Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Pinduoduo: Difficult To Make Profits In Future

|Includes: Pinduoduo (PDD)
Summary

It will be difficult for Pinduoduo to make profits in future.

As a decentralized e-commerce market, the discount for customers is actually part of the sales & marketing expense.

A traditional e-commerce market makes profits from its brand and abilities to distribute users to different product suppliers, which is difficult for Pinduoduo.

The profit margin today could be the profit margin in future, unless there are fundamental changes. The profit margin would be even lower if the counterfeit issues are solved.

The only way to improve profit margin is to decrease the cost, which could cause even worse counterfeit issues and quality problems.

It will be difficult for Pinduoduo to make profits in future based on its current business modal.

Normally, an e-commerce market makes profits from its brand and abilities to distribute users to different product suppliers. The processes are as follows:

(1)Build a market, and pick a brand name easily remembered.

(2)Spend plenty of money on marketing to building the brand.

(3)Customers access the market through the website/wap/app because of knowing the market instead of being invited

(4)The market benefits from distributing users to different product suppliers.

(5)Finally, the market would do everything it could to strengthen its brand.

Taobao/Tmall: product diversity/double 11 festival

Amazon:Alexa

JD: product quality/fast delivery/marketing CEO and his wife

Since Pinduoduo relies on Wechat and customers' relationships, customers buy things from their friends/groups instead of coming to the Pinduoduo market by themselves, which means that the benefits of user distribution belong to the customers. That is the core reason that it will be difficult for Pinduoduo to make profits in future.

If Pinduoduo try to lead users to its APP instead of purchasing in Wechat directly, it will probably damage Pinduoduo's corporation with Wechat.

One possible way to improve the margin, in my opinion, is decreasing the costs of the products and making profits from it. There are three directions:

(A)Selling products with brands in a cheaper way. Although suppliers can make special specifications for Pinduoduo(two different prices and specifications for one product or two similar products), which will still undermine the brand premium, especially when the distribution fees are paid back to the customers. That is the reason that Pinduoduo can't cooperate with high quality brands easily.

(B)Selling counterfeits or products without any brand. That is exactly what Pinduoduo is doing. As we know, a brand represents quality guarantee and extra profits. The suppliers of counterfeits and products without any brand have no incentive to improve the quality since they can't get extra profits from the brand(especially in Pinduoduo). We can foresee that the quality problems will probably become worse and worse if Pinduoduo tries to make more profits. Actually, Taobao tried to do that with the project name Taopinpai(small brands with high quality) several years ago, which ended nowhere.

(C)Building Pinduoduo's own brand. That would be a totally different story which is not what Wechat expected(Wechat expects to build a e-commerce market that can compete with Taobao/JD instead of building a single product brand).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.