Shulou(Shulou.com)06/01 Report--

At the close of trading on July 10, Beijing time, Puduo's market capitalization has exceeded 108 billion US dollars, making it the fourth largest Internet company after Alibaba, Tencent and Meituan.

On the other hand, the number of annual active buyers of Pinduoduo is about 628 million, and "pinduoduo, which is used by 600m people" is no longer just a slogan.

But the problem now is that pinduoduo, who has entered the top three of the domestic e-commerce rankings, is still losing money.

The 2019 report shows that the net profit of Pinduoduo is-6.968 billion yuan.

JD.com 's net profit for the same period was 12.18 billion.

Ali's 2020 annual report (March 31, 2019 to March 31, 2020) shows a net profit of 149.4 billion.

E-commerce is almost one of the closest businesses to money in the Internet era, so why does pinduoduo, an e-commerce platform, keep losing money? What is the value of pinduoduo's industry?

We try to make you understand the other side of pinduoduo through the analysis of this article.

What is the value of pinduoduo's model?

When it comes to pinduoduo, consumers' biggest impression is "cheap", and shopping in pinduoduo can save more money.

Huang Zheng, founder and chairman of pinduoduo, compared the company's business model to "Costco+ Disney". He explained that, like "Costco", the "C2M" model of reverse customized products to merchants provides consumers with cost-effective goods through a large number of concentrated consumer demand, so pinduoduo's goods are low in cost, so the price is "cheap".

At the same time, like Disney, it integrates the way of entertainment in the process of consumer purchase, and relies on the social model, so that consumers have psychological pleasure.

Two key words are mentioned here, one is cheap, the other is pleasure.

Separately, first of all, how is cheapness achieved?

Commodity "cheap" can be divided into two cases, one is "discounted cheap", that is, through discount subsidies to make the price of goods cheap, its essence is to transfer the cost of goods. The other is "cost cheapness", that is, it saves costs and improves efficiency in manufacturing, selection and channels, so that the cost of the goods themselves is reduced and cheap.

And Pinduoduo cheap, more is "discounted cheap", open pinduoduo APP can see conspicuous "discount, discount" words, at the same time red packets, bargaining is almost normal.

Pinduoduo launched the "10 billion subsidy" program in 2019. During the Singles' Day, pinduoduo's new authentic iPhone11 phones with tickets started from 4999 / iPhone11Pro prices from 7999 / iPhone11Pro Max prices from 8699.

The price is 500,900 yuan cheaper than Apple's official website, and the huge discount also made pinduoduo earn enough attention during the Singles' Day holiday.

It is true that the iPhone that consumers buy is a lot cheaper. Are those iPhone cheaper because of the low cost?

Obviously not, the price difference is shared by pinduoduo and dealers, why pinduoduo is willing to lose money to sell goods, which returns to one of the basic principles of the Internet "sacrifice profits for growth".

Pinduoduo attracts consumers in the form of subsidies and red envelopes, which in turn drives up the total number of users and key data such as MAU/DAU. There is a perfect story to tell in front of capital, and there are numerous enterprises that use this tactic to expand rapidly, such as early Didi, Meituan, ofo, Luckin Coffee and so on.

However, in the end, the "pig" in "wool comes out of the pig" needs to pay for "burning money", which is one of the reasons why pinduoduo, who takes subsidies, has been losing money.

Then whether pinduoduo achieves "the cost is cheap"? Not yet.

Guosheng Securities pointed out in its research report that the full-link cost rate of pinduoduo is 23.8%, Ali is 12.8%, JD.com is 15.2%, and offline retail is about 20.5%.

It can be seen that pinduoduo's full link cost is much higher than Ali, JD.com, and even higher than offline.

In the competitive relationship of the three companies, the fact that the cost is higher than the competitor is obviously not good news for pinduoduo.

Photo: Guosheng Securities

On the other hand, through observation, we can see that there is not much difference between the goods of Pinduoduo and those of Ali and JD.com, and even the manufacturers of some products are the same. in this case, everyone's "take the price" is close to the same. The "percentage" of goods sold is also the same, then operation and management become the key factor to measure the ability of the enterprise, from this point of view, the net interest rate is not dominant.

To sum up, Pinduoduo cheapness only transfers the cost and does not fundamentally change the value chain. Out-of-pocket subsidies are also one of the important reasons for its losses.

Source: Oriental Wealth choice

Second, how is pleasure achieved?

