The launch of Temu by the Chinese PDD Holding in 2022 marks a significant milestone in the digital commerce industry and possibly signals the beginning of the second generation of digital commerce marketplaces. By May 2023, the platform celebrated over 100 million active users in the United States. In Germany, Temu claims to have 33 million users in April 2024 and, according to Reuters, 75 million users across the EU (see here and here).
While criticism of Temu's shipping strategies, which place a strain on the entire logistics chain, is increasing in this country due to the inadequate sustainability caused by low product quality and the high carbon footprint, as well as safety deficiencies and the sale of counterfeits, Temu is also growing rapidly in Germany: As much as 26 percent of Germans have already shopped through Temu in the second half of 2023. According to estimates, 200,000 Temu packages are already delivered to Germany every day. According to analysts, Temu's gross merchandise volume (GMV) skyrocketed from $3 million to $1 billion between September 2022 and June 2023. However, since PDD Holding does not officially report the GMV, the extraordinary GMV cannot be confirmed beyond doubt.
This growth in the e-commerce segment is remarkable, and Temu is increasingly positioning itself as a competitor to Amazon in Western markets. But what exactly sets Temu apart? And does the platform truly have the potential to challenge long-established digital commerce giants like Amazon?
At the core of Temu's strategy is the consumer-to-manufacturer (C2M) model—a concept originally pioneered by Shein and now adopted by Temu. The C2M model enables production to be driven by specific customer requests and demands, made possible through data innovations at key stages of the sales value chain.:
Consumer preferences are captured with exceptional accuracy and speed through various methods and data sources. Social listening tools identify and analyze trends from platforms like TikTok, while proprietary customer and platform data offer further insights into consumer behavior. This data is interpreted in a way that enables both manufacturers and retailers to develop and offer products precisely aligned with consumer demand. In some cases, production doesn’t even begin until enough customers have added a particular product to their cart.
To make this “reverse manufacturing” approach successful, companies need strong data management and analytics capabilities. The Chinese fashion retailer Shein has perfected this model in the fashion industry.
“Reverse manufacturing” is the key innovation of the C2M model. It allows Temu to create a highly dynamic and efficient marketplace, where production is driven by consumer data. This benefits both retailers and manufacturers by minimizing overproduction and reducing the need for discounts. Market observers suggest that Temu utilizes this model, allowing manufacturers to produce in a demand-oriented and highly agile manner (see here and here). However, the extent to which Temu leverages its data analytics capabilities to manage manufacturers' production processes remains unclear. Some of the products on Temu also appear to be surplus stock from manufacturers and retailers.
Temu has expanded the consumer-to-manufacturer (C2M) model, which, as described above, is characterized by production based on customer demand, to include another component:
Temu sets itself apart from other marketplaces by integrating not just traditional Chinese retailers, but also manufacturers (factories) directly into its platform. Using air freight, these manufacturers ship products directly from factories in China to customers in Europe. The diagram above illustrates this innovative supply chain approach.
By "cutting out the middleman," wholesalers and retailers in Europe (including Germany) are bypassed, allowing for direct connections between manufacturers and the marketplace. This leads to lower prices as the retailers' markup is eliminated.
For instance, a “Memphis One” shoe sold online at Deichmann for €30 can be purchased on Temu for €10 or less. This creates three key outcomes:
Two key players—wholesalers and retailers—are removed from the supply chain.
Temu establishes direct customer access for the manufacturers connected to its marketplace. This is achieved through its own app and significant marketing investments, including aggressive advertising on platforms like Meta and others, as well as offering some products at ultra-low prices to attract customers.
Customers are willing to accept longer delivery times in exchange for these extremely low prices. The extended shipping times result from products being sent directly from China via ship and plane, rather than being stored in European warehouses as is common with other providers.
It’s important to note: Temu hosts not only manufacturers but also Chinese retailers on its marketplace. The exact share of retailers versus manufacturers on Temu’s platform is not publicly known. Temu is now opening its marketplace to European retailers as well (see here). While prices from European retailers will likely be higher, they can offer shorter delivery times, positioning Temu in direct competition with Amazon in Europe.
