Investing in Ecommerce stocks is no longer a walk in the park
Charlie Munger recently admitted that investing in Alibaba was a mistake because he underestimated the level of competition it faced as a retailer in the ecommerce space.
This is true, as there are now several prominent ecommerce sites in China, including JD.com, Pinduoduo, Vipshop, Douyin, Kuaishou, and Xiaohongshu.
The barrier to entry is not as high as some may believe, as new players continue to emerge and show promise.
Let’s talk about Pinduoduo in particular.
Pinduoduo, launched just 8 years ago, has managed to carve a space for itself in the highly competitive ecommerce industry in China.
Despite being a latecomer, it has now become the third-largest ecommerce player in China, after JD.com and Alibaba, both of which have been around for more than two decades.
Pinduoduo found a niche of serving the less well-off consumers in the third- and fourth-tier cities, using group buys and lower prices to attract more people to use the platform.
It worked and it is still growing fast when we compare the y-o-y revenue growth in their 3Q results:
Pinduoduo +65%
JD.com +11%
Alibaba +3%
In an attempt to defend its market share in China, Alibaba has had to resort to copying Pinduoduo and launching Taobao Deals, a discount community buying platform.
Alibaba hasn’t had much success going beyond China. With the exception of Trendyol in Turkey and Lazada in Southeast Asia, Alibaba’s presence in foreign markets is quite limited.
Even Lazada has lost its crown to Shopee. Speaking about Shopee, it has also shown how intense the ecommerce competition can be – it has retreated from numerous foreign markets just months after venturing into them.
Chinese companies face significant challenges when they venture overseas since they don’t have the same level of protection in foreign markets as they do in their domestic market.
This is compounded by the fact that Chinese culture is unique to the West, and there is an increasing level of sinophobia sentiment.
Despite these challenges, some Chinese companies have managed to successfully expand into foreign markets. Bytedance is one of the rare cases where it has managed to dominate in both China with Douyin and TikTok in the US markets.
Another example is Shein, a Chinese company that has seen tremendous success in the US, but it has no presence in China.
Recently, Temu, a subsidiary of PDD Holdings (the parent company of Pinduoduo), achieved the impressive feat of becoming the top shopping app in the US, surpassing the likes of Shein, Walmart, and Amazon in terms of downloads.
Interestingly, Temu was able to succeed where Aliexpress failed in the US market.
This success can be attributed to their low-cost strategy aimed at cost-conscious consumers, which has proven effective in the US market as well.
Will it pose a challenge to Amazon? Nah, not at the moment. Pinduoduo’s revenue is still a fraction of JD.com and Alibaba’s revenue in China despite the fast growth it has been enjoying.
Moreover, Temu was only launched last year, so it is too early to predict its long-term success in the US market. It remains to be seen whether it can sustain its momentum, retain and grow its user base.
PDD said in an analyst call that Temu’s impact on the parent company’s finances is small.
Temu remains as a promising newcomer and definitely a space to watch.
In conclusion, it is important to understand that the ecommerce industry is constantly evolving and becoming more competitive.
Companies like Amazon and Alibaba, which were once seen as untouchable, are now facing disruptions from new players who have found niches to steal market share. Therefore, it would be a mistake to assume that ecommerce stocks are easy bets.