For consumers, the word "cheap" is enough to excite them, so pinduoduo always gives people the impression that it is cheap.

"spelling more, saving more" is not only an advertising slogan, but also a magic weapon that pinduoduo's users can continue to grow.

On this basis, pinduoduo aimed at people with different needs, using game-style games such as group buying, bargaining, grabbing red envelopes and helping, which not only made people relaxed and relaxed, but also unwittingly spent money.

Huang Zheng firmly believes in the route of "Costco+ Disney". "now, we see that the Internet has solved more than just efficiency problems, people's fantasy and reality, online and offline are inextricable, and we believe that Costco+ Disney must be the future of the retail consumer market," Huang wrote in a letter on July 1.

Indeed, "cheap + pleasant" did make pinduoduo grow rapidly in just a few years, but pinduoduo did not do more basic construction, which laid a lot of hidden dangers for his future development.

Ali e-commerce entered the market early, did the first batch of decentralized platform integration, and later improved the payment system and credit rating.

JD.com has done the work of improving quality and efficiency, spent a lot of time on the optimization of the industrial chain, and built his own warehousing and logistics system.

From this point of view, the retail model of Pinduoduo is essentially the most traditional, putting a lot of money into marketing subsidies, rather than finding and creating value from the essence of retail.

Moreover, "low prices" cannot form core competitiveness, and "price war" has always been a strategy of harming the enemy and damaging himself by 800.

How is pinduoduo's profitability?

Pinduoduo as an e-commerce platform, connecting both ends of supply and demand, the specific point is to connect dealers (or factories) and consumers.

Theoretically speaking, as long as merchants are willing to sell goods on the platform and consumers are willing to spend money here, pinduoduo can make a profit, but at present, the more-than-more business system and consumers seem to be not sticky enough.

First of all, on the merchant side, too low prices will affect the product pricing system, which is not what merchants want to see. In the case that the commodity itself is not much different from Ali and JD.com, the price of Pinduoduo is lower, which means its profit is lower.

Even if pinduoduo is willing to pay subsidies out of his own pocket to make the prices of merchants (or dealers) on the platform lower than those of Ali, JD.com and offline, merchants with pricing power for their products are unwilling to "break the price" for pinduoduo platform alone, disturbing their own price system in the overall market.

Just imagine that Apple officials will allow one platform to sell for 5000 yuan and other platforms for 5500 yuan? This will obviously seriously disrupt the price system and pricing power, which obviously does more harm than good to the brand and violates the nature of business.

So the real situation is that the docking of pinduoduo's "10 billion subsidies" is mostly channel merchants, which adds an extra layer of cost to brands and factories.

Pinduoduo had to pay higher subsidies to make the goods "the lowest in the whole network".

On the other hand, the strategy of "free delivery" makes the cost rise further.

The data show that when merchants fulfill an order on pinduoduo, the logistics cost of sending a package accounts for at least 9 per cent of the total order price, while Alibaba JD.com has only 3 per cent and 4 per cent.

Although this cost is not borne by pinduoduo, and on the surface, it is not borne by pinduoduo users, but it has greatly reduced the profit space of businessmen on pinduoduo's platform.

In the long run, if pinduoduo does not subsidize the merchants, it will be very difficult for most merchants to make a profit, and if the merchants are not profitable, the platform will gradually lose one end of its docking between "merchants" and "customers".

Source: pinduoduo Financial report

On the consumer side, the "low price" strategy makes it difficult for it to grow upward.

First of all, the overall user growth rate of Pinduoduo has encountered no small challenge.

The data disclosed by pinduoduo's financial report also showed that the number of monthly active users declined significantly after entering 2018, and 2019Q1 reached single-digit growth of only 6.27%. Although it began to rebound in 2019Q2, it fell back to 12.08% in 2019Q4.

Superimposed Ali, JD.com and so on pay more attention to the sinking market, and it will be more difficult for pinduoduo to grab traffic outside the "five rings" in the future.

Second, the subsidized users are less sticky.

Pinduoduo's existing users spend on pinduoduo largely because they are "cheap". Once pinduoduo reduces or stops subsidies, users will flow to other platforms with more categories. Pinduoduo still has to continue to invest high subsidies in order to retain users after receiving customers.

As "Han Shu" said, "serve others with color, color decline and love Chi". Pinduoduo always shows people as "cheap". If one day it is no longer cheap, the "love" of consumers will disappear.

The race track is crowded, and the competition of e-commerce platform intensifies.

