

2023 - Mid-2024: High-Quality Development and Ecosystem Building

Dominating Story: Building a sustainable and high-quality platform ecosystem with a focus on long-term value creation.

Key Highlights:

• Emphasis on trust and safety, consumer experience, and supporting high-quality merchants. However, focus is mainly on the consumer not the merchant.

• Acknowledgment of external challenges, including competition and broader economic pressures.

• Long-term investment in critical areas, even at the cost of short-term profitability.

Transition Point: Q3 2024

A notable pivot within the broader “high-quality development” theme, focusing specifically on merchant support.

Q3 2024 - Present: Merchant Support and Addressing Competition

Dominating Story: Direct support for merchants, improving service and product offerings, and fostering a virtuous cycle within the platform ecosystem.

Key Highlights:

• Introduction of specific merchant support policies.

• Encouragement for high-quality merchants to enhance their offerings.

Sentiment Shift in the recent Earnings Calls

Over the last four earnings calls, there has been a noticeable shift in tone:

• Q4 2023: Management maintained a relatively positive outlook despite acknowledging potential profitability fluctuations. The focus was on sustaining growth while preparing for possible headwinds.

• Q1 2024: Management began voicing concerns more openly, noting intensifying competition and potential pressure on profitability due to heavy investments in platform development.

• Q2 2024: This call marked a stark departure from optimism, with management adopting an aggressive stance by:

  • Highlighting the inevitability of declining profitability.

  • Stressing the necessity of heavy investments.

  • Demonstrating readiness to sacrifice short-term gains for long-term positioning.

• Q3 2024: The tone shifted from aggression to pragmatic execution:

  • Focused on systematic implementation of ecosystem investments, such as fee reductions and supply chain improvements.

  • Acknowledged slowing revenue growth and declining profitability but emphasized early positive outcomes from merchant and consumer initiatives.

  • Demonstrated a more measured and confident approach, signaling commitment to sustainable, long-term growth.

Earnings Performance: A Top-Level View

In the third quarter of 2024, PDD 0.00%↑ reported a 44% year-over-year increase in total revenues, alongside a 46% rise in operating profit. On a non-GAAP basis, operating profit saw a 48% growth compared to the same quarter of 2023. Net income attributable to ordinary shareholders increased by 61% year-over-year, with non-GAAP net income also growing by 61% during the same period.

While these results appear impressive compared to Pinduoduo’s Chinese counterparts, Alibaba BABA 0.00%↑ and Jingdong JD 0.00%↑ , they represent a significant slowdown in growth relative to previous quarters. Margins also experienced compression. Operating margin remained essentially flat year-over-year, however it declined by more than 9% quarter-over-quarter. Additionally, cash generated from operating activities decreased by nearly 20% year-over-year.

Fears are that Pinduoduo cannot escape the gravitational pull of Chinese consumers. Currently, its valuation is roughly the same as that of its Chinese competitors, despite still stronger growth numbers. The market anticipates that its growth will align more closely with its peers. Pinduoduo trades at a PE ratio of 10 and holds enough cash to potentially acquire companies like JD or Kuaishou outright.

So much for the obvious. Now, I will analyze and explore what is currently changing and how it affects Pinduoduo’s financials. I will begin with Chinese e-commerce before moving on to discuss Temu.

Chinese e-commerce

Last quarter, there were reports of merchants protesting in front of Pinduoduo’s Chinese headquarters and growing dissatisfaction among merchants because Pinduoduo was squeezing them too hard. I wrote about this in my analysis of the unusual earnings call last quarter. I had a sense that the government got involved, as they likely did not appreciate seeing merchants struggling to make ends meet while Pinduoduo reported revenue and earnings growth close to or even exceeding 100%. I still feel like this is exactly what was happening, and this quarter we’ve seen the first reaction.

Pinduoduo has completely shifted its approach, dedicating its entire prepared remarks to discussing merchant support rather than maintaining a laser focus on consumers. Additionally, the earnings call and the entire report appear to be less aggressive compared to last quarter, as I discussed here.

Let’s have a closer look:

Last quarter, Pinduoduo began managing expectations by stating that profit declines are inevitable. Chinese competitors Alibaba and JD.com have now regained their footing, making it significantly harder for Pinduoduo to maintain its edge. After key management changes, both companies have refocused their strategies and are executing more effectively. Previously, Pinduoduo faced little resistance, but with these rivals regaining momentum, the competition has shifted to a more level playing field, turning what was once an easy advantage into a more challenging fight. Furthermore, the e-commerce industry is seeing diminishing returns from low-price strategies.

This quarter’s results highlight Pinduoduo’s urgent need for change.

Pinduoduo, once synonymous with extreme price competition, is shifting its approach to focus on merchant support and ecosystem investment. Management emphasized two key changes during the earnings call:

Relaxed Refund Policies: A new after-sales team allows merchants unlimited applications for disputed orders, aiming to reduce abuse and improve merchant satisfaction.

