The e-commerce landscape is changing again, and the one making the waves is still Pinduoduo.
In this business environment full of challenges and opportunities, the development trajectory of enterprises is like an S-curve, full of ups and downs, and Pinduoduo’s latest financial report data has undoubtedly shown a development trajectory that is consistent with the S-curve theory. It not only continuously makes strategic adjustments in its development, but also constantly seeks new areas of growth and extends the "peak" of the curve.
On August 29, Pinduoduo (NASDAQ: PDD) announced its unaudited financial results for the second quarter ended June 30, 2023, achieving revenue of 52.28 billion yuan, a year-on-year increase of 66%. Operating profit was 1.27 billion yuan, a year-on-year increase of 46%. Pinduoduo's financial performance has been strong in recent years, with revenue growing nearly tenfold over the past five years. In this financial report, Pinduoduo’s growth rate is still far ahead, and its financial data remains stable.
The capital market also reacted very positively to the financial report. Pinduoduo once rose by more than 18% during the day. As of the close of the US stock market, the increase reached 15.38%. It is worth mentioning that Pinduoduo has performed strongly so far, surpassing the return of the S&P 500 Index and has created significant alpha (excess returns).
Judging from the cross-verification of market data and financial report data, Pinduoduo has opened a new chapter of high-quality development. So what is the background of the company in the new development stage? Can it successfully cross the S-shaped curve?
The steady growth momentum continued in the second quarter, and high-quality development broke out into a new era.
Specifically, in the second quarter of 2023, Pinduoduo’s single-quarter revenue reached a new high, and it has achieved revenue growth for five consecutive quarters. From Q2 of 2022 to Q2 of 2023, Pinduoduo’s revenue was 31.439 billion, 35.504 billion, 39.82 billion, 37.637 billion and 52.281 billion respectively.
The quality of operations has also improved simultaneously. Net profit attributable to ordinary shareholders was 13.1 billion yuan, a year-on-year increase of 47% and a month-on-month increase of 61.7%.
The financial report shows that the increase in revenue and profit was due to the increase in revenue from online marketing services and transaction services. In the second quarter, Pinduoduo’s revenue from online marketing services and other aspects was 37.93 billion yuan, a year-on-year increase of 50%. Transaction service revenue was 1.43 billion yuan, a year-on-year increase of 131%.
The reason is undoubtedly that, benefiting from the overall boost in macro consumption, the GMV of e-commerce platforms has experienced a sharp increase. Zhao Jiazhen, executive director and co-chief executive officer of Pinduoduo Holdings, said that consumer sentiment has changed positively in the latest quarter, leading to rising demand in various product areas. According to data from the National Bureau of Statistics, the total retail sales of consumer goods in the first half of the year reached 22.8 trillion yuan, a year-on-year increase of 8.2%, and the growth rate increased by 8.9 percentage points compared with the same period last year. This change can also be seen in the financial reports of other platforms. Jingdong Group (09618) second quarter revenue increased by 7.6% year-on-year; Non-GAAP (non-GAAP) net profit increased by 31.6% year-on-year. Alibaba's second-quarter revenue increased 14% year-on-year. Under non-GAAP, net profit increased by 48% year-on-year.
Secondly, from a corporate perspective, Pinduoduo’s strategic shift is undoubtedly an important variable. In April this year, Zhao Jiazhen became co-CEO, and Pinduoduo immediately turned to the direction of high-quality development. Pinduoduo ’s development focus shifted from focusing on speed to pursuing quality, and from marketing-driven to R&D-driven. Zhao Jiazhen pointed out in the financial report conference call that cultivating internal strength and achieving high-quality development is the only way to further enhance the value of the platform.
The "internal skills" that Pinduoduo cultivates mainly include two aspects. One is the standardized management of the platform, such as combating piracy, protecting minors, and cleaning up vulgar information. What's more important is the shift in business focus. At this year's first quarter report conference, Pinduoduo announced the "Ten Billion Ecosystem" project. The main purpose is to help high-quality merchants, brands and small and medium-sized enterprises and stimulate "digital new consumption" on the demand side. ”, assisting industries to lead businesses to build “new digital supply”.
This is Pinduoduo’s third tens of billions of special funds, and the concept is not as easy to understand as the previous “tens of billions of subsidies” and “tens of billions of agricultural research”. The main purpose of the “Ten Billion Ecosystem” is to help Pinduoduo complete the overall reshaping of the platform value. In fact, although Pinduoduo has maintained strong growth, quality loopholes caused by low prices and spam on the platform have long plagued Pinduoduo. These potential problems broke out in the first quarter of this year.
Previously, Pinduoduo’s position was more on the side of consumers, and it tried to maximize benefits to consumers through “tens of billions of subsidies” and other methods, but this put increasing pressure on merchants. But the concentrated outbreak of conflicts allowed Pinduoduo to find a new direction. Today, when e-commerce traffic and demographic dividend have both peaked, the new traffic and GMV that low-price strategies can bring are limited. After the industry enters stock competition, there are more and more soft power aspects such as product quality and consumer experience. Being noticed by consumers, Pinduoduo has embarked on a path of high-quality development based on this.
However, what needs to be paid attention to is, what is the long-term path for Pinduoduo’s high-quality development? Is it sustainable?
