How Do We Understand the Retail Industry?
Retail is the process of efficiently moving goods from manufacturers to consumers, ultimately achieving “more choices, faster delivery, better quality, and lower prices” to deliver an exceptional consumer experience.
However, due to differences in supply characteristics across categories and the concentration or fragmentation of consumer demand, the retail industry has evolved various business formats tailored to specific product categories throughout history. Regardless of how these formats transform, they always adhere to the core logic outlined above.
What Is Pinduoduo’s Business Model?
It has established an order where only the most efficient players win for a single SKU. This order is achieved by screening (and even helping to transform) suppliers while efficiently matching them with consumers.
What Is Pinduoduo’s Moat?
Costco reduces SKUs to maximize the scale of each SKU, thereby gaining long-term bargaining power over suppliers and offering high-quality, low-priced products to consumers.
Pinduoduo has replicated this logic algorithmically through its “blockbuster product” strategy: traffic distribution is determined by low prices and high conversion rates, applied across all SKUs. While this algorithmic logic can be copied, first-mover advantage and retail scale effects ensure that as long as Pinduoduo adheres to this order, it cannot be surpassed in scale. Additionally, as algorithmic data accumulates, matching efficiency becomes increasingly precise—enabling reverse customization of products and prices with suppliers, which further strengthens its price competitiveness.
Furthermore, sustained low-price advantages drive continuous organic traffic. For categories that cannot fully adapt to Pinduoduo’s traffic distribution logic (e.g., long-tail product suppliers with fragmented demand rather than relying on blockbusters), Pinduoduo maintains a structural advantage in traffic costs compared to other platforms.
What Challenges Does Pinduoduo Face?
1. Merchants lowering product quality to cut prices for traffic
This is a problem of price comparison and matching, not merchant behavior itself. It is market logic that cheaper products often have lower quality—the key is to find the optimal balance between price and quality acceptable to consumers. For example, Mixue Ice Cream & Tea is cheaper than Starbucks; strictly speaking, Mixue also offers lower quality, but this does not mean it should be eliminated. Instead, it benefits more consumers seeking affordable beverages. However, a low-price-driven algorithm should not compare Starbucks and Mixue directly—this would reduce traffic to Starbucks, leading to a market dominated by low-quality products (“Gresham’s Law”). Conversely, this is precisely the problem Pinduoduo is focused on solving.
Thus, the solution lies in algorithmic optimization:
- Separate comparisons between white-label and branded products: Introduce a “black label” for platform-endorsed brands, ensuring branded products are compared only with other branded products. Use distributed algorithms to match users—white-label products for price-sensitive consumers, and branded products for quality-focused users.
- Enhance weights for consumer feedback: For white-label products, increase the importance of reviews, return rates, and other user-generated data to reward “ethical” merchants operating within the same price range.
2. Consumer distrust in purchasing high-value goods on Pinduoduo
Trust is built gradually. As long as high-value goods can circulate efficiently under Pinduoduo’s algorithmic logic, offering superior cost-performance, trust will naturally follow. In the past, Pinduoduo used its “10 Billion Yuan Subsidy” to endorse products; in the future, as more high-priced goods enter the platform and consumer purchases increase, trust will deepen—just as it did for Taobao.
3. Lack of high-consumer data leading to matching errors
This follows the same logic as above. Every e-commerce platform lacks high-consumer data in its early stages. As long as high-spending consumers value cost-performance (an inherent human instinct), this will not be a long-term issue.
4. Policy risks undermining Pinduoduo’s model
Pinduoduo has already built substantial user scale and transaction data, leaving significant room for algorithmic optimization. Resisting “involution” and low prices will not erode its competitive advantage—its core issue is supply-demand mismatch, and Pinduoduo’s order of “efficiency first” aligns with natural market development, which cannot be reversed by policy.
How Do We View Brands vs. White-Label Products on Pinduoduo?
Currently, high-end brands resist Pinduoduo’s low-price distribution logic, entering the platform primarily to clear inventory rather than launch new products. This raises questions about the future relationship between brands and channels:
In an era of underdeveloped technology, many traditional brands derived value from streamlining supply chains, retail networks, and matching supply with demand through traditional methods.
With the development of the retail industry and related technologies, many brand functions can now be replaced by channels. Channels and retailers are closer to consumers, better at understanding demand, and benefit from economies of scale due to large order volumes. As a result, some categories have bypassed brands, giving rise to white-label and private-label products. In some cases, retailers even participate in product innovation and reverse customization, further replacing brand roles.
Thus, the only enduring value of brands in the future will be innovation. Unique innovations require deep integration and iteration across supply chain links—capabilities that retailers and channels cannot replicate in the short term. Brands with strong innovation capabilities will not be tied to any single channel.
