GROUP EFFORT

China’s heartland towns have given rise to a new e-commerce giant

For the past several months, the most-downloaded shopping app for the iPhone in China hasn’t been Alibaba’s Taobao or Tmall. Nor has it been from JD.com, the e-commerce giant known for lightning-fast deliveries.

Instead it’s been Pinduoduo, according to data from App Annie. An online shopping service that launched in September 2015, it appeals to price-sensitive consumers in relatively poor parts of China by combining steep discounts with social media.

Walnut Street Group, the company behind the app, is now gearing up for an IPO in the US, having filed on June 30. While the firm hasn’t disclosed how much it plans to raise, Reuters reports it could be as high as $1 billion. At the time of its funding round in April, the company was valued at $15 billion, which then marked a tenfold increase from the year prior. Its revenue increased (p. 13) nearly threefold in 2017, hitting 1.7 billion yuan (about $261 million), though losses more than doubled during the same period to 596 million yuan.

Pinduoduo’s premise is simple: Users can scan the app looking for items they want to buy, and then share links to certain listings with friends on WeChat, China’s most popular messaging app. If enough people are interested in making a purchase, they can benefit from a group discount.

Many companies have made similar attempts to build successful group-buying services, but most have failed, with Groupon being an exception. Yet two factors make China unusually well suited for a service like Pinduoduo.

First, Pinduoduo has leveraged the ubiquity of WeChat in China to help users spread the word about deals. This in turn doubles as word-of-mouth marketing for Pinduoduo itself. Much of Pinduoduo’s traffic on WeChat comes from its mini-app—programs built specifically for the messaging app that function like apps-within-an-app. According to Chinese research firm Analysys, Pinduoduo was the third most-used mini-app on WeChat as of March 2018 (link in Chinese).

Second, many of the sellers on Pinduoduo are not well-known brands, but small Chinese companies or white-label manufacturers. Such outfits, as Chinese media outlet TMT Post notes (link in Chinese), are typically unable to attract large orders from overseas brands and buyers. Turning to Pinduoduo gives them an additional sales channel, and one that’s inexpensive, too. Whereas they’d have to spend money on keyword marketing to get noticed on Alibaba’s Taobao, awareness spreads organically on WeChat as Pinduoduo users share deals on group purchases.

As a result, while flipping through Pinduoduo’s app, one seldom sees any foreign brands or fancy outfits—instead, there’s a bevy of ordinary clothing and household appliances, sold by little-known companies.

“Our thought process right now isn’t to do first-tier international brands. Our thought process is to satisfy the broadest needs, good-enough-to-use, meet basic demands,” Pinduoduo co-founder Da Da told Chinese media (link in Chinese).

This model has helped catapult Pinduoduo to popularity in a relatively short time. Less than three years since its launch, it now has 295 million active buyers (p. 4)—about the same JD.com had by the end of 2017, though the latter has been active for over a decade. A majority of Pinduoduo users are from second-, third-, and fourth-tier Chinese cities—where consumers are generally less wealthy and more price sensitive.

“People living in the five rings of Beijing wouldn’t understand our purpose,” Pinduoduo co-founder Colin Huang, a former Google engineer, told Chinese media outlet Caijing (link in Chinese). “The new consumer economy isn’t about giving Shanghainese the life of Parisians. It’s about providing paper towels and good fruit to people in Anhui province.”

—Ziyi Tang contributed reporting.

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