Temu is busy overseas and has no time to care about domestic businesses

Temu, Pinduoduo's overseas e-commerce platform, is experiencing a rapid overseas expansion and is also facing increasingly complex business conflicts. From the Thai government's tax investigation to the Guangzhou headquarters being besieged by angry merchants, Temu's "refund only" policy and severe penalties on merchants have caused widespread controversy. The business model behind this platform, which quickly occupied the market with low prices and subsidies, and its impact on merchants are worth in-depth discussion.

Temu, which is expanding rapidly overseas, is facing increasingly complex business conflicts.

Just on August 4, Thaipbsworld reported that less than a week after Temu officially entered the Thai market, the Thai government has begun an investigation into whether Temu complies with Thai laws and pays required taxes.

But what attracted more attention in China happened on July 29th - on that day, the headquarters building of Temu, Pinduoduo's overseas e-commerce platform in Guangzhou was surrounded by angry sellers.

It is reported that there were about 800 merchants gathered at the scene. In order to seek justice, many merchants climbed the stairs to the 30th floor and then went to the 25th floor where Temu was located.

According to merchants on the scene, their stores were fined by Temu and had their "after-sales reserve funds" deducted, with the amount ranging from tens of thousands to millions of yuan. Some merchants had large sums of money frozen by Temu, which has seriously affected their normal production and operations.

The three-foot-thick ice does not form overnight. The tone of a company may have been hinted at the beginning of its establishment.

After launching in 2022, Temu quickly became popular, topping the App Store download charts many times, and even became a "national-level" app in the United States. Looking back, Temu and its parent company Pinduoduo have many similar elements in China: subsidies, advertising, and only refunds...

With extremely low prices, brainwashing advertisements and massive subsidies, Temu has gradually become what American internet celebrity Austin Evans calls "home of knockoffs, fakes and cheap stuff", but the honest Americans still contribute tens of billions of sales every year.

Behind the Americans' happy shopping, perhaps Temu is relying on its own size to "bully" domestic merchants. Temu's refund-only policy is one of the policies that the merchants gathered this time are most dissatisfied with.

1. Only refund, why?

In fact, refund only is not the first initiative of Temu or even Pinduoduo.

As early as May 2017, e-commerce giant Amazon officially launched a refund-only service, allowing customers to apply for a refund without returning the purchased goods.

Of course, this move also takes into account local conditions.

According to a study by Security.org, a US security consulting firm, more than 44% of respondents had experienced online shopping packages being lost or stolen in 2023. This is after smartphones became popular and US express delivery companies such as FedEx have made taking photos after delivery a basic workflow.

In some other cases, such as when goods are damaged during transportation and difficult to resell, in the United States where labor costs for express delivery, customer service, etc. are high, simply refunding becomes a more economical and efficient method.

However, to date, Amazon's policy has also triggered a series of illegal and criminal activities including fraud.

Criminals usually create groups on social platforms such as Discord, claiming to offer super low prices for goods. After participants select goods, organizers use stolen credit cards and temporary addresses such as Airbnb to purchase goods. After the goods are delivered, they use Amazon's refund-only policy to refund, and then charge participants on Discord at 80% off or even lower prices.

Refund scams like these are becoming more and more rampant in the United States, and the refund-only policy has even become a way for some criminals to purchase goods for retail stores. According to Amazon's second quarter 2024 financial report, e-commerce online sales were $54.7 billion. Roughly estimated, the "refund-only" policy introduced to improve efficiency has caused $500 million to flow from Amazon to the pockets of fraudsters in the second quarter of this year.

But for Pinduoduo, and later Temu, refunding only is another logic.

Although JD.com had a similar refund-only service as early as 2014, it was not until 2023 that it was forced to extend it to all merchants like Amazon.

So in 2021, Pinduoduo launched a refund-only policy, which can be said to be the first player in China to "take the lead". At that time, Pinduoduo had just established a foothold in the e-commerce industry. According to Pinduoduo's financial report data, in 2019, Pinduoduo's GMV broke the trillion mark for the first time, reaching RMB 1.0066 trillion.

Then, due to the changes in consumption habits brought about by the epidemic, major e-commerce companies also ushered in a wave of general growth. In fiscal year 2020, Pinduoduo's GMV increased by about 66%, and many key business indicators of e-commerce platforms such as Taobao and JD.com also increased significantly in 2020. So in 2021, major e-commerce platforms took steps to seize the market and started a new round of siege.