No single channel will dominate, but every channel is indispensable for reaching mass consumers. We believe that full-channel expansion by brands is inevitable: high-end brands will move slower (e.g., luxury brands, which rely primarily on flagship stores due to their scarcity), while non-high-end innovative brands will adapt faster. Brands lacking innovation will gradually be replaced by white-label or private-label products.
How Do We View Pinduoduo’s No Dividends or Share Repurchases Policy?
Pinduoduo aims to connect global goods with consumers. Whether through its domestic platform or global expansion via Temu, it needs to retain sufficient cash reserves to defend against potential vicious competition (e.g., unlimited subsidy wars by competitors) before establishing absolute efficiency and scale advantages.
For Pinduoduo, this cash reserve is like a “nuclear weapon”—it may not need to use it, but it cannot afford to be without it.
How Do We Evaluate Pinduoduo’s Management Team?
They believe algorithms and data can enhance efficiency to deliver exceptional experiences for the broadest range of consumers, and they remain unwaveringly focused on this mission.
Their core traits: down-to-earth, pragmatic, and focused.
How Do We View Temu?
Historically, U.S. and European retailers (excluding fresh produce) have relied on China’s supply chain to build structural advantages. Temu leverages China’s industrial chain to enable direct overseas expansion for Chinese suppliers. Compared to the traditional foreign trade chain, Temu integrates supplier screening, export logistics, and overseas retail—digitizing and managing the entire process through algorithms.
However, global expansion inevitably brings compliance challenges. This is an inevitable path, and the key lies in how these challenges are addressed.
In a conference call last year, Chen Lei (Pinduoduo’s CEO) made a memorable statement: “Prioritize building compliance capabilities as a core competitive advantage.” We fully agree. In many industries, compliance capabilities can act as a barrier to entry. For example, in finance and payments, compliance requirements may force companies, merchants, or customers to transact exclusively on compliant platforms. Lower compliance costs can also become a critical efficiency advantage in commodity circulation. As Temu resolves compliance issues country by country, this will become an additional moat—complementing its scale effects and algorithmic data.
How Do We Evaluate Other Retailers?
Alibaba
An online shopping mall whose efficiency gains in the goods-to-consumer chain primarily stemmed from lower traffic costs in the early internet era compared to offline retail. As online and offline cost structures have balanced, Alibaba now relies more on the growth of brands themselves.
JD.com
A vertical online retailer with a logistics network and absolute scale advantages in the 3C category. However, due to differences in supply structures across categories, its ability to expand into other sectors is limited. Its most likely future path is to deepen its advantages in core categories while leveraging its logistics network to expand into services such as instant retail and food delivery.
Costco
A targeted customization retailer with two key “niche” focuses:
- Niche consumers: Middle-class Americans filtered through its membership system.
- Niche SKUs: Concentrating fragmented demand onto a limited number of SKUs to create mass-market products, achieving scale effects and the lowest prices. For large-scale mass-market products, Costco bypasses brands to develop private labels, offering further price advantages while maintaining quality. However, it has limited advantages in non-standardized categories with fragmented demand.
Walmart
A large offline supermarket with a “build first, refine later” strategy. Benefiting from aggressive store expansion during America’s period of rapid economic growth, Walmart established an unassailable lead in store count early on. This scale has translated into advantages for certain SKUs, with key differentiators being its dense U.S. store network and broader SKU selection.
Conclusion — How Do We View Investing in Pinduoduo?
Investing in Pinduoduo means investing in a retail order—one that can be continuously optimized through algorithms to achieve precise matching, maximizing consumer demand for extreme cost-performance. As user numbers and transaction volumes grow, more dimensional data becomes available, creating greater room for algorithmic refinement—bringing Pinduoduo closer to the global optimal solution in retail. This is fundamentally different from businesses driven by traffic, which inherently suffer from efficiency losses due to their reliance on traffic.
Retail moats are becoming increasingly difficult to overcome as the industry evolves:
- In the past, the retail chain was long with numerous optimization points—improving one link could yield relative advantages in certain categories. Today, many links have been shortened, and opportunities for paradigm-shifting efficiency gains are scarce.
- Remaining links in the chain have been socialized (e.g., logistics) and continue to improve, with these efficiencies accessible to all participants fairly—no single player can monopolize them.
Thus, capturing and monopolizing the compounding value points in the supply chain (such as algorithm-driven order and resource mobilization) creates an insurmountable advantage. For society, this order ensures that genuine hard work is rewarded and that everyone can access a life of value. This aligns with the values we cherish and pursue—and we firmly believe this journey has only just begun.
Published by: Zherui Investment
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