On August 29, and Pinduoduo became the focus of heated discussions in the capital market.
Before 2021, the topic of controversy among investors was whether Pinduoduo could turn from losses to profits; after 2021, the topic became whether Pinduoduo’s profits could be sustained. With the release of the second quarter financial report on the 29th, Pinduoduo’s stock price soared by 14.71%. The market began to popularize the evaluation of “the sea is flowing, and only the hero shows his true colors”. The reason is that in the second quarter when the e-commerce industry generally faces economic anxiety, Pinduoduo’s stock price soared 14.71%. Duoduo has maintained high growth capabilities.
Among them, Pinduoduo’s revenue in the second quarter was 31.44 billion yuan, a year-on-year increase of 36%, operating profit was 8.6972 billion yuan, a year-on-year increase of 335%, and operating profit under non-GAAP was 10.542 billion yuan, a year-on-year increase of 231 %. Compared with the consensus expectations of and Bloomberg , Pinduoduo’s revenue should be 23.624 billion yuan, and operating profit under non-GAAP should be 4.195 billion yuan. This means that Pinduoduo’s performance significantly exceeded expectations.
As the leading e-commerce platform in China, Pinduoduo’s revenue growth has slowed down year-on-year. This is in line with the market trend of slowing down the overall penetration rate and in the e-commerce industry, but it shows stronger profitability. The question worth exploring is, where does Pinduoduo’s money come from and where does it spend it? Where does the unexpected performance of
come from?
Same business, Pinduoduo is more profitable.
In the second quarter of last year, Pinduoduo’s gross profit margin was 65.72%, which increased to 75% this year.
Two sets of data can explain this. First of all, Pinduoduo’s business structure has changed, with more asset-heavy self-operated businesses being replaced by asset-light marketing and trading businesses; secondly, Pinduoduo has become more cautious in spending money, rather than repeating the platform’s early successes. Break the style of circle-level subsidy war.
According to the financial report, Pinduoduo’s revenue consists of three parts of business, namely:
1, online marketing and other income, which represents the most mature advertising business model of the e-commerce platform. For example, merchants bid to purchase platform product keywords for the main products, and promote Search rankings and other advertising costs. 25.2 billion yuan was received in this quarter, a year-on-year increase of 39%.
2. Transaction service income is mainly the commission that Pinduoduo draws from merchant sales. In January last year, Pinduoduo’s “10 billion subsidy” began to charge commissions to merchants, with commission rates ranging from 1% to 3% for different categories. The revenue of this part was 6.2 billion yuan this quarter, a year-on-year increase of 107%, which means that the commission business model has matured.
3, product sales revenue represents Pinduoduo’s self-operated business. This part mainly refers to Pinduoduo purchasing some big brand products that are not on the platform from dealers and selling them on the platform in a self-operated model to cultivate consumers' brand awareness. For example, the Apple mobile phone and Moutai are representative in Pinduoduo’s tens of billions of subsidy activities.
Strictly speaking, self-operated business is not Pinduoduo’s main business. This quarter, Pinduoduo’s product sales revenue was 5.1 billion yuan, a year-on-year decrease of 97%.
The overall situation of Pinduoduo’s business is that the overall business model has entered a mature stage and the business model has become “lighter”.
From the expense side, Pinduoduo’s operating expenses increased from 13.2 billion to 14.8 billion. According to the financial report, Pinduoduo’s expenses mainly consist of three parts, namely:
1, sales and marketing expenses, which is the money spent on the front-end customer acquisition. This quarter was 11.3 billion yuan, a year-on-year increase of 9%.
2, general and administrative expenses, this quarter were 830 million yuan, a year-on-year increase of 90%, mainly due to the increase in employee-related expenses.
3. R&D expenses in this quarter were 2.6 billion yuan, a year-on-year increase of 12%, mainly from greater R&D investment, an increase in the number of R&D personnel, and the recruitment of more experienced R&D personnel.
Overall, the growth rate of Pinduoduo’s operating expenses is lower than the growth rate of revenue. At the same time, investment in marketing expenses has slowed down, while investment in research and development has grown rapidly.
It is worth noting that at the financial results meeting, Pinduoduo executives said that this quarter’s financial report exceeded expectations. It was the postponement of some projects such as agricultural projects and the reduction of costs that increased Pinduoduo’s profit level. Therefore, this quarter’s performance did not Not suitable as a reference for future performance. This means that in subsequent operations, reducing marketing and increasing R&D will still be the main theme of Pinduoduo.
What is agricultural research?
Since this year, a common problem faced by the e-commerce industry is that it is difficult to find incremental sales.
Not only is the overall growth of the consumer market slowing down, but e-commerce penetration is also slowing down simultaneously. This requires e-commerce platforms to make a change from volume-oriented growth to quality-oriented growth. National Bureau of Statistics data shows that in the first seven months of this year, the total retail sales of consumer goods was 24.6 trillion yuan, a year-on-year decrease of 0.2%, of which the total online retail sales of physical goods was 6.3 trillion yuan, a year-on-year increase of 5.7%.
Among them, the dilemma faced by the fresh food category is particularly obvious. Take Daily Youxian as an example. Since this year, Daily Youxian has carried out a series of reforms to reduce costs and increase efficiency, including reducing the size of its sales department and looking for B-end customers. The reason is that fresh products have the characteristics of high loss and low gross profit. The platform must achieve a large enough scale of consumer repurchase in order to establish a solid profit model.