How to attract more users is still the core focus of Pinduoduo's fierce competition with major platforms. On the one hand, Pinduoduo uses viral marketing strategies such as "cutting prices" and "10 billion subsidies" to attract a wider user group. On the other hand, in response to the common problems in the market such as mismatched goods, substandard quality, and malicious fraud, Pinduoduo launched a "refund only" policy to solve the worries of users.

Therefore, whether it is Pinduoduo or Temu, their refund-only policy serves the needs of platform business expansion. In essence, the e-commerce platform tilts buyers for its own traffic. Everyone knows the rest of the story. Pinduoduo's GMV caught up with JD.com in 2022. At the end of 2023, Pinduoduo's market value surpassed Alibaba, becoming a giant in the e-commerce field that cannot be ignored.

2. Replicable Success

Temu’s expansion route is almost identical to Pinduoduo’s.

(Temu franchise plan, image source: Temu official website)

In September 2022, Temu officially landed in the United States. Similar to Pinduoduo's "cut one knife" strategy of pulling in friends and relatives in China, Temu launched the "Temu Franchise Program" in the United States to encourage Americans to make money by pulling in people.

According to Temu's official website, members of the "Temu Affiliate Program" can receive a $10 cash reward for each person they invite to register for the app. At the same time, 5% to 20% of the invitee's spending on Temu will be given to the inviter as a bonus. If the invitee also joins the "Temu Affiliate Program", his inviter will receive 20% of the invitee's bonus as a secondary reward.

Unlike the domestic "cutting down" that is always just a step away, Temu's rewards are real money. On social media such as YouTube and Reddit, there are many people who earn thousands of dollars a month from Temu rewards, and some "certified big Vs" even get 5,000 dollars a month.

Coupled with discount activities and intensive advertising similar to Pinduoduo in China, Temu topped the Google Store download rankings in November 2022 before the Super Bowl.

Last year and this year, Temu's Super Bowl ads pushed its influence to a new height. It is reported that a 30-second Super Bowl ad costs about $7 million. Last year, Temu's 30-second ad was broadcast twice, and in February this year, the ad was broadcast five times.

Temu’s slogan “Shop like a billionaire” is even more popular than Pinduoduo’s slogan “Save money and make shopping more fun”.

The success of viral marketing has brought Temu a huge amount of traffic. According to data from Morning Consult, a US consulting firm, in March this year, after the Super Bowl, more than 86% of Americans knew about Temu.

Temu's app downloads reached 41.34 million times that month, a year-on-year increase of 217.02%. The MAU in the first quarter reached 50.4 million, a year-on-year increase of 134.42%.

Having gained traffic, Temu is not worried about not being able to retain customers. Its core secret is its unimaginably low prices.

(Comparison of Temu and Amazon products in the same category, sorted by highest sales, source: Temu, Amazon)

The most popular products on Temu rarely cost more than $50. In categories with supply chain advantages such as clothing and small commodities, Amazon's prices may be several times higher than Temu's.

So Americans who have suffered from inflation suddenly found hope. According to research by US asset management giant AllianceBernstein Holdings, Temu's total sales reached US$275 million in the fourth quarter of 2022 after landing in the United States. This figure reached US$6.62 billion in the fourth quarter of 2023, an increase of more than 23 times year-on-year.

AllianceBernstein Research also expects Temu's sales to reach $37.13 billion this year and grow to $50.67 billion in 2025. By spending money on advertising and subsidies, Temu has taken customer acquisition to the extreme.

3. Whatever you want behind the screen

The happiness of European and American customers is built on the pain of domestic merchants.

Although there are objective reasons such as long international shipping time, expensive logistics, and complicated exchange procedures, in order to compete with American competitors and to serve customers, Temu has a "refund only" policy. As a result, most of the lower-priced products on TEMU can enjoy a 90-day full refund policy without the need to return the product.

However, Temu often takes issue with merchants after receiving a request for a refund only.

In the second half of last year, Temu revised its "After-sales Service Rules". In the revised rules, for products that Temu determines to have quality problems, the platform has the right to require sellers to pay after-sales compensation at 5 times the total price.

But in actual operation, Temu's judgment rules have many unreasonable aspects.

