How TEMU Really Works and What They’re Planning for Europe

Like many of you, I initially jumped on the trend of criticizing TEMU as just another low-quality platform, similar to AliExpress or Wish, offering cheap junk from China.

However, after listening to two episodes of 'Let's Talk Marketplaces' with Ed Sanders from the Netherlands and hosts, marketplace specialists Valerie Dichtl and Ingrid Lommer from Germany, I changed my perspective.

Also, presentation from Juozas from Marketplace Pulse clicked with me.

I’ve decided to share the notes I took, hoping they might help others too.

Shares of TEMU Parent Company PDD Plunge Almost 29%

Shares of PDD Holdings, parent company of TEMU and Pinduoduo, dropped 28.57%, marking their largest one-day loss since listing on Nasdaq. The drop was caused by PDD missing Wall Street expectations for second-quarter revenue, reporting $13.6 billion instead of the expected $14.034 billion.

Despite the revenue miss, PDD's operating profit surged 156% year-on-year, and attributable income rose 144%. Analyst Shaun Rein suggested the market's reaction was an overreaction, calling it a potential buying opportunity due to PDD’s continued growth. The stock drop was also influenced by cautious statements from company leadership about future challenges, investments, and profitability impacts. PDD faces fierce domestic competition from JD.com, Alibaba, and SHEIN, and internationally from companies like Amazon. Weak consumer growth and a saturated e-commerce market in China are also hurdles.

Current problems of Temu:

Drop in Share Value: TEMU experienced a 30% drop in its share value due to missing analyst expectations. The decline was driven by unmet expectations rather than actual performance.

Risks in Domestic Market: TEMU faces increasing competition in China, especially from companies like JD.com, as Chinese consumers become more price-sensitive. Pinduoduo, TEMU's parent company, primarily focuses on low-cost products, but competition is fierce as rivals also move towards cheaper offerings.

Need for Product Quality Improvement: To stay competitive, TEMU must develop higher-quality products, which will require significant investment and lead to lower profits in the coming years.

Expansion and Seller Hesitation:

European Expansion: TEMU is expanding into Europe by leveraging Chinese factories that fulfill products to TEMU warehouses. This allows TEMU to sell and ship products throughout Europe.

Chinese Seller Hesitation: Some Chinese sellers are hesitant to ship their products to TEMU's European warehouses due to concerns over unsold inventory and high shipping costs.

Attracting Big Brands: TEMU's biggest challenge is attracting large European and US brands to its platform. Without these brands, TEMU risks remaining known as a platform for cheap, no-brand products. This reputation hurdle mirrors Alibaba's past struggles when it tried to attract major brands with little success.

Potential Strategy - Following Amazon's Footsteps:

TEMU might adopt a strategy similar to Amazon's early days, where Amazon bought products from distributors to attract big brands. Over time, brands saw the volume of sales and were compelled to work directly with Amazon. TEMU could force big brands to collaborate by driving customer volume, even if it means losing money initially.

Third-Party Model Challenge: To attract established brands, TEMU would likely need to shift from controlling prices to a third-party model, allowing brands to control their own pricing. However, this could make TEMU less competitive since big brands are less likely to be as price-aggressive as current sellers.

TEMU's Business Models

1.Factory-Fulfilled Model (Fully Managed Model): This is TEMU's primary model. In this setup, factories place products in TEMU's warehouses, but they retain ownership of the products until they are sold. TEMU controls the sale price and shipping once a customer makes a purchase. This model allows TEMU to avoid upfront inventory risks while still offering a wide variety of products.

2. Chinese Sellers with Existing European Operations: TEMU is encouraging Chinese sellers who already sell in Europe (via their own or third-party warehouses) to store their products in TEMU’s European warehouses. These sellers can use TEMU’s platform to reach European customers, but many are hesitant due to concerns over unsold inventory and shipping costs.

3. Attracting Big Brands by Reseller Model: TEMU may pursue a strategy similar to Amazon’s early approach by purchasing products from resellers or distributors at a loss. As TEMU grows its customer base, big brands might feel compelled to engage with TEMU directly to regain control of their product lines and pricing.

4. Third-Party Marketplace Model: TEMU also has the potential to shift to a third-party marketplace model, where big brands control their own pricing and inventory. However, this could make TEMU less competitive, as larger brands are less likely to engage in aggressive price reductions compared to current sellers on the platform.

Comparison to SHEIN:

Different Product Focus: TEMU initially focused on fashion but quickly realized the difficulty of competing with SHEIN, which dominates the fashion space. Many factories are tied to exclusive contracts with SHEIN, limiting TEMU’s ability to source from these manufacturers.

