Ecomm Battle: How Temu Might Compete with Amazon in the US Market

Temu represents a fresh wave of Chinese eCommerce entrants reshaping Western markets. Since its September 2022 launch in the US, it has expanded to 56 countries. With monthly sales surpassing US$2 billion and showing steady growth, Temu is making significant strides in the global eCommerce arena.

Behind Temu’s Meteoric Rise in the US

Introduced by Chinese eCommerce powerhouse Pinduoduo (PDD) in July 2022, Temu has swiftly amassed 50 million downloads globally, surpassing Amazon in popularity. This meteoric rise stems from its exceptionally competitive pricing, bolstered by savvy social commerce strategies, several 30-second Super Bowl commercials, and influencer marketing tactics.

This puts Temu front and center of American consumers, posing a potential challenge to Amazon’s dominant position in the US eCommerce market.

To compete with Amazon, Temu could leverage its strengths in several key areas:

Low Price Strategy to Lure Customers

Imagine discovering your regular Amazon buys at unbelievably discounted rates on Temu? Consumers are eager to seize such opportunities, as reflected in its $3 billion in revenue by the first half of 2023.

Temu’s business model hinges on affordability. The platform offers a diverse range of products, from affordable $12 dresses to $20 sneakers, alongside a variety of holiday decorations, storage solutions, and toys reminiscent of items found in dollar stores. This approach targets a wide customer base, especially bargain seekers, by offering cost-effective products.

As inflation rates climb, American shoppers gravitate towards Temu for their purchases. The company’s catchy slogan “Shop like a billionaire” has propelled it to claim 17% share of the US market, disrupting established American retailers like Amazon.com, Dollar General, Dollar Tree, and Five Below.

Low Operational Costs

Unlike Amazon, Temu specializes in unbranded or white-label products, akin to Shein’s approach. 

Temu primarily offers mass-produced goods from China, leveraging the country’s low-cost manufacturing. Its efficient supply chain aggregates products for unified packaging, reducing logistics expenses. For example, shipping costs from Guangzhou to the US per small parcel can be remarkably low.

While Amazon boasts broader product offerings and brand recognition, Temu thrives on affordability, catering to a specific consumer niche.

Lower Spending on Inventory and Warehousing

Temu uses a semi-hosted model, through which sellers are responsible for overseeing products in their own warehouses, setting supply prices (which are still validated by Temu buyers), and fulfilling orders, similar to Amazon’s Fufilled by Merchant method.

Until recently, the Chinese eComm giant used a full hosting model, where it oversaw pricing entirely. Under this model, the suppliers simply deliver goods to Temu’s domestic warehouses, where it handles logistics, warehousing, customer service, and marketing. However, implementing and maintaining a full hosting model can be expensive due to the need for infrastructure, technology, and manpower. Plus, sellers have less control over fulfillment and inventory management.

For that reason, the semi-hosted approach is integral to Temu’s cost-cutting and efficiency-boosting plan. This model may help reduce expenses and improve fulfillment efficiency. 

Some sellers speculate that Temu’s semi-hosted approach might offer an alternative for Amazon sellers aiming to liquidate excess inventory. Considering the expenses linked to storage and shipping charges on Amazon, this model could present a financially viable option.

Reverse-Manufacturing Model

Similar to Shein, Temu operates under a reverse-manufacturing approach that revolutionizes the industry with its Demand-Driven Planning strategy. Beginning with limited product quantities, it swiftly adapts to consumer demand by restocking popular items and replacing less successful ones.

This dynamic model ensures responsiveness to market shifts and evolving consumer preferences, setting a new standard in business agility and efficiency. It also enables a broader product selection compared to traditional retail methods.

For instance, Shein successfully churned out 150,000 new products in 2020, surpassing its rivals significantly. Temu’s adoption of a similar strategy in the global eCommerce landscape is now garnering attention, overshadowing Shein’s achievements. 

In contrast, Amazon employs a dynamic pricing approach (thereby pricing sellers with less competitive offers out of the market) and imposes multiple seller fees (making the marketplace a viable option for those with wider margins). But the retail giant’s success can be attributed, in part, to its adept navigation of critical shopping periods like Prime Day, Black Friday, and the broader holiday season along with its delivery speed and decades-long foothold.

Temu’s Impact on US Rivals

As one of the rapidly expanding eCommerce platforms today, Temu has indeed significantly influenced various business models across the US, whether they operate online or offline.

Versus Amazon

Temu’s rapid rise presents a formidable challenge to Amazon’s traditional business approach, particularly Jeff Bezos’s “flywheel theory,” which prioritizes competitive pricing and enhanced user experience to drive traffic and attract more sellers to the marketplace.

However, Temu’s aggressive pricing undermines this model, leading Amazon to exclude Temu from its price comparison system in June 2023, citing concerns over product authenticity. This move highlights Amazon’s struggle to match Temu’s pricing strategy.

Challenging Amazon’s Middleman Model

Unlike Amazon’s middleman model, where it facilitates transactions between sellers and consumers, Temu directly connects manufacturers with buyers, bypassing intermediaries. While Amazon’s model has dominated the US eCommerce market, the rise of Temu challenges its reliance on intermediaries, potentially disrupting its pricing structure and market dominance.

Versus Dollar Stores

Though dollar stores have retained their appeal for customers purchasing food, beverages, and household products like detergent, they face challenges due to changing consumer preferences and operational issues.

For instance, as part of its ongoing restructuring efforts, Amazon has disclosed plans to reduce its Buy with Prime team by 5%, potentially impacting retailers relying on its fulfillment and delivery services for their off-Amazon sales.

Dollar General’s yearly profit outlook has been reduced thrice due to cautious spending by budget-conscious shoppers, shifting toward lower-margin consumables. Margins declined as markdowns on excess inventory increased, exacerbated by retail theft. 

Earnest Analytics reports Dollar General saw a decrease in customer spending, dropping from 60% to 51% compared to the previous year. Dollar Tree experienced a similar decline from 30% to 26%. Conversely, Temu’s share of customer spending rose significantly from 0% to 14%. Meanwhile, spending at specialty discounters like Five Below remained consistent.

This report suggests that Temu is capitalizing on consumer weariness due to elevated prices and inflation.

Overall, as the market undergoes constant transformation, it becomes intriguing to observe the response of current industry leaders to Temu’s disruptive strategies.
Perhaps, for Temu, the difficulty lies in preserving its pricing superiority, particularly amid potential shifts in global trade regulations, consumer preferences, technological innovations, and policies influencing tariffs and taxes. Changes to these regulations could directly influence Temu’s pricing approach and its competitive position.

Related: Major eComm Players Making Big Changes to Take on Amazon