For example, the most controversial issue is "shoes are 1 size or more too small or too large". The US shoe size system is different from the domestic shoe size system, the shoe size system of continental European countries is also different from that of China and the United States, and the UK shoe size system is another independent standard. Although some merchants on Temu are engaged in export, it is inevitable that there will be errors in the allocation of goods in the face of the complex systems of different countries.

Even if there is an error, it is not serious. For the platform, asking American customers to send the shoes they bought for five dollars back to China and then asking the merchant to determine whether it will affect the secondary sales and then resend the correct goods is definitely a waste of time and manpower and material resources.

However, for a pair of shoes worth five yuan, Temu would punish the merchant by five times the compensation plus a fine of 1,000 yuan for each item. Moreover, according to merchants, if customers make mistakes and buy inappropriate shoes, Temu will also punish the merchant.

Moreover, Temu’s judgment is also rife with opacity.

In January 2024, Temu revised the penalty system to adjust the penalty amount according to the product quality score. Temu will score the products, but no matter how many points the product has, it will not settle the payment after a complaint. The 90 to 100 points are exempt from fines, while 70-80 points, 60-70 points, and less than 60 points will bear 1.5 times, 2.5 times, and 5 times the compensation respectively.

However, Temu has not yet clearly stated how the platform will be scored.

On July 23, Temu launched new penalty rules. Temu said that in order to improve the quality of platform products and buyer satisfaction, the platform will impose targeted penalties on "product quality accidents" in terms of product description, appearance, quality, qualifications, etc.

If the amount of goods suspected of violations is small and the quality problems are minor, the penalty may be rounded up from 1,000 to 10,000 yuan, and there is a maximum fine; if the number of illegal goods is large and the quality problems are serious, the fine will be determined by multiplying the declared price by the number of sales in the past month, or by multiplying 1,000 yuan by the number of stock orders in the past three months. There is no maximum fine.

Unlike Amazon, where merchants can decide which products and what price ranges are eligible for a refund-only policy and warn customers of quality issues, Temu needs merchants to go all out every time he "gets inspired".

In March this year, Temu introduced two more indicators: "declared high price rate" and "declared high price amount", and imposed penalties on merchants that did not meet the standards.

Temu's declared high price rate is the ranking of the overall price of all products in the seller's store after comparing with the prices of similar sellers. The declared high price amount is the total amount obtained by multiplying the price difference of all SKUs of products that Temu considers to be overpriced by the seller's sales volume. If the merchant's high price rate ranks in the bottom 5%, or the high price amount exceeds a certain amount, the merchant will face penalties including but not limited to restrictions on new product launches and restrictions on cash withdrawals.

This move is to ensure that the overall price of the platform remains low. However, this practice inevitably puts many normal business operators into a race to the bottom with "inventory clearers" and "washers".

Considering that merchants have to change prices frequently, Temu has thoughtfully launched the "One-click to obtain exemption rights for the next 30 days" function. Merchants who click on this function will lose the right to set prices, and the goods sold will automatically follow the price. For the losses caused by merchants' misoperation, Temu's buyers also enthusiastically provided a solution: reduce the prices of all high-priced goods by 95%. According to data from Business of Fashion, a world-renowned fashion business media, by the end of 2023 alone, Temu had occupied 17% of the discount store share in the United States. Pleasing customers has given Temu the capital to bully customers, and Temu's commercial bullying stick has really hit many small and medium-sized merchants in China.

4. Final Thoughts

For Temu, the events of July 29 were, to some extent, inevitable in the process of its business expansion.

From the subsequent development, Temu has given a corresponding response, and the situation seems to be calming down. But in the long run, with the continuous expansion of its business volume and the regulatory issues faced by cross-border e-commerce business itself, the challenges Temu will face will inevitably become more severe.

How to balance the interests of consumers and merchants in the complex and ever-changing cross-border e-commerce battlefield is a big test that Temu has to face again and again.

After all, globalization and free trade have brought the international community closer together. But the essential difference between competition and involution is whether it is "pursuing excellence" or "pursuing the bottom." When achieving "Pareto efficiency," what should be achieved is "Nash equilibrium."

In other words, the melody of our era should be one that takes into account the interests of all parties, rather than the strong party using advantages such as size and capital to engage in "monopoly" or "commercial bullying."

Author: Jingwei Editor: 308