According to the China Electronic Commerce report 2019 released by the Electronic Commerce Department of the Ministry of Commerce, the number of Internet users in China has exceeded 900 million in 2019, with the Internet penetration rate reaching 64.5%.

Judging from the market trend from 2011 to 2019, the year-on-year growth rate of China's e-commerce transaction volume and retail sales has continued to decline and slowed down since 2014. In 2019, the volume of e-commerce transactions nationwide reached 34.81 trillion yuan, an increase of 6.7 percent over the previous year, the lowest in recent years.

Photo Source: China Electronic Commerce report 2019

Indeed, the growth rate of China's e-commerce market has slowed significantly.

Some products, such as clothing, shoes and bags, cosmetics, home appliances 3C, etc., have a penetration rate of more than 40%, and the space for continued penetration is limited.

And in recent years, there have been more subdivided e-commerce players, such as VIPSHOP, who focuses on female consumption, fresh horses that focus on fresh fruits and vegetables, temples that focus on luxury goods, and so on. to some extent, these players are subverting the traditional "big and complete" e-commerce system.

On the other hand, the e-commerce platform headed by Ali and JD.com began to exert force on the sinking market, further reducing pinduoduo's market share.

In May 2019, Alibaba released its Q4 financial report for fiscal year 2019, showing that the number of core e-commerce users of Alibaba increased by nearly 100 million throughout fiscal year 2019, of which 77% came from the low-line market. Zhang Yong, CEO of Ali, explained that Taobao's accelerated penetration of the sinking market is an important engine for the growth of Ali's core e-commerce business.

Xu Lei, CEO of JD.com Retail, also revealed that after starting a new round of strategic cooperation with Tencent, JD.com will make use of unique resources such as the primary entrance to Wechat and the huge number of users in the Wechat market to create a new platform different from JD.com 's existing scenes and models. "this will be an important means for JD.com to deeply tap the Wechat market and expand users in third-to sixth-tier cities."

According to the data released by Ali and JD.com, during the 618 period of this year, the number of orders from the sinking market of the two giants increased by 176% and 122% respectively compared with the same period last year.

Under the situation that the "three Kingdoms struggle for hegemony" sank in the market, GMV of Pinduoduo also declined significantly. 2019Q4 pinduoduo achieved a quarterly GMV of 370.8 billion yuan, an increase of 81.41% over the same period last year, the lowest increase in nearly two years.

Source: pinduoduo Financial report

It should be noted that this is still in the "double 11", "double 12" and other shopping festival under the premise, without these e-commerce growth fatigue may be more obvious.

As of July 10, Alibaba's market capitalization was about 701.7 billion US dollars, pinduoduo's market capitalization was about 108.1 billion US dollars, and JD.com 's market capitalization was about 99.6 billion US dollars. From this point of view, pinduoduo, who has been established for a shorter time, has surpassed "Big Brother" JD.com.

But in terms of revenue, pinduoduo still needs to work hard.

From the perspective of the number of users, pinduoduo, with 600 million users, has left JD.com far behind and posed a certain threat to Ali.

However, at present, pinduoduo's biggest bottleneck is not user growth, but user retention. If it is not possible to retain low-cost users, the profitability of the platform will be nowhere in sight.

Summary

There are three giants in the sinking market, and netizens call it "PKQ" (the acronym for pinduoduo, Kuaishou and Qitoutiao). Despite the unlisted Kuaishou, pinduoduo and Qitoutiao are both losing money.

The once vigorous economy outside the Fifth Ring Road seems to have entered a bottleneck period of development.

The Costco that Huang Zheng yearns for is to achieve the whole process control of the supply chain to achieve low price.

Costco supply chain is very short, almost without any intermediate links, providing a small number of selected SKU, relying on its warehouse sales guarantee scale advantage, effectively control procurement and operating costs

Costco product differentiation and bargaining power is very strong, to provide exclusive special products, through buyout control, strict quality control, to achieve low price and high quality.

Pinduoduo lacks this kind of supply chain control, so the cost advantage is not obvious, coupled with large subsidies and promotions, resulting in profit margins being compressed and long-term losses.

Guosheng Securities pointed out in its research report that from the perspective of the "whole value chain", the real value created by pinduoduo in the whole commodity circulation link is very limited. It only changes the cost structure to transfer the inevitable losses in its value chain to facilitate the transaction, and the true value does not match its market value significantly.

Therefore, Guosheng Securities said, "We believe that pinduoduo is currently the biggest bubble in the history of the Internet in China."

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