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Business trends

Discounter Pinduoduo puts Alibaba and JD.com execs on hot seat

Upstart Chinese e-tailer proves a big hit with senior and rural shoppers

Pinduoduo is edging into China's crowded e-tail market by arranging its discounts similar to the way Twitter arranges users' timelines.   © AP

SHANGHAI -- China's already intense online retail market is having to make room for a relatively new and particularly cutthroat competitor.

Pinduoduo is taking on Alibaba Group Holding and JD.com -- which combine for about 80% of the market -- by offering steep discounts and making them fun to find.

By undercutting the competition, sometimes by as much as 50%, the upstart is winning over price-sensitive consumers in rural area as well as the country's swelling ranks of seniors.

These demographic groups are sizable. In 2017, 576.61 million Chinese lived in rural areas, according to Statista.com, and by the end of that year 241 million Chinese were 60 or older, according to Chinese news service Xinhua.

While China is experiencing wild demographic shifts, these segments remain weighty enough to help Pinduoduo nibble away at the two established players' customer bases. In fact, other Chinese e-tailers are also following demographic trends out of big cities like Beijing and Shanghai, where growth is bottoming out.

These other retailers are shifting their focus to suburbs, a partial admission that Pinduoduo is on to something.

Alibaba and JD.com are also having to contend with an overall market that is losing growth momentum. As a result, the two pioneers have had to step down the price ladder.

"I always use Pinduoduo because it offers the best prices," said a 50-something woman who resides in a Shandong Province city. "And I use Alibaba for products not offered by Pinduoduo."

The big online retailer not mentioned by the Shandong woman is the one being hit hardest by Pinduoduo. That would be JD.com, the industry's second-largest player.

A person familiar with Chinese e-commerce indicated that consumers do not necessarily consider what online retailer is the largest when they decide to buy. They are more concerned with prices, the source said, and in this regard, Pinduoduo is No. 1. Alibaba is the second cheapest.

The source added that JD.com also lags its rivals in selection, at least when it comes to clothing and other products that appeal to rural consumers.

Pinduoduo listed on Nasdaq in July, about three years after first taking on China's online Goliaths. The company has announced revenue of 13.1 billion yuan ($1.95 billion) for 2018, up a staggering 650% from the previous 12 months.

For that, CEO Colin Huang Zheng can thank merchandise like ladies' pants priced at about $1.25 and electric razors that go for about $5.50.

Pinduoduo has given itself another advantage over Alibaba and JD.com, which have designed their websites to quickly take shoppers to pages featuring the kinds of products they are looking for. Pinduoduo's mobile app unapologetically offers much less choice and instead displays products in order of cheapness. Shoppers scroll though looking for bargains much like Twitter users flick through their timelines looking for informational nuggets.

JD.com has introduced these delivery robots in Beijing, and Alibaba has bought a stake in a courier company to better compete with a new player that is shaking up China's e-tail market.   © Reuters

The e-tailer also offers deep discounts for group purchases.

But Pinduoduo is paying a high-price while it remains in customer-acquisition mode. Its net loss increased substantially, to 10.2 billion yuan, in 2018. It suffered a 500 million-yuan loss the previous year.

Pinduoduo also has to deal with its users' perceptions. Some consumers say they use Pinduoduo because it is cheap, knowing that many of its products could be knockoffs.

And while Pinduoduo has helped rejuvenate China's online marketplace, it is unclear whether a high-revenue discounter that nevertheless posts distressing losses can continue to grow.

Furthermore, excessive competition could work to the detriment of the industry as a whole.

Although Pinduoduo's market share is less than 6%, it has proved hefty enough to force Alibaba and JD.com to try to fend off its attacks.

In March, Alibaba announced an investment of 4.6 billion yuan for a 14% or so stake in Chinese courier company STO Express. The purchase is an attempt to beat Pinduoduo in small but fast-growing municipalities. STO Express, which has about 20,000 delivery bases across China, will team up with Alibaba to develop logistics technology.

JD.com CEO Richard Liu Qiangdong says his company will have to add products if it is to lure more buyers this year. At the end of 2018, JD.com had about 300 million users, up 4% from a year earlier, when the company's user numbers jumped 29%. With all the competition, JD.com has announced that it will cut 10% of its top executives, including vice presidents, who do not deliver expected results over the next 12 months.

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