The Rise of Temu: Their Supply Chain Competitive Advantage

By Anna McGovern and Marcus Xue

In the past few years, the e-commerce industry has undergone substantial changes, primarily due to the emergence of new players, such as Temu (pronounced as “tee-moo”). With its novel strategies and approach, this platform has managed to disrupt the status quo of established retail giants, including Amazon, and has also posed a significant challenge to brick-and-mortar dollar stores. Today, we will explore Temu’s unique business model, assess its influence on Amazon’s market dominance, and explore the ripple effects it has created on dollar stores like Dollar General and Dollar Tree.

Temu is an online marketplace that entered the U.S. market in 2022. It is part of PDD Holdings, a multinational conglomerate that also operates Pinduoduo, one of the largest e-commerce platforms in China. Temu aims to bring a wide range of affordable products to consumers, leveraging the extensive network and supply chain capabilities developed by Pinduoduo in China.

Overview of Temu’s Key Features:

Temu’s unique business model has been a game-changer, challenging Amazon’s status quo and impacting traditional brick-and-mortar stores. Here are the essential elements that form the foundation of Temu’s innovative business model:

1. Wide Product Range: Temu offers many products across various categories, including fashion, beauty, electronics, home goods, and more. This extensive selection is similar to what is available on Pinduoduo in China.
2. Low Price Strategy: One of the core strategies of Temu’s business model is its focus on affordability. The platform utilizes economies of scale and efficient supply chain management to provide products at lower prices. This strategy primarily aims to attract a massive customer base, particularly those on the hunt for bargains.
3. Global Marketplace: While it is based in the U.S. (Boston), Temu’s platform connects consumers with sellers from around the world, particularly from China, allowing for a broad selection of goods. It sells products across 250 categories. Like other e-commerce platforms such as Amazon and eBay, Temu functions as a marketplace that links sellers and buyers. Although this model enables a wide and varied product selection, it also necessitates quality control and customer service across the platform.
4. Data-Driven Approach: Taking a cue from Pinduoduo’s experience, Temu employs data analytics to comprehend consumer behavior and preferences. This aids in optimizing their offerings and marketing tactics.
5. Global Sourcing: Temu’s global sourcing of products allows for a diverse product range. However, this international supply chain also entails dealing with logistical complexities, notably in shipping times and costs.
6. Digital Marketing and User Acquisition: Temu heavily invests in digital marketing and user acquisition strategies. This includes online advertising, social media marketing, and other digital channels to draw in new customers. It is hard to be on social media without coming across Temu.
7. Monetization Strategies: Revenue is generated through a mix of commission fees from sellers, advertising fees on the platform, and potentially other value-added services.

Business Model Differentiators

Ultimate Cost Performance Ratio

Temu’s business strategy revolves around its ‘Ultimate Cost Performance Ratio.’ By implementing a ‘full hosting’ model combined with a bidding mechanism, Temu offers products at prices significantly lower than competitors like Shein (another China-based marketplace) and Amazon. This pricing strategy is crucial in attracting cost-conscious consumers.

Full Hosting Model

In the ‘full hosting’ model, Temu exercises complete control over pricing. Suppliers simply deliver selected goods to Temu’s domestic warehouses, from where the platform manages logistics, warehousing, customer service, after-sales service, and marketing. This approach significantly reduces the labor costs and complexities for suppliers, making it easier for them to participate in cross-border e-commerce. Moreover, this model helps in combating the issues of counterfeit goods and empty packages, which are prevalent in international transactions. The integration of commodity packages also results in substantial savings in logistics costs.

Bidding Mechanism

Temu’s bidding mechanism is another cornerstone of its business model. Here, merchants bid for product listings, and the platform reviews these bids to verify the prices. This system fosters an almost perfectly competitive market where price determines a product’s success. High-priced goods are gradually phased out, while low-priced ones gain prominence.

Reverse-Manufacturing Model

Temu’s reverse-manufacturing model is a game-changer by exercising Demand Driven Planning. It starts with small quantities of products on the marketplace. Based on consumer demand, popular products are reordered, while less successful ones are replaced. This model enables a dynamic response to market trends and consumer preferences.

Supply Chain Strategy

What Differentiates Temu’s Supply Chain? Let’s dig a little deeper into the business model and how their supply chain strategy offers them a competitive advantage.