Portfolio Breakdown: SHEIN’s portfolio consists of 70% fashion and 30% other products, while TEMU's portfolio is the reverse, with only one-third focused on fashion and the remaining two-thirds consisting of household and no-brand products.

SHEIN’s Business Models:

- Own Production: Two-thirds of SHEIN’s sales come from its own production, where factories exclusively manufacture products for SHEIN.

- Fully Managed Model (Similar to TEMU): Factories place products into SHEIN’s warehouses, and SHEIN manages the sales and shipping once a purchase is made.

- Third-Party Marketplace: SHEIN also operates a third-party marketplace, though it accounts for only 15% of its total sales.

- A/B Testing and Demand-Driven Manufacturing: SHEIN heavily relies on a data-driven approach to test products and scale production for the most popular items. TEMU, in contrast, offers a broader range of product categories, with less emphasis on fashion trends and A/B testing.

What's Next for TEMU:

- Adopting a Strategic Brand Partnership Model: TEMU might eventually need to shift to a model similar to Amazon’s, where larger brands control pricing and inventory. However, this shift would require significant investment, patience, and a focus on building long-term partnerships with established brands.

- Long-Term Success and Brand Partnerships: In order for TEMU to succeed in the long run and shift away from its reputation as a platform for cheap, no-brand products, it must focus on forming strategic partnerships with well-known, established brands. This would not only improve its image but also help TEMU expand its product offerings beyond low-cost goods. To do so, TEMU may need to adopt a vendor model similar to Amazon, where it purchases products from resellers and distributors at a loss, until big brands see enough customer demand on TEMU to engage directly.

- Challenges of Switching to a Third-Party Marketplace: To attract bigger brands, TEMU may need to offer them a third-party marketplace model, allowing these brands to control their own prices and sales. However, this could reduce TEMU’s competitiveness, as larger brands are less likely to engage in aggressive pricing, which currently defines TEMU’s appeal. The shift from a platform focused on low-cost products to one that supports larger, higher-quality brands will be complex and require significant investment.

- TEMU’s Broader Product Focus: Unlike SHEIN, which primarily focuses on fashion (with 70% of its portfolio in that category), TEMU’s broader product base, with two-thirds of its offerings in household and no-brand items, provides an opportunity to differentiate itself in markets beyond fashion. This diversification could be an advantage as TEMU continues to expand, especially in regions like Europe, where household and everyday items may have greater demand.

- Adopting an Amazon-Like Approach: TEMU could follow a similar growth path to Amazon by using short-term losses to build long-term market share and attract larger brands. In Amazon’s early days, big brands were hesitant to join, but Amazon purchased products from distributors until these brands saw enough demand to enter the platform directly. TEMU could leverage a similar strategy by buying from resellers and using aggressive pricing to attract customers, eventually compelling big brands to engage once there is sufficient demand for their products on the platform.

Made, Sold, and Promoted by China

The global e-commerce landscape has been dramatically reshaped by China's influence. Historically, China’s role was primarily focused on manufacturing (Made in China), but the country has now progressed to not only making products but also selling and promoting them globally.

From "Made in China" to "Sold and Promoted by China"

Initially, “Made in China” gained prominence during the 1980s and 1990s. However, the narrative has evolved, and now Chinese sellers dominate global e-commerce platforms like Amazon. As noted in the presentation, nearly 60% of marketplace sellers on Amazon are based in China, compared to just 30% five years ago.

In addition to platforms like Amazon, China’s own e-commerce giants such as AliExpress, SHEIN, and TEMU have grown rapidly, cementing China’s influence not only in manufacturing but in direct-to-consumer sales. These platforms offer lower prices, albeit with slower delivery times, disrupting global retail by cutting out traditional sellers and offering direct-from-China merchandise.

TEMU: A Key Player in the “Sold by China” Revolution

TEMU has become one of the most-visited e-commerce websites globally. By heavily investing in advertisements and integrating the supply chain directly at the source.

TEMU has successfully promoted itself as a leader in low-cost, direct-from-China products.

TEMU, along with AliExpress and SHEIN, represents a combined $200 billion market, demonstrating the massive shift toward “Sold by China” and “Promoted by China”.

However, TEMU’s dominance comes with challenges. While its low prices attract customers, there are concerns about product quality, safety, and environmental sustainability. Additionally, consumers are becoming more aware of the ethical and environmental impacts of fast-fashion and low-cost merchandise, which could affect the long-term success of platforms like TEMU.

The Future of TEMU and Chinese E-commerce

As regulatory gaps close and domestic markets react to China’s growing dominance, the future of e-commerce will likely see increased scrutiny on platforms like TEMU. Yet, as China continues to position itself as both a manufacturer and retailer, it’s clear that the world is increasingly becoming China’s marketplace.

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