Reduced Reliance on Low Prices: New promotional strategies provide traffic opportunities for smaller merchants beyond just price-based competition.

These shifts reflect a broader trend in e-commerce. Platforms like JD and Alibaba are prioritizing user experience and product quality over low prices, aligning with changing consumer preferences. Pinduoduo mentions that shoppers now value convenience, quality, and service as much as price, rendering it’s low-cost model less effective.

Under its previous strategy, merchants on Pinduoduo often faced unsustainably low gross margins of 20%-30%, far (10-15%) below competitors. This approach hurt product quality and deterred repeat customers, with factories resorting to cheaper materials to meet price demands. Growth in user activity has also stagnated, with average order value remaining below RMB 45 and order frequency increasing only slightly over two years.

Management anticipated this issue and, since the beginning of 2023, has focused on high-quality development and ecosystem building. They recognized early on the need to move beyond their low-cost strategy to remain competitive. However, the urgency has increased significantly due to merchant protests and probable government involvement. They are now shifting upstream, moving away from their budget brand image to attract major brands. Their goal is clear: branded goods should account for over 60% of total GMV, similar to Taobao and Tmall.

To achieve this, Pinduoduo has revamped its platform. It now includes live-streaming for branded merchants and showcases more branded products in high-traffic areas like “Billion Yuan Subsidies.” These moves have begun to yield results. By July, the overlap between merchants on Pinduoduo and Taobao increased from 23% to 32%. Even international brands like H&M have shown a willingness to join the platform.

This aligns with changing consumer habits, as younger people move to lower-tier cities (PDD’s home turf) to escape the high rental costs of first-tier cities. These individuals are driving a consumption upgrade, purchasing more high-end electronics, cosmetics, and fashion, and fueling growth in these regions. Interestingly, Pinduoduo reports strong consumers and consumption upgrades, which stands in stark contrast to the earnings reports of other e-commerce platforms and public opinion about China. The key trend here, as I’ve discussed in my articles about Kuaishou, is that growth in China is now centered in lower-tier cities. This is where growth and consumption upgrades are happening in China right now—not in the first-tier cities anymore.

I think Pinduoduo’s shift toward branded merchants is a positive move but comes with challenges and short-term financial pressures. Their low-cost image makes brands hesitant, fearing forced price cuts¹ and disrupted pricing structures. To address this, Pinduoduo is moving away from aggressive pricing slogans during promotions, signaling a clear effort to protect brand value.

The result? Revenues remain under pressure as branded merchants are still in the support phase, and advertising demand has yet to grow. Fee reductions, logistics upgrades, and brand cultivation demand significant investment, keeping costs high and profit margins under pressure.

However, as management stated, they are not concerned with short-term financial results. Their focus is on investing with determination to ensure the platform’s long-term success.

Temu

Since its launch in September 2022, Temu has experienced rapid growth, accomplishing in just over a year what took competitors decades to achieve. This success is driven by its ability to transform cross-border e-commerce into a low-barrier industry through its comprehensive full management model, leveraging China’s strong supply chain capabilities and Pinduoduo’s outstanding organizational efficiency.

However, with Trump’s upcoming presidency and the threat of high tariffs on the horizon, this model faces significant challenges. In anticipation of higher tariffs, Temu introduced a semi-managed model. They are reaching out to Chinese merchants who sell on Amazon and already have local infrastructure in the United States to use their semi-managed model. However, some reports suggest they have fallen short of expectations regarding the number of merchants adopting this approach.

Initially, Temu priced semi-managed products at 80-85% of Amazon prices to position itself as offering “Amazon-quality goods at lower prices,” driving strong orders for merchants. However, then Temu has imposed stricter rules, requiring prices to undercut similar listings on its platform, sometimes forcing merchants to sell at 65-70% of Amazon prices. This, combined with higher logistics costs for semi-managed merchants—such as shipping, warehousing, and domestic distribution—has increased operational challenges and frustration among merchants, ultimately leading to the protests mentioned above.

However, after restructuring in October, Temu has repeatedly emphasized enhanced merchant support during its earnings calls. They are now even considering adopting a third-party platform model. If implemented, Temu would operate under three distinct models simultaneously: full management, semi-managed, and third-party platform models—a strategy already employed by competitors like Shein and AliExpress.

The semi-managed and third-party platform models naturally come with their own advantages and drawbacks. With these models, more stakeholders become involved, requiring Pinduoduo to balance a broader range of interests rather than focusing solely on consumer benefits. By outsourcing responsibilities to other companies, these models influence the platform’s financial structure. For example, gross margins are likely to improve as operational costs, such as inventory management and logistics, are offloaded.

