Have you found yourself needing a toaster-shaped desk lamp? How about a $1.28 keychain stapler? Or a 200-pack of men’s ankle socks? If so, I’ve got you covered. Temu has it all, and quickly became one of the most downloaded shopping apps in the US, offering millions of relatively inexpensive products shipped directly from China, targeting low-income Americans.
In recent news, Temu announced they would open their marketplace to US and European sellers. While this sounds like an obvious way to expand their operation, this information surprised me and made me wonder about Temu’s long-term strategy. Will they still pursue low-cost items, or are they attempting to diversify their offer?
Temu’s Current Model
Unless you live under a rock, you’ve heard of Temu, or at least its annoying ad “Shop like a Billionaire”. Temu, operating under PDD Holdings, has emerged as a major player in the US and global e-commerce space. Its growth is especially impressive, with over 100 million active users in the US since its launch in September 2022.
The platform initially focused on selling a very diverse range of products, from clothing to electronics, primarily sourced from Chinese manufacturers, at ultra-low prices. They also aimed to add many unique items not currently sold on Amazon. This pricing strategy has been important in its fast rise in the US market: Temu’s GMV grew from $3 million to over a billion dollars in a short span.
Temu’s initial business model was a fully-managed marketplace approach. Sellers would send goods in bulk to Temu’s warehouses in China, where the company would take over the tasks of listing, marketing, fulfillment, customer service, and pricing. This model allowed Temu to maintain control over the supply chain and product pricing, which is key to its strategy. According to Marketplace Pulse, Temu has allegedly more than 100,000 merchants based in China selling their goods on the platform. Temu recently announced that they would open to US and European sellers.
What does Expanding to US and European Sellers mean for Temu
A Temu spokesperson recently confirmed the company’s plans of opening to US and European sellers. A major difference will be that Temu will not handle pricing or marketing for sellers, and they won’t have to ship their products to the warehouses in China but handle fulfillment from their local warehouses. This will give sellers a lot more freedom while allowing faster shipping to US and European consumers. For businesses, this will be more similar to what they can do with Amazon. However, it comes with its challenges, with no FBA-like program available for those without a 3PL partnership in place or with their own warehouses. But in my opinion, this announcement brings up another, much bigger challenge.
It was reported that Chinese manufacturers selling to Temu are operating on very thin margins, and the Chinese giant puts a lot of pressure on suppliers to keep prices low. In addition to the low COGS, according to Wired, Temu loses about $30 for every order placed. Chinese news site 36kr suggests the company currently loses about 30 to 35 percent on every US order. That is the secret recipe to offer customers $2 cat socks with free delivery from across the world.
Customers go to Temu to find these inexpensive items, and for many, shopping on the website feels like a treasure hunt for stuff they didn’t know they needed. But US and European sellers probably won’t sell at a $30 loss per order. If they have higher COGS and have to pay for shipping to the customers (while paying fees Temu may require), they won’t be able to offer the same ultra-low prices. Opening to US and European sellers conflicts with Temu’s core value proposition for consumers. If Temu wants popular brand names on their platform, it could turn the shopping experience into a confusing Amazon-Wish mix. Other Chinese platforms, like Shein or Aliexpress, attempted to attract US sellers, but were not as successful as expected.
I believe that profitability will become a challenge for Temu at some point, but doing so while matching customers’ expectations when it comes to logistics and pricing will be a major challenge, especially when competing with Amazon or Walmart. Amazon has its own challenges, but the US giant has many solid brands selling through their marketplace, and an impressive logistic network in place.
Temu’s decision to open its marketplace to US and European sellers marks a significant shift in its strategy that could redefine its core value proposition and its position in the e-commerce world. This would push the company away from its original model of offering ultra-low-priced products from Chinese manufacturers, and offer more diverse products, including brand names. While this expansion offers greater diversity of products and potentially faster shipping for US and European consumers, it raises the question of how Temu will reach profitability and effectively compete with established U.S. titans.