The Inevitable Shape of Cheap Online Retail

Pinduoduo in China, Shopee in Southeast Asia, and Meesho in India operate in markets that could hardly be more different -- an upper-middle-income industrial state, a stitched-together archipelago of under-banked economies, and a country where three-quarters of retail is unorganized and e-commerce penetration sits at about 7% -- yet all three have landed on the same business model.

These platforms run asset-light marketplaces specializing in cheap goods and slow delivery, monetizing through logistics mark-ups, advertising, and installment credit rather than retail margins. Temu and Shein are further variations now expanding in the U.S. and Europe.

The economics are thin for all. Pinduoduo's EBITDA margins on GMV (gross merchandise value) sit in a 0-4% band; Meesho's group-wide EBITDA hovers around break-even. Neither charges commissions on most sales; both earn through logistics mark-ups and advertising. Sponsored listings account for 1-3% of GMV at Indian marketplaces and 4-5% at Alibaba and Pinduoduo.

Credit is the more consequential side business. In India, cash on delivery functions as unofficial credit. Meesho CEO Vidit Aatrey said the customers prefer CoD for its "built-in delay," which effectively makes it "a five-day loan." Geography, income, and regulation were supposed to produce different answers. They produced one: a 3% endgame where e-commerce clips a few points of GMV and relies on attention and credit for profits.

The real shape of online retail

[smooth wombat]

Pallets of returned items from Amazon and others stacked in pallets in warehouses [nytimes.com]. The refuse remains until someone decides to buy the pallet (approximately $700), have it delivered (which costs extra), and possibly resell whatever is inside.

This is in the U.S. It is guaranteed in China and India the vast majority gets thrown into a hole or piled high at a dump.

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[PPH]

or piled high at a dump.

Garbage gyre.

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[shanen]

Pretty sure "gyre" is intended as a joke, but websearch failed me [just] now. Care to clarify the joke?

The "future shape" I was thinking of actually involved smartphone-enhanced clothing. Still don't understand why no one (that I know of) is making clothing with suitable adaptations for smartphones. Also shower proof pouches for people who worry about missing a message when they are in the shower...

Re: The real shape of online retail

[drinkypoo]

Gyre is a more official name for the Pacific Garbage patch, as there are presumably few kids in it

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[shanen]

Thanks, but even looking at the full context and with that definition, I'm missing the joke. So why haven't the moderators rated it Funny already?

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[sysrammer]

Pretty sure "gyre" is intended as a joke, but websearch failed me [just] now.

?

"A gyre is a large system of rotating ocean currents, typically driven by wind and the Earth's rotation. These currents play a crucial role in the movement of heat, nutrients, and marine life in the ocean." Wikipedia

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[SomePoorSchmuck]

or piled high at a dump.

Garbage gyre.

Gachiakuta!

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[PleaseThink]

Those dumps are then scavenged through by the poor looking for reusable or repurposable items and materials. I'm not saying it's great, just that being dumped isn't the absolute end of their lifecycle. Granted the vast majority will stay in that dump.

Err, maybe you're talking about China/India waste rather than USA waste shipped to those countries? I have no clue what happens to their local trash.

Can someone tell me what this means?

[sabbede]

"monetizing through logistics mark-ups, advertising, and installment credit"

Logistics mark-ups sounds like shipping costs, which doesn't make much sense since that's a cost not revenue. Is that something they are making the manufacturer over-pay for? Are they overcharging customers for shipping?

Advertising?? Again, usually a cost. Are they charging manufacturers for advertising the products in the Temu ads that run on every cheap phone app? It'd be a pretty slick move to make factories pay for Tem

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[BranMan]

Logistics mark ups as in it costs you $4.37 to ship out and you charged the customer $7.99 for shipping? I could see that being a revenue stream.

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[sabbede]

I suppose so, but I just looked at Temu for the first time ever and while the first item I looked at had a $2.99 shipping fee (shipping from seller warehouse in California), while the next item had free shipping. The first item was a portable projector ($11), the second was a couch ($384). If I didn't want the couch in two days, I could save $5. I don't want it at all, but that's not important now.

That doesn't seem like a good revenue stream.

Next item, $5.03 head scarf thing, free shipping.

Oh! Bu

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[BranMan]

I imagine the installment payment companies pay Temu, or whoever, 90% (so at a discount) and collect the whole price from the customer over time. Similar to the merchant paying a CC fee (they get less there too). Klarna or whoever market it as making big sales more likely for the merchant, so they make the discounts up in volume?

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[sabbede]

Their margins are razor thin. If Klarna pays them 90%, and their margin is 4-5%, that's a loss. Klarna must be working on an even thinner margin. And that's not the retailer who has 0-4% margins.

Point being, they can't be making anything off that. Klarna makes a little something, but Temu sold the product for less than the sticker price when their margins are already very small. How much would the volume have to increase to make what must then be a 0-2% margin sustainable?