China's e-commerce upstart Pinduoduo is still working to make a profit and shake off its reputation as a counterfeit goods Set another ambitious goal for 2025: Exceed 1 trillion yuan, or $ 145 billion gross annual commodity, of agricultural products.
The announcement came with the company's Q2 results last Friday. In some cases, online sales of agricultural products in China reached 400 billion yuan, or $ 58 billion, in 2019, up 27% year over year, according to statistics from the Department of Commerce.
It is important to note that GMV sums the dollar value of goods sold through a platform without considering discounts, refunds, returns, etc. Therefore, GMV is not accepted as a standard accounting term for measuring revenue. However, the term is useful for measuring the transaction size of a burgeoning company like Pinduoduo, which is still in the red.
The key message here is that Pinduoduo wants to lead the digitization of the Chinese agricultural sector. Only 2.5% of Chinese agricultural products were sold online last year, more than half through traditional wet markets and around a third through supermarkets, according to a report by research company iiMedia.
Launched as a group fruit shopping service in 2015, Pinduoduo has since grown into an all-purpose e-commerce service that rivals Alibaba and JD.com. Fruits and vegetables remain a key category as over 240 million, or 38% of the yearly active users bought agricultural products through their marketplace in 2019.
Pinduoduo believes that its “pin” or “group buy” approach can help standardize growing practices and create economies of scale for small businesses. Compared to countries like the US, where industrial agriculture predominates, China is dominated by small farms as it has far less arable land per capita. As newly appointed CEO Chen Lei said of the earnings call:
"We combine consumer demand on our platform to achieve economies of scale and can use consumer insights to help farmers make more informed decisions about planting cycles, including what to plant and when to harvest."
Pinduoduo's annual report elaborated on:
"We find that & # 39; pin & # 39; an effective solution is to aggregate consumer demand, match it with batches of agricultural products, and mobilize China's well-penetrated and affordable logistics capacity to deliver perishable and fresh products direct from farms to users and bypass multiple levels of distribution. Not only does this improve the user experience, but most importantly, it helps transform small-scale agricultural production of varying quality, variety and volume into a semi-custom batch processing mechanism. This lowers the unnecessary cost of agricultural consumption and makes potentially small-scale bespoke services profitable. "
The company's foray into agriculture also includes engaging agricultural experts in training farmers and investing in precision farming technologies such as robots, IoT sensors and low-power data transmission.
Pinduoduo's rise has undoubtedly unsettled his rivals. The upstart had 683 million active buyers per year for the year ended June. For comparison, Alibaba claimed 742 million active consumers in China in March through March, and JD.com recorded 417 million in August through August.
But Pinduoduo still lags far behind the others when it comes to spending per customer. Using the annual GMV and active buyer numbers, our calculation shows that JD.com recorded approximately 5,760 yuan ($ 833) GMV per consumer, while the average for Alibaba (in China) was 8,447 yuan and for Pinduoduo it was 1,127 yuan. Production in China has notoriously low profit margins. Hence, the challenge for Pinduoduo is to achieve a healthy bottom line while working towards his dream of transforming China's agribusiness.