Education Series: Single-Stock ETPs

Pinduoduo: Online Retail Gamified

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We had already discussed “e-commerce companies” in China (read Part 1 here and Part 2 here) – Alibaba is the king of the roost but there are challengers aplenty in the keenly-contested e-commerce market. We had mentioned JD.com as being uniquely differentiated from Alibaba by focusing on “Tier 2” and “Tier 3” regions, i.e. areas mostly in the interior regions of China as opposed to the coastline.

We had mentioned Pinduoduo as being a close competitor to JD.com on account of its focus in those same areas. This article will highlight exactly how Pinduodou differentiates from JD.com and its unique standing in the cut-throat online retail market of China.


Differences and Advantages

Like JD, Pinduoduo also operates a marketplace that connects sellers to customers. However, Pinduoduo differs markedly in a few key aspects:

  1. JD operates a substantial direct sales business. Pinduoduo doesn’t.

  2. JD operates one of China’s largest fulfillment infrastructure systems, covering almost all of the country’s counties and districts. Pinduoduo relies completely on 3rd-party delivery companies.

  3. JD has ventures in logistics, finance, and healthcare. Pinduoduo remains focused on online retail.

  4. JD has a growing presence in the U.S., Thailand, Indonesia, et al. Pinduoduo remains focused on China.

As highlighted in a previous article, Pinduoduo has nearly double the number of user accounts than JD but the latter has a higher average spend. This is partially attributable to the fact that JD’s direct sales have a preponderance of high-value goods while Pinduoduo has a more pocket-friendly feature: the “team purchase” which leads to substantial discounts from suppliers.

In Pinduoduo, suppliers list two prices for each item – one for individual purchase and one for team purchase. A user can either:

  1. initiate a team purchase and encourage friends via social media to join their team or;

  2. join an existing team purchase.

If the team is completed within 24 hours, the items are shipped at the team purchase price. If not, all participants receive refunds. The benefits of this feature are so attractive to users that nearly all Pinduoduo transactions are completed using team purchase.

Pinduodou went beyond non-perishable items into groceries under a similar model. Formally spun into its own segment called Duo Duo Grocery in August 2020, it operates in 300 Chinese cities where orders placed before 11 pm through the app are ready for collection after 4 pm the following day at selected collection points. In 2020, Pinduoduo doubled its agriculture-related Gross Merchandise Value to 270 billion yuan ($42 billion) from the year before, cementing its place as China’s largest agriculture platform.

There are a number of other ways in which the company gamifies the shopping experience:

  1. Daily Check-Ins encourages users to login for small values of redeemable credit.

  2. Price Chop allows users to get certain products for free by sharing a custom link with their friends. The number of friends who click on the link within 24 hours drives the discount. If the discount drives down to 0 in 24 hours, the link sharer gets the item for free.

  3. The Card Program offers a number of different loyalty cards for users: the “Free Pass Card” enables a team purchase discount without joining a team, the “Brand Black Card” offers discounts on branded items in exchange for reviews, and the “Brand Card” which users can give away to friends so that they can receive discounts on branded goods.

The company also operates literal games: In Duo Duo Orchard, for instance, a user creates a virtual fruit tree which, when nurtured, results in the user receiving a box of fresh fruit delivered for free. Water and other essentials for this tree are generated through app activity, purchases and interactions – all of which can be shared with friends.

The gamification of online shopping experience has led to a large and dedicated customer base for the company in a country where the purchase of goods and groceries continue to be largely driven by recommendations. This has led to a higher “active” user base than Alibaba.

The company also has an interesting trajectory in one very interesting metric especially when compared to JD and Alibaba: the gross profit margin, which is the amount of profit made before deducting selling, general, and administrative costs. As of the end of March, the gross profit margin for Pinduoduo has trumped that of both Alibaba and JD.

In the 12 months trailing March 2021, the company posted a staggering 133.7% growth in revenues. While the company is yet to show profitability in its “Earnings Before Interest and Taxes” (EBIT) metric, its costs have shown remarkable improvement over the past year, indicating that the company is steadily showing economies of scale in building out a customer scale. Thus, while it’s hard to determine whether “gamification” directly translated to increased buys, it certainly did help the company’s growth to a certain extent.


In Conclusion

Pinduoduo has a significant Achilles heel: its lack of a dedicated delivery infrastructure. In areas of delivery services, Alibaba rules the roost by its agreements with a large roster of top delivery companies – a number of which it has investments in. If the price of delivery were to shoot up, Pinduoduo’s profit margins will collapse.

There may be a ray of hope in the current tech crackdown: Alibaba has been roundly chastised by the government for abusing its market position and is unlikely to do so any time soon.

The tech crackdown hasn’t been kind to Pinduoduo either: the company – along with rival Meituan – was accused in May by the antitrust watchdog of pressuring partner companies and listing counterfeit products, among other misconduct. Earlier this month, regulators have asked the likes of Pinduodou to “learn from Alibaba” and complete a “comprehensive self-inspection” within a month. Since June, the company had lost nearly 27% of its value till date. The company’s partnership with Tencent could also be in jeopardy, on account of regulatory scrutiny on the latter.

Given the ongoing troubles with JD and Pinduoduo and the language by the regulators regarding Alibaba, the Year-To-Date (YTD) performance is probably unsurprising.

The fact that Pinduoduo continues to decline, despite encouraging metrics, highlights that there is some anticipation of punitive action. However, much like Alibaba, it wouldn’t be impossible to see a strong rally immediately following said action. The current period, therefore, can be expected to be a “Dip”: buying into the company’s growth story at this period might just work out to be a bargain over the next few months.

This is, of course, one outlook. In reality, given the uncertainty caused by the crackdown, the current situation in China continues to create polarising narratives for both institutional and private investors alike.


  1. How Pinduoduo beat Alibaba to be China’s top e-commerce?, TechWire Asia
  2. China’s richest tech titans have seen $87 billion of personal wealth wiped out since the start of July amid government crackdown, Business Insider
  3. Pinduoduo surpasses Alibaba, JD.com in user numbers, as founder Colin Huang steps down as chairman in surprise move, South China Morning Post

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Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

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Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.

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