In the first of a new series, “Can Chinese brands go global in 2024?”, we investigate Temu, which has leveraged China’s technology and logistics advantages to bring cheap products to shoppers in the UK directly from manufacturers in China. But what is the cost of its rapid growth?
Since launching in late 2022, Temu has captured the attention of millions of shoppers worldwide with its promise to allow customers to “shop like a billionaire” at rock-bottom prices.
The Temu app was the most downloaded free app in the US in 2023, and in December 2023, it became the second-most visited commerce site in the world, trailing only Amazon. Its sales topped US$ 5 billion in 2023, just one year after launch.
However, Temu’s exponential growth has raised concerns within the business community. In this article, we delve into the company’s background, its remarkable growth, concerns surrounding its business model, and the implications of its expansion.
What is Temu?
Temu (pronounced ‘tee moo’) is a discount e-commerce platform with an app and website that launched in the UK in April 2023. The platform sells ultra-cheap products across a range of segments – from tech to kitchen gadgets to clothing – shipped directly from China. It has been compared to other discount e-commerce sites like Ali Express, Wish and Shein. Shoppers are encouraged to buy with “lightning deals”, clearance sales and free shipping; at the time of writing, some of the lightning deals on offer included a 13-piece make-up brush set for £1.07 and an insulated drinks tumbler with handle and straw (similar to the viral Stanley Cups that have been dominating Instagram and TikTok) for £5.67.
The platform keeps prices low by shipping directly from a network of small manufacturers and independent sellers, avoiding the need to spend on warehousing. The low value of most individual orders also means that it avoids UK customs duties, which only kick in on shipments valued above £135. From 15 March 2024, Temu will open its marketplace to sellers in the US, followed shortly by Europe. Like eBay or Etsy, products will ship directly from these sellers, theoretically reducing shipping times for consumers (and saving Temu money on logistics).
Temu supported its launch with a massive marketing push, including spending huge sums on ads on social media platforms – reportedly spending $1.2 billion on Meta platforms (e.g., Facebook and Instagram) alone – and taking out two TV spots during Super Bowl LVII in February 2023 (reportedly costing more than $14 million).
Who owns Temu?
Temu is operated by PPD Holdings, best known for its flagship e-commerce platform Pinduoduo. Starting out life as a group-buying platform for agricultural produce, Pinduoduo has surpassed expectations and taken a leading position in China’s e-commerce market, with a particularly strong customer base in third and fourth-tier Chinese cities. Its focus remains on cheaper products (often daily essentials rather than the discretionary products pushed by Tmall and JD.com) and repeat custom – something that appeals to bargain-savvy consumers in lower-tier cities.
As it has grown, Pinduoduo has created a vast network of manufacturers and suppliers in China, and Temu has drawn on this network to scale quickly. The success of both platforms propelled PPD Holdings to overtake Alibaba as the largest Chinese e-commerce company by market capitalisation for the first time in December 2023, with PPD valued at US$185 billion (although Alibaba is not far behind at US$184 billion).
What are the criticisms of Temu’s business model?
Temu’s rapid growth has generated much conversation in the business community.
Some have raised questions about the long-term viability of the business. A Wired investigation in May 2023 found that Temu was losing an average of $30 per order and may lose up to RMB 6.73 billion per year in total. It is also putting a lot of pressure on Chinese manufacturers, which are already feeling the pinch from China’s slower-than-expected post-Covid economic recovery, to cut costs or even supply products for free.
As with Shein, environmental groups have criticised Temu’s sustainability credentials, arguing that its business model encourages impulse purchases that lead to waste, and that parcels come in excessive, un-recyclable packaging. Organisations such as Greenpeace have noted that it is difficult to find concrete information about Temu’s climate impact or its environmental commitments on its (or PDD’s) websites.
Of course, the same criticisms have long been levelled at Western fast-fashion companies like Zara and H&M. And proponents of Shein and Temu’s models say that by gathering data on what consumers are buying and then directly feeding it back to manufacturers, they can reduce the production of unwanted items. Nevertheless, the computing power required to process this data also contributes significantly to carbon emissions.
Like other Chinese platforms, Temu is facing scrutiny about the collection and use of data, especially in the US. A report published by the US-China Economic and Security Review Commission in April 2023 accused platforms like Temu of “data risks, sourcing violations and trade loopholes”.
The future of Temu
There is no doubt that Temu’s rapid expansion makes it a successful example of a Chinese brand “going global”. Nevertheless, its focus on bargain basement pricing could be a barrier to success in the long run. The cheap products might tempt people in, but if the quality isn’t there, they won’t return. Indeed, research by Goldman Sachs suggests that Temu’s retention rate is under 30% – Amazon Prime’s, in comparison, is over 90%. Therefore, Temu may have to shift its strategy in the long term if it wants to be a permanent fixture in the Western market.
