Happy Sunday!

If you’re reading this, I hope you had an incredibly relaxing weekend. Last week was… a long one, packed into a short one, so I hope you got some good sleep last night, had a slow morning today and you’re feeling recharged for tomorrow.

You know the rules… when we open this email, you must be sitting on a couch, feet up, and with a beverage in hand! Today’s newsletter is going to be a fun read that will hopefully score you some brownie points on a date, at the dinner table, or your next presentation at the office… the rise of Temu!

Before we get into that, did you get a chance to listen to this week’s episode of Limited Supply? Moiz and I talked all about Shopify’s pricing increase, Faire as a sales channel, and did a live CRO teardown of a listener’s website (sorry!). Search for it on your favorite place to listen to podcasts, or listen on Apple and Spotify!

I’m hiring for a few roles at Sharma Brands as we continue to grow our team and service world-class brands. I can’t name who some of our clients are, but I bet you have our clients in your bathroom, your kitchen, your closet, your fridge and in your living room. Join our incredible team (seriously, no one has ever quit working at Sharma Brands!):

  • Director of Paid Media — you will oversee our team of media buyers, providing strategic input around campaigns, how to achieve client results more efficiently, and working with our internal creative and web UX/UI team. You must have good experience to apply for this role.
  • Account Coordinator — you will work with the BEST account team in eCommerce, supporting them to ensure that our clients always feel a proactive and thoughtful presence from us. You don’t need much experience to apply for this role, you just need to be hungry.
  • Graphic Designer — this graphic designer role will directly support the Lifecycle team (email, SMS, loyalty, subscription and membership). You should know how to design for email, and also have experience doing so. 

If you’re the right candidate, or you know the right person, please reach out! Our office is based in New York City, but we’re open to remote candidates, too.

Also, I launched a referral program for this newsletter — did you see it? Someone already got a Jolie, a hoodie, and is getting close to a MacBook Pro! Think of it like those tupperware parties, except you can give it all away for free and still keep the rewards. Plus, you might help someone out who’s one newsletter away from figuring something complex out! Click THIS LINK to see your progress and referrals!

Ok, let’s get back into the newsletter for today… 

After we all saw Temu spend 10s of millions of dollars on a bunch of Super Bowl ads two weekends ago, I thought it would be valuable to do an email breaking down the $175BN e-commerce giant behind Temu and its rise to prominence over the last few years. 

So for today’s email, I’m going to explain what Temu is (alongside what their parent company PDD Holdings is), how both Temu and Pinduoduo grew so quickly, how and why they are spending billions of dollars per year on marketing to the US consumer, and what results they have achieved so far with that spend.

Alright, let’s dive in: 

So what is Temu (& Pinduoduo)?

Temu is a subsidiary of PDD Holdings, previously known as Pinduoduo, which is a massive Chinese e-commerce holding company. 

To give you some context, PDD Holdings has a market cap of $175 billion with $28BN in trailing twelve month revenue according to their latest financials. 

In Q3 of 2023, they reported $9.4BN in revenue with $2.2BN in profit. Their 2023 Q3 revenue was up 94% year over year and their Q3 profit was up 60% y/oy.

Their market cap is just 9 billion dollars lower than Alibaba today. 

PDD is a cash machine. Temu on the other hand? Not so much.

But before we get to Temu, we first need to talk about Pinduoduo, the flagship company within PDD Holdings. 

Pinduoduo was founded in 2015 as an e-commerce marketplace focused on social shopping. The experience of using Pinduoduo is somewhere in-between Amazon and a social network. 

One of the big core innovations that Pinduoduo pioneered is a concept called "team purchases" or "group buying." The platform basically helps users shop together with friends, family, or other users to unlock perks like lower prices on products due to this group buying. 

This model leverages the power of these "team purchases" to facilitate bulk orders directly from manufacturers and suppliers, and then they can pass those savings on to the consumers at scale on the other end.

It was genius, and consumers loved it, which helped Pinduoduo quickly grow to processing more than $450 billion dollars of GMV in 2023.

So… why launch Temu?

With all of Pinduoduo's success, you might ask yourself, why launch a second brand?

According to my research, the reasons why PDD wanted to launch Temu are primarily about these four things: 

1. International Expansion:

As mentioned above, Pinduoduo is a dominant force in Chinese e-commerce but doesn’t have a strong presence outside of China. Launching Temu is the first step towards expanding to more international markets, hopefully diversifying PDD’s revenue sources and customer base. 

