What is Pinduoduo? Revolutionizing retail, generating profits

In the last two decades, there have been a plethora of companies in the e-commerce space that managed to capture the imagination of investors. While Amazon is the most popular online marketplace in the world, there are several other firms growing at a higher pace especially in emerging economies like China and India.

Here, I take a look at Pinduoduo (NASDAQ: PDD), a China-based e-commerce company revolutionizing the Chinese retail landscape and making many of its investors a lot of money along the way. So, exactly what is Pinduoduo?

What does Pinduoduo do?

Founded in 2015, Pinduoduo is a mobile-only marketplace that connects millions of buyers directly with sellers. It has become one of China’s most popular e-commerce platforms in recent years for fresh produce, household items, clothing and electronics. The company aims to bring more businesses and consumers online so that local communities and rural agricultural prodcuers can benefit from the growth of the digital economy.

What is Pinduoduo’s model?

Its mobile platform provides buyers with a wide selection of merchandise as well as an interactive shopping experience, while enabling sellers to seamlessly connect with customers. Pinduoduo’s growth has been underpinned by the community group buying model which has allowed the company to expand its buyer base at a fast clip and establish strong brand recognition.

The total gross merchandise volume (GMV) on the Pinduoduo platform has increased from US$72.75 billion in 2018 to $383 billion in the 2021 calendar year.

The GMV basically represents the value of the total amount of goods purchased on the company’s platform.

Further, the total number of active buyers on Pinduoduo in 2021 (users who placed one or more orders throughout the year) hit a record of 868.7 million, up 10% compared to 2020.

What is community group buying?

Merchants on Pinduoduo platform set two listed prices for products. One price is for individual buyers while the other is for community group purchases, and is generally lower. This incentives users to bring friends and family onto the platform in order to access cheaper prices.

Buyers can access the platform and make group purchases by visiting Pinduoduo directly or via popular social networks such as QQ and Weixin.

Community group buying has seen a rapid shift in fresh produce and grocery shopping habits in many parts of China. Instead of making multiple trips to wet markets, community group buying programs see orders made on mobile and pick-up arranged at a nearby location.

Pinduoduo focuses on the social shopping element

Buyers are encouraged to share product information on social networks and invite their friends and family to form a shopping team and benefit from attractive prices. Hence, buyers actively introduce others to Pinduoduo allowing the company to lower customer acquisition costs and increase organic traffic without too much difficulty.

Pinduoduo’s active buyer numbers make it one of the largest e-commerce platforms in the world. This active user base also attracts merchants to Pinduoduo and the scale of its sales volume allows the latter to offer competitive prices thereby creating a virtuous cycle.

Its mobile-only social shopping platform has allowed Pinduoduo to grow revenue at an enviable pace over the years. The company’s team purchase model transforms online shopping into a dynamic social experience and its platform resembles a virtual bazaar. This dynamic business model has also allowed Pinduoduo to increase customer engagement and ensure repeat purchases.

In its annual report, Pinduoduo explains. “Not only is the team purchase model an efficient tool for user engagement and expansion, it also encourages users to give feedback and actively participate in improving the supply chain efficiency of the retail market.”

It adds, “Through demand aggregation, user preferences and feedback can be channeled to merchants quickly and directly so that merchants can adjust their product designs and production and sales plans accordingly.”

What is Pinduoduo’s profit?

In the 2021 calendar year, Pinduoduo’s reported an operating profit of just over US$1.2 billion. This was Pinduoduo’s first ever annual operating profit since becoming a public company. Similar to most other early-stage e-commerce stocks, Pinduoduo was unprofitable for around 5 years after launching. The company’s first ever quarterly net profit was recorded in the second quarter of 2021.

Due to its robust business model, Pinduoduo has managed to increase revenues from just over $2 billion in 2018 to $14.7 billion in 2021. Analysts tracking the stock expect the company will grow its sales to $22.5 billion in 2022.

Since the listing of the Pinduoduo Inc ADR on the NASDAQ in July 2018, the Pinduoduo stock price has increased by more than 100%.

But despite its strong longer term gains, the stock is currently trading around 50% below its record high.

Pinduoduo is now valued at a market cap of $81 billion which means its forward price to earnings multiple stands at around 32x.

Comparatively, the forward price to sales multiple for peer e-commerce companies such as Etsy and Hello Fresh stand at 30x and 29x respectively. Analysts tracking Pinduoduo have an average target price of $70.55, which is around 10% above its current trading price.

Read: How to invest in Chinese stocks – 4 easy ways to get started

Does Pinduoduo support rural communites?

Rural famers are key to the success of the Pinduoduo platform. Pinduoduo removes the middle-man from the supply chain and provides an opportunity for farmers to interact directly with consumers, thus helping them get a better price for their produce.

As of March 2021, Pinduoduo says it has trained more than 100,000 new farmers in how to operate e-commerce businesses and has committed to train 100,000 more in the coming years. Many of these trainees are digitally savvy youths who have returned to their hometowns to set up online businesses and help their rural communities sell produce. 

What’s next for Pinduoduo?

Pinduoduo has leveraged its platform and developed the Internet+ Agriculture initiative to facilitate direct sales between small-scale farmers and consumers. The platform makes recommendations to consumers based on their shopping preferences due to which it is able to aggregate demand and generate large volumes of orders for farmer merchants. This reduces the farmer’s dependence on large distributors which reduces the overall cost and improves the supply chain.

Last August, the company started Duo Duo Grocery which is a next-day grocery pickup service that allows users to order products online and collect them from designated pick-up points the next day.

Pinduoduo has seamlessly integrated its platform with major social networks in China and created a highly engaged social buying ecosystem. It has also partnered with third-party online payment service providers such as QQ Wallet, Alipay, and Apple Pay to facilitate payments.

China is already the largest e-commerce market in the world. However, there is massive potential for companies to gain traction in lower-tier cities in China in the upcoming decade which will be a key driver of revenue growth. Further, the increase in the purchasing power of China’s middle class and rising GDP numbers make e-commerce companies like Pinduoduo a good bet for long-term investors.

Related: Investors guide to the Chinese stock market