Introduction
In the following report, I will be discussing trends in the Chinese retail and e-commerce market, predictions regarding the future role of digital technologies, as well as the opportunities and threats of startups within these markets. I’ll also be analyzing Pinduoduo’s success and possible growth strategies, all related to ‘Pinduoduo: 300+ Million Shoppers Teaming for Good Deals’.
Key Trends Driving China’s Retail Market & the Future Role of Digital Technologies
China is the world’s largest retail market, and notably the world’s largest e-commerce market since 2016. In China’s current retail market, furniture and communication appliances, together with Chinese and Western medicine were the top 3 growth categories of products over the last few years. The year-on-year growth of online retail is much higher than for the overall retail market, demonstrating that it is the most rapidly developing segment. There are various trends that can explain the convergence towards online retailing over the last few years:
Firstly, improved financial conditions, along with the development of China’s technological infrastructures allowed for this rapid expansion of and a trend towards e-commerce (Exhibit1)1. Spending on online platforms is increasing in both urban and rural areas, with rural areas keeping up with the developments within the urban areas.
Mobile internet is also now in greater use in China, allowing for e-commerce to extend to mobile as well as internet selling. This trend towards mobile e-commerce is influenced by the improved economic conditions, and the development of reasonably priced smartphones that allow people to participate in this type of activity. Many online retail companies in China, including Pinduoduo, now operate through mobile apps as well as through their website, with PDD incorporating the use of the Chinese social media app, WeChat, in their sales to encourage their team purchasing movement, in turn using the mobile e-commerce trend in their favour.
Another trend driving China’s retail market is that online businesses in China, such as Alibaba, are now developing their own online payment platforms to facilitate payments and encourage consumers to purchase online.
These above-mentioned trends are creating a rise of the O2O (online to offline) initiative, which describes the relationship between online and offline shopping. In other words, the O2O initiative is anything online that encourages people to shop offline by familiarizing them with a brand, experience or product – a great example of this is Uber. I believe that this indicates a shift towards a more cooperative stance between the digital and physical worlds in the future, providing a sign to retailers that, although brick-and-mortar stores are clearly still relevant as a purchase point, the digital platform is becoming increasingly essential in priming customers to increase purchases, both online and in physical stores.
Furthermore, online retail giant, Alibaba, has, for the past 3 years, been implementing a strategy to support “new retail”, in which they believe that retail is moving from B2C (business to consumer) to C2B (consumer to business). In other words, through this new C2B concept, consumers give the businesses information, ie. data is gathered about consumer behaviour and buying patterns, and this is then used to determine the design and manufacturing of the products. Through this, there is a much greater consumer involvement in the whole process, indicating a trend towards greater interaction between consumers and businesses, and greater learning by companies (notably, digital companies) to be gained from consumers, to improve the efficiency of their practices. This is increasingly being used by many Chinese companies who are changing their positioning to adapt to the new consumer habits regarding their greater influence in the decision-making process, and are using this to expand into new areas in which they see greater demand. As quoted by PWC China5 in a report issued in July 2019, “New retail is here to stay”, indicating the great influence of this trend in the present day and in the future.
Opportunities & Challenges for E-commerce Startups in China
With China being the country with the world’s largest population, there are many opportunities for e-commerce startups. Firstly, due to the immense population, there are plenty of consumers and segments of needs to target, in turn being more likely to have gaps in the market, making it potentially easier for startups to gain customers. This wide range of potential targets is also due to the fact that the Chinese population is divided into tiers of cities, ranked according to many elements, including population size and GDP. There are also extreme differences between rural and urban cities, meaning that companies will be unlikely to succeed within all areas, with most large companies targeting the more urban and higher tier cities, indicating many potential opportunities for entry into less explored markets. Finally, China is the country with the greatest online retail market, being projected to grow by 70.7% by 2023, demonstrating a much higher growth rate than other countries such as the US, which is projected to grow by 45.7% 6.
However, as with all areas of business, no matter how appealing the market seems and how encouraging the prospects of success, there will always be challenges that startups will face. First of all, there are already e-commerce giants in play in China, such as JD.com and Alibaba, and now Pinduoduo too. This makes for tough competition for startups looking to enter into e-commerce, as these companies are well-established in the industry, having many loyal customers at this point. They have a massive range of products that target consumers in multiple segments and with varying profiles and locations, making it difficult to find a gap in the market in which you will not be competing with these companies. Building on this is the issue that, especially online, people can be skeptical regarding the quality and trust-worthiness of products, notably after events such as the Pinduoduo counterfeit scandal, so startups in the e-commerce market may struggle to gain the confidence and trust of consumers, which can be a time-consuming and expensive process. Lastly, in a country such as China, with a wide ranging population, one has to be careful with the segmentation of consumer groups, needing to use a complex classification of cities in order to effectively establish our target.
