Fallout from recent management shifts and deeper user spending concerns have China e-commerce application Pinduoduo investors on their toes in spite of the company chalking up more than a few wins over the past year.
Pinduoduo beat Alibaba in annual user count by a narrow margin last year - its 788 million shoppers overtaking Alibaba's 779 million for the first time. The grocery and consumer goods mobile application's final quarter sales grew 146% to hit 26.5 billion yuan.
This is in large part a result of the social-commerce strategy used by Pinduoduo to attract and retain users, according to Ophenia Liang, director and joint founder of marketing agency Digital Crew.
"They created a 'group buying' concept where a group of users purchase in bulk to receive huge discounts on price. This fits the needs of their target users, good value for money and low price," she told Business Times.
Pinduoduo's rise has been fueled by deep discounts and sales to attract budget-conscious consumers.
"Pinduoduo has historically been very focused on lower tiered cities which were quite elusive...because these consumers are much more price-focused," Mark Tanner, the founder of Shanghai-based consultancy China Skinny, said in an interview with Business Times.
But this strategy comes at a cost. Despite the rise in revenue last quarter, the company still posted 1.38 billion yuan ($212.1 million) in losses - only slightly lower than the 1.75 billion yuan deficit recorded over the same period in 2019.
Pinduoduo's net loss in 2020 was 7.18 billion yuan, greater than both market expectations and the year before, with marketing expenses up 59% year on year accounting for the bulk of this increase.
"The company uses social commerce to encourage users to share what they buy and earn better deals if they do. It's very viral and very addictive," said Tanner.
But Pinduoduo is now charting a fresh course under new chairperson Chen Lei.
Chairperson and founder Colin Huang, who started the company in 2015 after a stint at Google, quit his position last week to seek out "new, long-term opportunities" in food and life sciences, according to a letter he wrote to shareholders.
Before Huang, China's digital shopping sector was long considered a duopoly dominated by JD.com and Taobao, according to Tanner. "Then all of a sudden this guy came out of nowhere and appealed to lower-tier cities and rural towns," he said.
The entrepreneur, owner of 30% of Pinduoduo's shares, has given up his super voting rights and last week departed the company he built with a personal fortune valued at over $57 billion.
This makes him the second richest person in China ahead of Tencent's Pony Ma and Alibaba's Jack Ma - but also invites closer scrutiny from the authorities.
"When you get your net value up in that range, Beijing starts paying closer attention to you," said Tanner.
The founder's group-purchasing schemes have come to the attention of antitrust regulators, who fined Pinduoduo for oversubsidizing grocery sales in 2020.
"So we thought that might be the reason: he might still be involved with the company but the message being brought down will help him be less of a target for government scrutiny," the consultant suggested.
The New York-listed stock, which made its market debut in 2018, has fallen by more than 12% since Huang shared his news Wednesday.
"He was the right captain to steer the ship and there's no doubt that that will impact the business if he has genuinely stepped down," Tanner said.
Current chief executive Chen Lei will take over from Huang as Pinduoduo's chairperson, graduating from a role he took just last summer.
"The resignation of Colin is not helping," Marcus Yang, and investment adviser at Arete, told Business Times, but he attributes the decline in Pinduoduo stock value to more than a simple leadership shuffle.
"The primary reason behind the falling share price in our view is its disappointing gross merchandising value growth in the fourth quarter, which slowed and missed the street's expectation," Yang said in an interview with Business Times.
Pinduoduo's average monthly active users reached 719.9 million in the fourth quarter - a 50% year on year increase but still well below Alibaba's 902 million over the same period.
"Average spending for Pinduoduo customers is quite low compared with Alibaba," said Tanner. "It will be harder for them to gather more new users and the challenge now is to squeeze more money out of their existing users," he added.
Over the past year, Pinduoduo users spent an average of 2,116.3 yuan per person, while Taobao and TMall customers each purchased roughly 9,075.7 yuan on average for the 12 months ending May 31.
Under Chen's leadership, Pinduoduo will need to walk a fine line between improving user growth and spending - which until now has been fueled by unsustainable social discount deals - and abiding government regulations.
"No one can be immune from regulatory risk this year and the overall sentiment in this space is being hurt," said Yang.