Temu’s supply chain strategy is notably distinct and competitive, especially compared to giants like Amazon and other market players. According to An analysis of Temu’s cross border supply chain & logistics, Temu’s advantage is majorly reliant on their logistics and freight strategy.

 Here’s an overview of their approach and how it stands out:

1. Focus on Cross-Border Logistics: Temu’s strategy heavily relies on its ability to leverage US laws that exempt imported goods under $800 from taxes, giving it a significant competitive edge. This is crucial for their low-cost model as it allows them to avoid certain tax burdens that competitors might face. They have further optimized this strategy by establishing warehouses in Mexico, which enables direct shipping to the US, bypassing the need to export from China. This approach not only reduces costs but also allows Temu to circumvent potential tariff implications if the warehouses were located in the US.
2. Low-Cost Production and Supply Chain Efficiency: The majority of products available on Temu are unbranded and mass-produced in China, taking advantage of low-cost production there. This is combined with a robust supply chain network that focuses on bulk aggregation of goods for unified packaging, which significantly lowers logistics costs. For instance, the freight cost from Guangzhou to the US for each small parcel can be as low as a few tens of cents.
3. Direct Delivery and Negotiations for Favorable Terms: Temu optimizes logistics costs by employing direct delivery services, such as transporting goods directly from the airport to USPS sorting centers, which offers price benefits. They are also actively negotiating with courier services like USPS and UPS to obtain competitive prices, further driving down their operational costs.
4. Comparison with Competitors: In contrast to Amazon’s diversified and massive inventory, Temu focuses primarily on unbranded or so-called white-label products. This strategy, similar to that of SHEIN (another consumer good digital marketplace), emphasizes low-cost production and high-speed supply chain operations. Unlike Amazon, which has a more established brand presence and a wider range of products, Temu’s competitive advantage lies in its ability to offer extremely low-priced products, primarily targeting cost-conscious consumers.

Comparison With Amazon

In general terms, the reverse-manufacturing model relays customer feedback directly to manufacturers. This model allows Temu to reorder products in high demand and replace those that are not popular. Temu also offers a selection of features not available on Amazon, such as group buying, gamification, and a referral program.

Amazon, on the other hand, operates a competitive pricing strategy, especially during shopping periods like Black Friday. Amazon charges various seller fees, including referral and fulfillment fees1. Amazon’s success is partly due to its winning key shopping periods like Black Friday and the holiday shopping season in general.

Temu’s competitive advantage lies in its pricing strategy, which is enabled by its direct connection to Chinese manufacturers and wholesalers. However, concerns over product quality and logistical limitations have been raised. Temu’s supply chain strategy involves a reverse-manufacturing model that relays customer feedback directly to manufacturers. Amazon, on the other hand, operates a competitive pricing strategy and charges various seller fees. Amazon’s success is partly due to its winning key shopping periods like Black Friday and the holiday shopping season in general.

As the industry continues to evolve, it will be fascinating to see how established players adapt to these disruptive strategies.

Challenging  Amazon’s Flywheel Theory

Temu’s rise poses a significant threat to Amazon’s established business model, particularly challenging Jeff Bezos’s “flywheel theory.” This theory, introduced in 2000, revolves around attracting consumers with low prices, enhancing user experience, and subsequently leveraging traffic to negotiate lower prices from sellers. However, Temu’s aggressive pricing strategy undermines this model. Amazon’s response to this threat was evident in June 2023 when it removed Temu from its price comparison system, citing concerns over product authenticity. However, the underlying reason seems to be the inability of Amazon’s system to compete with Temu’s low pricing.

The Middleman Model

Unlike Temu, which directly connects manufacturers to consumers, Amazon acts as a middleman. It offers services such as warehousing, fulfillment, and customer service. While this model has served Amazon well, allowing it to capture nearly 40% of the U.S. e-commerce market, it is now facing challenges. The majority of Amazon’s goods and third-party sellers are from China, operating on a model that includes multiple intermediaries, leading to higher product prices.