2. Differentiating the Brand:

Launching Pinduoduo in the US wouldn’t work. Temu offers PDD Holdings an opportunity to create a new brand tailored to international consumers with a clean slate. They are actively trying to differentiate it from Pinduoduo's brand image, which is strongly associated with the Chinese market. With Temu, PDD really wants to appeal to consumers in the US and Europe with fresh marketing and a new brand.

3. Leveraging Existing Supply Chains:

The only reason Temu is even possible is because PDD Holdings can leverage its existing network of suppliers and logistics capabilities that Pinduoduo already created to support Temu's operations. Without this, the brand would be impossible to recreate. This infrastructure allows Temu to offer many of the same products that Pinduoduo has at discounted rates to international customers, giving it an extreme competitive advantage. 

4. Responding to Competition: 

The last reason to launch Temu is basically to keep growing and combat the competition. As we all know, the global e-commerce market is highly competitive, with major players like Amazon, eBay, Walmart, and Alibaba. By launching Temu, PDD Holdings is taking a big shot at the other players competing on the global stage. 

How is Temu different than Pinduoduo?

While Pinduoduo focuses more on social shopping, Temu focuses more on low prices for international customers. Many of the products are similar, but it’s catered to a Western audience, and social shopping plays much less of a role on Temu today. 

Does Temu make money, or would VCs love the business?

Here’s where things get interesting…

Although Temu’s financials aren’t publicly disclosed, the brand is estimated to lose billions of dollars annually. Although some reports estimate that Temu is earning around $16BN a year in revenue, it’s also losing between $3-4BN a year. 

That would obviously be disastrous if it were a standalone company. Still, because it’s backed by PDD, they have the resources to backstop the losses from other profits to continue subsidizing Temu’s growth. 

The fact that they sell low AOV, low-priced products also doesn’t help. Even if they become profitable, their margins will still be very thin due to the nature of what they sell. If you’ve ever wondered why or how Temu’s products are so cheap… It’s because they are losing money on almost every sale!

One of the smartest things that Temu and Shein both do is take advantage of a loophole in the US government tax/duties rules, which allows them to ship products of value less than $800 into the country without applying taxes. I assume that when that loophole was created, it was to protect things like family sending packages to one another. But Temu and Shein have built a full supply chain around that, sometimes saving them 20-30% of margin that the government would otherwise take if those products were coming in on a pallet vs indiviudally air-frieghted orders.

I recently invested in a company called Portless.com, and they do exactly this — it’s genius. Let’s say I was starting a brand to make the world’s greatest leggings (if you know how, please do hit me up), here’s how I could take advantage of the loophole myself. I would manufacture this product in China once the final sample is ready to be mass-produced, and then I’d ship it to Shenzen, where Portless has its 3PL. From there, Portless will pick & pack orders of leggings as they come through Shopify, and ship them directly to your door in the USA, or anywhere in the world. The beauty is that you, the customer, don’t see your order tracking on UPS, DHL, or USPS until the product has landed in the US and starts from Miami or LA, for example. The entire cost, from storage to pick & pack to shipping, is about $6, and you completely avoid all taxes and duties, meanwhile, the order lands from Shenzen to your door in the states in 5-7 days. Bascially Portless helps you exploit the same loophole Temu and Shein have used to be extremely margin efficient.

So, why are they doing this?

The obvious answer is that many of the largest software and eCommerce platforms are winner-take-all or winner-take-most outcomes. They are following the classic Silicon Valley playbook to hyperscale and gain market share as fast as possible, even if it means they have to do it unprofitably. Amazon did this. Alibaba did this. Uber did this, etc. It’s a massive bet on growth that may or may not pay off. 

How much is Temu spending on marketing?

Reports claim that Temu spent $3B. Yes… $3,000,000,000 on marketing in 2023. This made them one of the largest advertisers in the US. 

They also recently spent 10s of millions on six Super Bowl commercials and another 10M on giveaway offers. Currently, they’re spending roughly $57.6M per week on marketing to grow and generate orders. 

Most of their spending is happening on Meta and Google. According to this article I read, they spent $1.2BN on Meta last year. According to Meta’s ad library, Temu has more than 13,000 active ads running right now. 

They are going all out on marketing, and no one really knows how it’s going to turn out. 