Some more comments on the financials

Pinduoduo’s gross margin took a significant hit this quarter, dropping to 60%, a sharp decline of 5.3 percentage points compared to the previous quarter. This reversal comes despite ongoing benefits from Temu’s improved margin structure, as the impact of reduced commission income outweighed any gains. Recent merchant-friendly policies, such as lowering technical service fees, offering commission refunds for certain returns, and reducing merchant deposits, have significantly compressed margins. These changes reflect Pinduoduo’s response to prior concerns about overburdening merchants, but they come at the cost of profitability. Furthermore, with the platform’s monetization rate already nearing saturation and competitive pressures mounting, the company faces limited room to drive further margin expansion, making this decline a critical challenge as it adapts to a maturing market.

While Pinduoduo’s financial results may appear concerning at first glance, with declining margins and slower earnings growth, these challenges stem primarily from the company’s deliberate commitment to supporting merchants through reduced fees, commission refunds, and other subsidies. The silver lining, however, is in Pinduoduo’s advertising business. Online marketing revenues grew by 24% year-over-year (albeit down from 29% last quarter), a growth rate that outpaces nearly all major players in the ad-revenue space. I plan to delve deeper into this topic in a separate article once more companies release their results. Make sure to subscribe so you don’t miss it. As a teaser, Baidu’s performance, as anticipated here, fell short.

In the current environment in China, where supply outpaces demand, merchants are locked in fierce competition to capture the attention of willing buyers. This dynamic has fueled robust growth in ad revenue, even amid sluggish consumer spending. Once again, Pinduoduo’s ad revenue, driven by its strong base in lower-tier cities, outperformed other players in the ad space. Moreover, its recent initiatives to support merchants, such as reduced fees and subsidies, align with similar strategies employed by other major players in the industry. While these measures have temporarily weighed on margins, Pinduoduo retains the flexibility to scale back these supports if necessary, providing a safeguard against prolonged profitability pressures.

Conclusion:

What Pinduoduo has achieved in just nine years is remarkable. Despite the dominance of established e-commerce players like Alibaba and JD.com, the company managed to carve out a significant share of the market, at one point even becoming the most valuable Chinese e-commerce company. Since 2022, it has entered international markets, achieving in a short time what AliExpress could not achieve in over a decade, making a serious impact on Amazon’s US business to the extent that Amazon was forced to launch its own low-price competitor, Haul.

However, Pinduoduo’s low-price strategy is now under pressure from multiple directions. Domestically, their core clientele in tier 3 and lower cities is shifting toward consumption upgrades, seeking higher-quality and branded goods. Internationally, tariffs and trade wars have created challenges, forcing Pinduoduo to move away from its fully managed business model. While maintaining a focus on low prices both domestically and through its Temu model, the company squeezed merchants to the extent that they began to publicly protest—likely prompting intervention from the Chinese government, escalating tensions further.

Last quarter, management reset expectations and, in a very aggressive conference call, essentially declared war on all their competitors. After years of Pinduoduo outpacing its rivals both in China and internationally, those competitors have finally woken up and are fighting back.

Pinduoduo’s transformation is a gamble, but with a proven track record of navigating fierce competition and executing bold strategies, the company is well-positioned to adapt to the challenges ahead. The road may be bumpy, but its long-term vision remains compelling.

Let me conclude with a remark on the management team.

Remarks on the management team

In some circles, PDD’s tendency to say very little during conference calls and maintain secrecy about their business is often linked to suspicions of fraud. While I understand this reaction, I believe it is irrational. Just because someone speaks a lot doesn’t mean they are truthful. Whether there is fraud or not, your guess is as good as mine. However, as I’ve written before, it might be more rational to rely on the opinion of those with better insights—such as Tencent. Tencent is a major shareholder in Pinduoduo, and through its WeChat payment platform, it has precise visibility into transactions made on Pinduoduo. If anything questionable were happening, Tencent would certainly know.

At the end of this quarter’s earnings call, PDD’s management openly admitted to mistakes, particularly their failure to capitalize on government trade-in programs for appliances. They acknowledged that this misstep will cost them significantly, both now and in the coming quarters. I appreciate this bluntness, especially when compared to the sanitized and predictable earnings calls of other management teams, who speak of being “cautiously optimistic” or some similar nonsense but never revisit those statements when they fail to deliver.

Again, don’t underestimate this management team. In the community group-buying battle, where all major Chinese tech players went head-to-head, Pinduoduo is, without a doubt, the only clear winner, with Meituan being the only other player that has somewhat survived.

Pinduoduo’s story is far from over. As it navigates this critical turning point, the implications for the Chinese e-commerce landscape and its global ambitions are enormous. If you’re interested in following this journey and exploring how it shapes the future of the industry, subscribe now to stay updated with my in-depth analyses and insights. Have thoughts on Pinduoduo’s strategy or the broader e-commerce market? Share your comments below—I’d love to hear your perspective!

1. Ahead of Pinduoduo’s earnings, Nongfu Spring founder Zhong Shanshan criticized the platform, claiming its pricing model harms China’s brands and industries. While biased, his comments reflect broader merchant concerns.