After the release of last year’s second quarter financial report, Pinduoduo made an important shift that surprised the market, namely significantly reducing marketing expenses and launching a “10 billion agricultural research project”. The announcement shows that starting from the second quarter of 2021, Pinduoduo will prioritize profit allocation to this initiative until the 10 billion investment commitment is completed. Such bold moves as
caused a lot of controversy. One particularly obvious one is that agriculture is a notoriously difficult business, and any R&D investment in agriculture is destined to be difficult to reap returns in a short period of time. Pinduoduo focuses its platform profits on agricultural research and development. Is it worth the money? The key depends on whether it can bring long-term value.
Agricultural products are Pinduoduo’s “basic plate”. The biggest pain points in related fields are that products are non-standardized, quality control is difficult, and there is a lack of unified market standards. At the same time, market supply and demand fluctuate greatly, and scattered upstream producers often encounter market fluctuations, which affects production capacity.
Take the most successful brand Chucheng as an example. In 2001, the founder Chu Shijian began to engage in orange planting. It took more than ten years to successfully create Chucheng that could be mass-produced and of stable quality.
Pinduoduo’s approach is to focus on upstream supply and downstream demand at the same time, and use the platform’s huge agricultural product purchase order volume to combat market uncertainty.
Take the Super Agricultural Products Festival as an example. Starting from August 2019, Pinduoduo has launched the Super Agricultural Products Festival event to provide traffic support and financial support for high-quality agricultural products through special search pages, live broadcasts, tens of billions of subsidies, and tens of thousands of groups. . This year’s Super Agricultural Products Festival started on August 21 and lasted for 24 days, covering 200,000 agricultural products from nearly 2,000 agricultural product producing areas across the country.
A similar activity is Xinxian China. Compared with the Super Agricultural Products Festival, which focuses on increasing sales of agricultural products, Xunxian China focuses on high-quality regional brands with certain influence, and puts more emphasis on the branding and premium prices of agricultural products. In the relevant areas, consumers will see more seasonal local agricultural products, such as lychees from Maoming in Guangdong, bayberry from Xianju in Zhejiang, and even Chagan Lake fish in Jilin and golden squid in Rizhao, Shandong. Behind
is the unique advantage of the platform. On the basis of users' purchasing mentality, the production end is integrated through the direct delivery model from the origin, which reduces the circulation link of agricultural products and quickly brings cheap and high-quality agricultural products to the market. When downstream demand is greater and more certain, upstream farmers can reduce the impact and achieve long-term accumulation on the production side.
Do the hard but right thing
The pain points of the agricultural product industry can be attributed to "information asymmetry". In the upstream, the market entities are scattered small-scale farmers. Fluctuations in supply and demand have repeatedly trapped them in cycles of "good years" and "bad years" In the middle; in the downstream, massive consumer demands lack integration, and users’ decision-making costs for consuming agricultural products are very high.
It is difficult to integrate information from both sides and allow upstream and downstream to enjoy the benefits of improved market efficiency at the same time, but the long-term value is great. We must go deep into the fields and establish a complete digital supply chain to solve a series of problems such as data collection, warehousing, and transportation.
Since the release of the intelligent agricultural products processing system in 2018, Pinduoduo has introduced digital technology to the field of agricultural products. The specific method is to go deep into the production areas, enter agricultural products, build sales channels, and expand sales through ordering. Taking Duoduo University as an example, this training channel focuses on cultivating the Internet operation capabilities of new farmers who are willing to return to their hometowns, so as to accelerate the rise of agricultural products in poor areas. In a sense, Pinduoduo is doing a difficult but correct job similar to Lianjia’s “Real Estate Dictionary”.
It’s not just agricultural products that are being supported. Well-known agriculture expert Wen Tiejun believes that a prosperous countryside should have "all industries prospering". In addition to agricultural production, farmers can also engage in carpentry, blacksmithing and other jobs, which will help enrich farmers' sources of income.
In early August, Pinduoduo launched the “2022 Duoduo New Craftsmanship” campaign, which lasted for three months. During this period, agricultural and sideline products from handicraft industry belts such as Jingdezhen in Jiangxi, Yiwu in Zhejiang, and Fenghuang in Hunan will undergo digital upgrades.
In the Duoduo New Craftsmanship Plan, the platform will invest 1 billion level traffic resources and subsidy resources to promote the accelerated branding of rural traditional handicraft products. On the related theme pages of Pinduoduo APP, consumers from cities can see traditional handmade products such as handmade combs, willow storage boxes, handmade iron pots, and bamboo lanterns. At the same time, craftsmen will also receive e-commerce training to build product brands.
For Pinduoduo itself, the process of building upstream agricultural product digitization also irrigates the soil that nurtures itself. With the comprehensive integration of platform e-commerce, grocery shopping, and agricultural research, the overall efficiency of the agricultural product supply chain has improved, which means that the platform can provide cheaper and high-quality agricultural products, gain more stable consumer minds, and thus deepen the moat.
At the same time, we should also note that the journey of agricultural research and development is long and difficult. In the domestic market, foreign products such as cherries and kiwi fruit have achieved higher premiums due to their strong branding advantages. However, due to the lack of industry standards and capital accumulation among upstream producers, Chinese agricultural products lag behind overseas products in terms of branding. . This requires Pinduoduo’s longer-term investment in deep cultivation, allowing faster accumulation in the agricultural field, and building brand reputation while increasing profits and sales.
Just as Pinduoduo stated in the announcement a year ago: "The Ten Billion Agriculture Initiative is not driven by profits or commercial goals, but strives to promote the development of agricultural science and technology." In the short term, increasing agricultural research and development will impact the short-term interests of shareholders. However, in the long term, agricultural research and development will change the backward status of my country's agricultural products and increase the added value of high-quality products. Pinduoduo will also be a beneficiary of this change.