The results so far

If they are spending billions per year on marketing, what are they getting back?

As I said above, they are generating sales. Reporters are estimating around $16BN per year in revenue. 

Temu’s traffic also grew by 700% in 2023 which equated to 92.2M monthly site visits. 

It’s also rumored that Temu has 100M+ users on its app. It was also the most downloaded app in the US in 2023. And their 2024 Super Bowl spots propelled Temu back to being the third most downloaded free app on the App Store this month. 

Lastly, they already have 17% of the “discount/dollar store” market in the US. They are third in line behind Dollar General (43% market share) and Dollar Tree (23% market share) 

For context, Dollar General was founded in 1939. Dollar Tree was founded in 1968. Temu was founded in July of 2022! It’s gaining massive market share from brands with a 50+ year head start. 

So, the marketing is obviously working, but for how long? No company can spend billions per year unprofitably forever. That said, if one company beyond Amazon would do it, PDD might be it. As of September 2023, they reported having 28.3B dollars of cash on their balance sheet. If nothing else changed and PDD kept printing money, they could afford to lose the $3BN per year for another 9.4 years. That’s a lot of time! 

The spending seems unsustainable, but when you look at the numbers, they have a longer runway than you might think. 

What can we learn from this all? 

The obvious thing to know is that Temu is spending aggressively to gain market share in the US. They want to be here, and unless the US regulates them out, I don’t see them stopping their growth efforts anytime soon. 

In the meantime, if you are a founder, investor, operator, or just someone who is interested in e-commerce, I do think it’s valuable to know and understand the landscape and key players today. Not many US people talk much about Temu, so I wanted to do a story-time-style email to bring everyone up to speed. 

That’s all for this week. 

Now, onto some fun stuff.

Vendor of the Week:

Black Crow — The company that makes individual AI models PER brand just launched their newest product: Predictive Offers.

What happens when most people go to your brand’s site? They get hit with an email pop-up, and then they close it. You spent $3 to get that person to your site, and then they left without giving you any information. The problem with the pop-up is that it’s not correctly timed…it lands when you get there, maybe 15 seconds later, or on a 50% scroll down the page.

You’ve heard me talk about Black Crow’s other products before; all of their tech is built on top of their ability to build individual AI models for brands based on their website’s traffic behavior, purchase behavior, etc. Black Crow can assign a score of shopping intent to users (i.e., how likely they are to purchase), or in this case, know precisely when to serve someone a second pop-up that will have the highest chance at conversion.

Predictive Offer has yielded brands ~40% more revenue from their welcome flows. If you previously made $100,000 with your welcome flow, you’ll likely see around $40,000 in new revenue with no extra work, other than adding the Black Crow to your site. On the site, you’ll see a ~15% increase in new email and phone number signups of high LTV shoppers.

The AI tech that Black Crow has is incredible. Sakara, Ekster, Mansur Gavriel, KITSCH, Clean Simple Eats, and more are all customers. If you’re running a Shopify or Shopify Plus store and looking to increase your new customer revenue, I recommend meeting with their team. I got a sneak peek of their product roadmap and it’s sick, and plan to onboard a couple brands this month so they can get into the free trial.

If you have a brand that does over $2M/year in revenue, Black Crow will give you a $125 Amazon gift card just to speak with their team.

Sign up for a demo with this link, and claim your $125!

That's all for this week

How did you enjoy today’s newsletter? As I re-read through it, it felt like I was watching am movie in my head. What Temu has done is impressive but also damn… Temu is just out here jacking up our CPMs, taking sales from our brands, and the loopholes they play in are only getting exploited more and more. 

All that said, I hope you have an incredible upcoming week. We’re finally back to full weeks until May for Memorial Day — short weeks are great on that extra weekend day, but just absolute chaos when you’re trying to fit 5 days of work into 4. Remember those 4 day-workweek Twitter thought leaders? I think his company’s valuation was cut by 250-300x — TLDR: they don’t work!

As you’re reading this, I’m just now touching down in Hawaii. I’m taking the first vacation for myself in 7 years. A full week of drinking fresh juices, reading, writing, exercising, and of course, still tackling my inbox. If you need me this week… please don’t! 

Have an amazing week. Next week I want to write about all the ways to prevent mistakes that I’ve picked up from our clients at Sharma Brands, but also from the other companies I’ve invested in. 

See you next Sunday!