Temu is aggressively pursuing growth and expanding its market share, echoing Amazon's approach during the early days of e-commerce. In fact, the domain www.relentless.com still redirects to Amazon, a nod to how fiercely it competed for market dominance. In the third quarter of 2023, the Temu parent company reported three billion US dollars in marketing expenses – that was almost a third of the 9.4 billion US dollars in revenue. Much like Amazon in its early years, Temu is willing to sacrifice profitability on individual orders to gain market share. According to Wired, in 2023, Temu lost around $30 per order in the U.S., a calculated move to capture the market by offering extremely low prices.
The critical question surrounding Temu's bold strategy is whether it can convert this short-term customer acquisition into long-term, sustainable relationships. Will customers remain loyal if prices eventually rise? The outlook is promising. Thanks to the “cut-out-the-middleman” aspect of its consumer-to-manufacturer (C2M) model, as mentioned earlier, Temu is positioned to maintain permanently lower prices than its competitors.
Currently, Temu does not allow customers to filter products by quality. The quality of non-branded items from China available on the platform varies significantly, which can overwhelm consumers. Additionally, the quality often falls short of Western standards. This creates an opportunity for local retailers, such as Lidl, to differentiate themselves by conducting stringent quality checks and offering products that meet safety certifications, like the CE mark.
In Germany, online pure players like Amazon, mail-order companies such as Otto, and fast-fashion omnichannel players like KiK are now facing the challenge of adapting their e-commerce strategies. The question is: which of these companies should be concerned about competition from China?
Our thesis: Any company or intermediary selling interchangeable, non-branded products without strong brand value is vulnerable. Retailers that offer branded products, such as Bosch, Makita, or Einhell in the tool sector, have less to worry about since brand recognition serves as a key differentiator. However, retailers like Lidl or Kaufland, who sell non-branded products from China in sectors like non-food, may face a challenge. With Temu connecting directly to Chinese factories, it can offer significantly lower prices, making price less of a competitive advantage for these retailers.
At the moment, however, Temu does not yet allow customers to filter by product quality. Many no-brand products from China sold on Temu have varying quality standards, and consumers are overwhelmed by the selection. Furthermore, the product quality on Temu does not yet meet the demands of customers in Western markets. As long as Temu does not offer filtering by product quality and increases the number of products with high quality, no-brand retailers like Lidl can differentiate themselves by carrying out quality controls and consumers can rely on product safety being ensured by the CE mark, for example.
However, established retailers should not rest on this advantage for too long: Chinese manufacturers are capable of producing high-quality consumer goods (as evidenced by the no-brand products made in China for outdoor retailer Decathlon), and Temu has the technological expertise to match the right products with the right quality for its customers on the platform.
We placed a test order with Temu, and here’s what we experienced:
From an ethical point of view: no. For practical reasons: yes. For example, Temu offers very affordable spare parts for tools and household appliances. An air filter for a Dyson vacuum cleaner in a 3-pack costs only €12.79 at Temu. The original Dyson part costs €39.00 in the dealer shop.
Comparison picture: Temu spare parts vs. original Dyson part:
Temu’s rapid growth is likely more than just a fleeting success. It signals a broader transformation occurring in the e-commerce sector. The consumer-to-manufacturer (C2M) model not only disrupts traditional marketplace structures but also sets new standards for supply chain management, production, and pricing based on consumer data and preferences. This evolution marks the beginning of a second generation of e-commerce marketplaces and business models that ensure low prices by directly connecting with manufacturers. Leveraging data management and analytics, these platforms are able to produce and sell goods that are perfectly tailored to consumers' needs and desires. Temu, for example, continues to expand rapidly.
If you’re interested in understanding how Temu's rise could impact your business model and what adjustments you can make to stay competitive, feel free to reach out to us