Challenges and Considerations

While Temu’s unique business model and strategies have the potential to disrupt the e-commerce market, there are significant challenges and considerations that the platform must navigate:

• Quality Control and Customer Satisfaction: One of the primary challenges that any marketplace model faces is ensuring consistent product quality and customer satisfaction. Because Temu acts as an intermediary between buyers and sellers from around the world, it needs to have stringent quality control measures in place to ensure that the products listed on its platform meet the expectations of its customers. Additionally, it needs to develop effective customer service strategies to address any issues or concerns customers may have regarding their purchases.
• Logistics and Shipping: As Temu sources products from sellers worldwide, particularly from China, it faces logistical challenges. External threats and global disruptions are bound to impact its razor-thin margins. Laser focus on logistics will continue to be a key priority for them. International shipping can result in longer delivery times, which may impact customer satisfaction. Therefore, efficient logistics and shipping strategies are crucial to ensure timely delivery of products and maintain customer satisfaction.
• Competition: The U.S. e-commerce market is highly competitive, with established giants such as Amazon dominating the space. Temu faces stiff competition from these established players. To succeed, it needs to differentiate itself from its competitors and attract a significant customer base. This could be achieved through its focus on affordability and its wide range of products.

Despite these challenges, Temu has ambitious plans to carve out a niche in the highly competitive U.S. e-commerce space. It aims to leverage its connections to PDD Holdings’ extensive network and experience, focus on affordability, and offer a wide range of products to attract a significant customer base. However, its success will ultimately depend on its ability to effectively navigate these challenges and considerations.

Impact on Dollar Stores

The growth in e-commerce penetration in the U.S., accelerated by the pandemic, has seen a migration of low- and middle-income consumers to online platforms. During this period, dollar stores have been compelled to increase prices due to hyperinflation, further driving customers towards more affordable online options like Temu.

Market Share Shift

According to a Reuters article published in early December, Temu accounted for nearly 17% of market share in the United States within the discount stores categories, according to data analytics firm Earnest Analytics. That compares to 8% for the dollar chain Five Below, 43% for Dollar General and 28% for Dollar Tree.

According to data from Earnest Analytics, Tennessee-based Dollar General experienced the most significant market share decline among its competitors. Its market share dropped from about 57% in January to 43% in November, while Dollar Tree’s share fell from 32% to 28% in the same period. This shift underscores the growing preference of consumers for platforms like Temu, which offer lower prices and the convenience of online shopping.

Temu launched in the United States in September 2022 and quickly became popular through its use of social-media influencers to tout its merchandise as better and more affordable than traditional stores.

What’s Next? 

The future prospects of Temu, as an emerging player in the e-commerce space, revolve around several key factors that are crucial to its continued success and growth:

1. • Maintaining Competitive Advantages in Cross-Border Logistics: The challenge lies in maintaining this advantage, especially if there are changes in international trade policies or regulations that affect import duties and taxes. Any adjustments in these laws could impact Temu’s pricing strategy and its competitive edge.
   • Sustaining Low-Cost Production: A core aspect of Temu’s business model is its reliance on low-cost production, primarily based in China. This allows them to offer a wide range of products at very competitive prices.
     1.  The sustainability of this model depends on the stability of production costs in China and the ongoing relationship between Chinese manufacturers and Temu. Factors like rising labor costs, changes in manufacturing regulations, or shifts in the geopolitical landscape could impact production costs and, consequently, Temu’s pricing model.
   • Navigating Changes in International Trade Policies: The global trade environment is dynamic, and changes in trade policies, such as tariffs, trade agreements, or economic sanctions, could affect Temu’s operations. For instance, any changes in the U.S.-China trade relations or policies affecting cross-border e-commerce could have significant implications for Temu.
   • Adapting to Consumer Preferences: Consumer preferences and shopping behaviors are continuously evolving. Temu’s ability to adapt to these changes, such as shifts towards sustainability, quality, or different product categories, will be crucial for its long-term success.
   • Technological and Operational Innovations: E-commerce is a technology-driven sector, and continued investment in technology for better customer experience, efficient logistics, and data analytics will be key to staying competitive. Operational innovations, such as improving supply chain efficiency, optimizing delivery times, and enhancing customer service, can help Temu in retaining and expanding its customer base.

Is Temu’s business model sustainable? Time will tell, as consumers are very fickle, and global disruptions are here to stay. There is a massive lesson in Temu’s model for all consumer goods manufacturers and procurement leaders about supplier relationships and downward price pressures in the market. It will mean a continued forensic focus on waste elimination, ruthless focus on inventory management and a relentless flexibility and agility to adapt and react to market changes and respond accordingly.

Are you prepared for the next level of agility? Are your systems agile enough? Are your teams trained to respond quickly? Share your thoughts with me. 👇

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