Amazon suffered a disappointment in China earlier this year after its plans to acquire e-commerce platform Kaola fell through. But its search for partners in China has now brought it into closer contact with another major player, with the US giant’s opening of a pop-up shop on Pinduoduo.
The tie-up, launched to coincide with Black Friday on November 28, is a relatively small undertaking. For the next month, Amazon will offer 1,000 specially selected products on Pinduoduo (an e-commerce site we first wrote about in WiC404), taking advantage of an Rmb10 billion ($1.41 billion) incentives programme. But presumably the hope is that the two companies are heading for deeper collaboration in future.
For Amazon, the immediate benefits are two-fold. Firstly, Pinduoduo is providing 80% of the sales subsidies, allowing it to offer products like Dyson hairdryers and Bose speakers at discounts to rival platforms. And secondly, it will give Amazon bosses better visibility in a market where it has traditionally struggled. For example, its China sales platform has often been criticised for being dull compared to the brighter, busier e-commerce formats that Chinese shoppers prefer. Customers have also complained about its delivery service on social media, saying that orders take too long to arrive.
Amazon kicked off another strategic review in China this summer, deciding not to sell goods from domestic merchants, and to refocus on what it sees as its competitive edge: sales of imported brands.
At the end of the second quarter, it held 5.7% market share in sales of international brands online (down slightly on the previous quarter), according to Analysys data. This compared to 33% for Alibaba’s Tmall Global and 22% for NetEase’s Kaola. In March, the rumours were that Amazon and NetEase would partner against Tmall, with a share swap that gave Amazon a position on Kaola’s sales platform in exchange for granting Kaola more access to Amazon’s global supply chain. However, a few months later NetEase announced that it was selling Kaola to Alibaba instead, which intends to maintain the brand as a separate sales channel (see WiC466).
Over the short-term this shores up Alibaba’s position as the market leader, giving it a dominant share of sales. However, it might also push Amazon closer towards Pinduoduo, which is keen to move upmarket and sell more of the type of goods that Alibaba offers.
Pinduoduo’s share price has reacted well to the news of the tie-up with Amazon. Prior to this its shares had been under pressure, although this was partly because they performed so strongly in previous months (Pinduoduo’s stock is still up more than a third this year). There was a sell-off in the third week of November when the Nasdaq-listed platform’s third quarter results didn’t live up to the market’s higher expectations. Annual active users had shot up 39% year-on-year to 536 million (the fastest growth in seven quarters). However, the sales subsidy programme offered by Pinduoduo meant that net losses were also much higher than expected at Rmb1.7 billion. The share price dropped by a fifth on that news.
A research report from HSBC last month warned that Pinduoduo still lacked “a clear roadmap to profitability”, although one of the e-commerce brand’s primary goals is to diversify away from its base targeting less affluent shoppers towards higher-value customers in tier-1 and tier-2 cities. It has already claimed some success in growing its customer base, but a longer tie-up with Amazon could help it shed more of its cheap-and-cheerful image and instead be more associated with “value for money”, as local investment bank CICC puts it.
Of course, in doing so it is going head-to-head with Alibaba, which has been moving in the opposite direction by targeting price-sensitive shoppers in smaller cities in a bid to keep its own growth rates up. In the meantime Pinduoduo continues to focus most on winning new customers, HSBC commented.
Its current Rmb10 billion sales campaign will run for several more quarters but the key question is when Pinduoduo will start to cut back on subsidies and focus more on profitability.
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