Oct 13, 2020 02:23 PM

In Depth: Alibaba and Pinduoduo Slug It Out for Dominance of China’s Online Bargain Basement

Editor’s Note: This story is the second of a two-part series on Alibaba’s efforts to defend itself from younger rivals. Read part one here.

After facing one of the first serious threats in years to its core e-commerce business, industry behemoth Alibaba is finally showing early signs of turning the tide in its ongoing battle with up-and-comer Pinduoduo. But the shift hasn’t come easy, and there’s no guarantee the tables might not turn yet again as China’s dominant e-commerce company rounds out its first year since visionary founder Jack Ma turned over the keys to a younger generation of new leaders.

The Pinduoduo threat and nascent Alibaba comeback are perhaps most easily traced in Pinduduo’s stock, which more than quadrupled from its 2018 IPO price, only to lose momentum after its own visionary CEO and founder Colin Huang scaled back his role in July. Since that move, which caught the investment community by surprise, the stock has lost about 20% of its value.

Pinduoduo made its huge inroad by targeting the ultra-low end of the market, which is sizable in China’s many smaller cities filled with less affluent consumers. Its strategy centers on a no-name approach that offers generic products at extremely low prices, often direct from manufacturers who use the group buying model to sell their wares in big lots.

But after initially eschewing those ultra price-sensitive customers, Alibaba is now taking the group far more seriously. Meantime, Pinduoduo’s efforts to move into the higher-margin realm of branded products, where Alibaba and rival JD.com dominate, are having trouble gaining similar momentum due to its reputation as a bargain basement seller.

Huang Dehua is typical of the manufacturers who flock to Pinduoduo. Operating a clothing factory on the outskirts of the coastal city of Hangzhou — which happens to be Alibaba’s home base — Huang makes a living by offering deeply discounted group buying bargains to his online customers. But after a decade in his current location, Huang says he’s planning to close down his current factory and relocate to his hometown in adjacent Jiangxi province to save money.

“Before a T-shirt would sell for 10-plus yuan,” he said, citing a sum equivalent to about $1.50. “Now it’s just 9.9 yuan or lower, and that also includes postage. We just can’t do it.”

Swelling numbers

Pinduoduo’s meteoric rise has seen it garner numbers that come tantalizingly close to Alibaba’s, at least in terms of users. Its annual active users as of this year’s second quarter totaled 683 million, up 41% year-on-year, compared with Alibaba’s 742 million users built up over two decades in business.

Pinduoduo has zoomed over the past year partly on the strength of a 10 billion yuan subsidy program that has helped cement its place as the cheap e-commerce leader. It has also rolled out a wholesaling edition of its service in a bid to attract upstream suppliers in the massive apparel and accessory segment, as well as other segments traditionally dominated by Alibaba.

Everbright Securities estimates Alibaba’s gross merchandise value (GMV), the total value of goods sold on its platforms, grew between 18% and 20% in the second quarter, lagging the broader market’s growth. That discrepancy reflected the threat posed by Pinduoduo, which picked up share in the “no-name” segment of the market even as Alibaba’s branded business made strong gains.

But the figures are less impressive when it comes to how much Pinduoduo’s users spend. Pinduoduo’s average revenue per transaction is currently only a fifth of Alibaba’s, reflecting how much harder it has to work for each dollar that changes hands over its platforms.

Fighting back

Pinduoduo buyers are far more likely to buy ordinary everyday items like clothing and soap, in contrast to flashier, higher-margin wares like home electronics. But its rapid growth selling such ordinary items eventually caught the attention of Alibaba, which is taking the threat more seriously.

Responding to the challenge, Alibaba set up a new Taobao Special Edition portal in March, branded with the name of the company’s dominant Taobao C2C marketplace that is much like eBay.

But while the new marketplace shares the Taobao name, it is actually tied directly to Alibaba’s non-consumer-facing 1688 wholesaling B2B marketplace operator. Taobao Special Edition and 1688 officially connected their platforms last month, underscoring Alibaba’s determination to give wholesale-level prices to ordinary consumers. Alibaba has also used its older Taobao Juhuasuan platform, which specializes in group buying and flash sales, to take on Pinduoduo.

“Taobao Special Edition’s entire traffic flow is coming from the bottom of the market, which has a lot of overlap with Pinduoduo,” Wang Hai of 1688 told Caixin.

That response is still in its early days, and Taobao Special Edition remains small. It had a modest 48.86 million monthly active users in June, compared with Pinduoduo’s 610 million, according to market research firm QuestMobile. Taobao Special Edition’s 34.20 million monthly active users for its main site in June was barely enough to get it onto the country’s list of top 10 e-commerce apps.

In response to Alibaba’s counter-offensive, Pinduoduo at the end of July launched its own dedicated wholesaling site and began recruiting suppliers.

As it starts feeling the heat from Alibaba’s counteroffensive, Pinduoduo’s momentum appears to be slowing. The company surprised the investment community in July when Colin Huang issued a letter saying he would step down as CEO but retain the company’s chairmanship, giving over the CEO title to chief technology officer Chen Lei. Huang also left the board of Pinduoduo’s main operating entity a month later to focus on strategy.

Pinduoduo shifted its subsidy program back to its traditional strength in clothing and daily-use items after the second quarter, in what some saw as a retreat from traditionally strong areas for Alibaba like branded electronics. Pinduoduo vice president Ma Jing said on a recent conference call the company decided to focus on such products because consumers typically ordered them more frequently and thus they provided the best return on its marketing spending.

Banished by the big brands

Pinduoduo is also getting trapped by its reputation as a place where consumers go to find the lowest price for anything, be it a bar of soap or an iPhone. Such an attitude is scaring away mainstream brands, which see Pinduoduo as undermining their pricing strategies.

The company had high-profile run-ins earlier this year with electric car maker Tesla and microchip maker AMD for selling their products without authorization. Similarly, late last year around the time of China’s “Double Eleven” online shopping extravaganza, several brands including household appliance maker Dyson put out statements saying they had not authorized Pinduoduo to sell their merchandise.

“We all say that Pinduoduo sells low-priced apples,” said one investor in the company. “Whether it’s an iPhone or a real apple, all people care about is how cheap the product is. Once it isn’t the lowest price, the user will leave.”

Contact reporter Yang Ge (geyang@caixin.com) and editor Gavin Cross (gavincross@caixin.com)

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