The "Ten Billion Ecosystem" effect has met expectations, helping Pinduoduo cross the S-shaped curve?
How to continue to grow? This is the next step for all companies to consider after experiencing rapid growth, and Pinduoduo is no exception.
British management scientist Charles Handy believes that the secret to sustained corporate growth is to start a new curve before the first S-shaped curve ends. The correct starting point for the second S-shaped curve should be when the company is at the peak of the first S-shaped curve, so as to ensure that the company has enough time, resources and energy to ensure that the company achieves breakthrough growth in the second curve before the first curve declines.
From this perspective, it is not difficult to understand the change in Pinduoduo’s current development tone. When it was growing rapidly and developing smoothly, Pinduoduo chose to actively jump out of its "comfort zone" and tried to go through the development cycle of "initiation, growth, maturity, and decline" and draw a new S-shaped growth curve.
Return to practical action. It can be seen from the financial report that "Operation Agricultural Cloud" and Duoduo's cross-border participation in the global market are two important pilot projects for Pinduoduo to build a "10 billion ecosystem". In the second quarter, Pinduoduo’s sales of agricultural products increased by 80% year-on-year; with the support of the zero-commission policy for agricultural products, the number of agricultural-related businesses with tens of billions of subsidies increased by 60% year-on-year, covering more than 100 agricultural production areas across the country. At the same time, the board of directors also appointed Ivonne Rietjens, a tenured professor at Wageningen University in the Netherlands, as an independent director. It is understood that Wageningen University is recognized as a top agricultural scientific research institution in the world.
Pinduoduo’s determination to firmly establish the agricultural track is obvious. However, many domestic e-commerce companies have previously made attempts in the supply of agricultural products and digital empowerment. Although they have achieved certain results, they have failed to truly become a profit fulcrum and help companies achieve leapfrog. growth, more functions are to improve the existing e-commerce system.
The consensus in the industry is that the domestic small-scale farmer economy, non-standard products, geography and climate vary greatly, and the level of agricultural profits is not high. Why is Pinduoduo so obsessed with this field?
From the perspective of Pinduoduo's transformation, Pinduoduo has invested a lot of resources to evolve agricultural products from 'production, supply and marketing' to 'sales, supply and production'. This may be a preview before the large-scale transformation of the e-commerce platform. For consumers, the biggest advantages of e-commerce over online shopping are higher cost performance and more choices. Affordable price and high quality are the core advantages of e-commerce platforms.
Affordability has become Pinduoduo’s label. Therefore, pursuing high-quality supply is Pinduoduo’s future direction. On the supply side, agricultural products are the most difficult for e-commerce platforms. The supply is scattered, time-sensitive, and consumers have high requirements for goods. If Pinduoduo can successfully conquer the online high-quality supply of agricultural products, it will achieve The experience can be replicated in other aspects to complete the transformation of the platform's overall goods supply to high quality.
Management revealed that the platform has achieved a series of achievements in improving the supply ecology of agricultural products. It has successfully promoted 100 agricultural production belts across the country to "go to the cloud", and nearly 2,000 new offline large-scale agricultural supply chains are being built in batches. Open stores and operate on the platform to help local agricultural products grow rapidly.
Under the framework of the “10 billion ecology”, Duoduo Cross-border, as another pilot, is equally committed to improving the supply side. Its unique "full hosting model" allows manufacturers to only focus on supplying goods, while entrusting the platform with the responsibility of operations, promotion, customer service and after-sales.
This strategy can not only improve the efficiency of the supply chain, but also create a more stable and predictable partnership for manufacturers and platforms. Therefore, in less than a year since its launch, Duoduo Cross-border has expanded to more than 30 countries. Sensor Tower data shows that in the second quarter of 2023, Duoduo Cross-border ranked among the top 10 most downloaded applications in the world.
Of course, it cannot be denied that Duoduo’s current cross-border overseas expansion strategy is still based on huge subsidies, and high customer acquisition costs will indeed have a certain impact on Pinduoduo’s recent profits.
However, we cannot ignore that the purpose of this strategy is to pursue long-term profitability and sustainability, and it is also the only way to implement the "10 billion ecology". Once Duoduo’s cross-border expansion phase is over, its huge user base and growing market share will almost certainly translate into substantial profits, and second-quarter data shows that Pinduoduo has an excellent balance sheet, with more than 24 billion yuan of liquid assets that can be used as a buffer.
Conclusion
Domestic e-commerce is now highly mature and traffic has peaked. However, from the perspective of industry scale, Pinduoduo still has a lot of room for upside. However, under the old e-commerce logic framework, there are certain limitations in achieving long-term growth. Therefore, what Pinduoduo pursues is not progress in one aspect, but a complete innovation. Changing the sales logic of the e-commerce platform from the traditional people looking for goods to goods looking for people is the true connotation of Pinduoduo’s high-quality development.
From traditional PC and mobile shopping to today’s Douyin and WeChat, e-commerce has penetrated into consumers’ daily lives in various forms, and consumers have increasingly higher requirements for the quality of goods. Starting the transformation at this time is a wise move for Pinduoduo. If it can successfully cross the S-shaped curve, it may usher in greater growth in size.
Source: US Stock Research Institute