It came as a surprise when Pinduoduo, a four-year-old e-commerce platform, started to challenge the duopoly of JD.com and Alibaba in China. Founded by an ex-Google engineer Colin Huang in Shanghai in September 2015, Pinduoduo made its debut on NASDAQ in July 2018. The company’s business model is different from traditional e-commerce platforms and uses a ‘Disney + Costco’ model, which combines elements of entertainment and value into sales. It provides a more interactive shopping experience for customers by offering discounts when they make group orders with friends or family. There are several reasons for the rise of Pinduoduo in such a short time. The following is a closer look at some of these factors：

Increasing penetration of internet users in rural areas

China’s increasing internet users in rural areas provides a fertile ground for the development of e-commerce platforms like Pinduoduo, which is more focused in lower-tier cities and rural areas. According to the latest statistics from CNNIC (China Internet Network Information Center), the number of internet users in Chinese rural areas reached 209 million while internet penetration has significantly increased to 36% at the end of 2017, compared to just 7.4% in 2007.

China’s large and fragmented consumer market

Given how large and fragmented China’s consumer market is, Pinduoduo’s initial strategy was to tap into lower-tier cities and rural markets. Pinduoduo carries more affordable products that are often unbranded or white-labeled. It quickly became a success in China’s less urbanized areas, where consumers are more price-sensitive and care less about brands. Despite China’s rising income per capita, there is still a significant discrepancy in income levels in urban versus rural areas. GDP per capita in China’s top tier cities is 5.2 times more than that in third-tier cities, based on data from NBS (National Bureau of Statistics). Pinduoduo expanded quickly with the right products in the right markets. Building on its initial success, Pinduoduo has also gradually entered top-tier cities.

Ubiquitous use of WeChat in China

WeChat is China’s most popular messaging app with over one billion users in the country. With Tencent being one of the investors for Pinduoduo, the company easily shared links on discounts through the WeChat platform. This level of access on WeChat is not allowed for Tencent’s rival Alibaba. Many netizens in China’s rural areas have just started to use mobile internet and find it much easier to navigate on Pinduoduo and make the payment directly through WeChat. Using Alibaba’s platform requires an extra step to set up Alipay and is challenging, especially for elderly users.

Exhibit 1: Annual Active Customers of E-Commerce Platforms in China

Source: Company filings

Pinduoduo posted strong earnings in Q2 2019, beating market expectations. Revenue jumped to RMB 7.29 billion (roughly US$1.02 billion), an increase of 169% YoY. Net loss also narrowed to RMB 1 billion (roughly US$141 million) from RMB 6.5 billion (roughly US$917 million) in the same period last year. Pinduoduo’s current annual active customers as of Q2 2019 reached 483 million, surpassing that of JD.com. Though Pinduduo continues to make losses, it has the potential to turn profitable if it gets enough scale in China’s e-commerce market. Editor’s Note: Pinduoduo reported its numbers in RMB. The conversion rate we have used is US$1 = RMB 7.08.

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