Pinduoduo’s Success In China’s E-commerce Market
Getting started in such an already explored industry as online retailing can be tough for new businesses, as described above. However, Pinduoduo managed to become the number 3 online retailer in China within the mere period of 3 years. I will now explain how I believe that this was achieved amongst the great competition faced within this market.
First of all, Pinduoduo set themselves apart from competitors by using a team-purchase format in order to gain greater market demand and attract new customers. Consumers were asked about their interests in terms of products, and then encouraged to join together a “team” of people who were all interested in the same products, allowing consumer teams to purchase these items at a discount. This allowed Pinduoduo to provide products at a discounted rate without losing money, due to the use of bulk buying from manufacturers. The high demand allowed PDD to have greater influence over manufacturers and sellers, being able to obtain discounts that smaller companies couldn’t. This also allowed them to not lose money on unsold products, as they could order in relation to levels of demand.
Coherent with their use of team purchasing, Pinduoduo also used referrals to increase customer base, encouraged by offering rewards, either in the form of a free gift or cash, to a member if they referred a friend to download the app and sign up. They also had coupons that were only valid for a short period of time, which encouraged immediacy within the consumer.
Moreover, Pinduoduo focusses its targeting on lower-tier cities in China, from tier 4 down, unlike its biggest competitors, such as Alibaba, which targets mostly tier 1 and 2 cities. As the focus is different, and the appeal for PDD is greater within the lower tier cities due to its heavy discounts, this company avoids some direct competition within its focus target. Although these competitors also sell within the lower tier cities, PDD has the cost and price advantage that cannot be matched by competitors. Added proof of this targeting and cost difference is that Alibaba’s brand, Taobao, brought out their new line of products called Xinxuan, which consisted of higher quality products, indicating a higher price point. These would be targeted more at higher tier cities, such as Beijing and Shanghai, sustaining my point that Pinduoduo was not so threatened in the lower tier markets.
Finally, PDD focusses on “agricultural produce”, which was something that none of its competitors were looking at as a core focus. The company uses its online platform to sell the agricultural produce of poor farmers in the rural regions of China in order to try and help them improve their living standards. According to 36kr3, the growth rate of Pinduoduo’s agricultural sales is of 233%, demonstrating how they have managed to majorly innovate Chinese e-commerce, both targeting and being supplied by residents of rural communities. Through this, they are also demonstrating somewhat of a philanthropic activity – another advantage that can be leveraged over their competitors.
Growth Strategy for Pinduoduo
In order to enable PDD to sustain its growth, I would recommend a Market Development strategy to allow them to sell worldwide. Currently, Pinduoduo only sells to Chinese consumers and, although China is the country with the largest population, indicating that a great portion of the world’s consumers have already been reached, I believe that for Pinduoduo to grow even further, to be able to compete against the likes of Alibaba4 they need to expand their horizons and start to appeal to international consumers. Currently, Pinduoduo not only doesn’t ship to countries other than China, but its website is also in Chinese2, meaning that they are even missing out on potential sales to non-Chinese speaking citizens in China, such as expatriates.
Their first step should be to have an English version of the website, to be able to extend to the international citizens of China. Due to their referrals policy and team-buying strategy, it is extremely important to get expatriates acquainted with the website before being able to expand their sales internationally. By doing this, recommendations can be shared in favour of Pinduoduo with friends or family members in their home country allowing a more effective transition into international shipping, with increased facility of gaining international clients.
Tying into this, Pinduoduo should ship internationally, at least to countries with large populations, such as the US, in order to be able to augment their customer base and revenues. I believe that a global expansion will allow PDD to potentially overtake JD.com and become more of a direct competitor for Alibaba. E-commerce is a global trend, not only impacting China but also most developed countries and, thus, the introduction of PDD in the global market would likely be a success as there are few other direct competitors in terms of pricing. Of course, consumers would have to pay shipping, but the team-buying strategy is likely to offset this cost.
Conclusion
In conclusion, the Chinese retail and, more specifically, e-commerce market is the largest in the world, following trends, such as mobile retail and online payment platforms, towards O2O and “new retail”. Though there are many challenges to be faced by startups in the online retail market in China, Pinduoduo managed to overcome these through having a differentiated target and a marketing mix that promotes “spreading the word”. I believe that they can continue to grow using a market development strategy, in order to become a multinational enterprise.
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