Social Commerce at Scale only Exists in China

When you think of the term "social commerce" you might think of Instagram or Pinterest, but in reality, Pinduoduo is the ideal example of what social commerce is.

This as the Chinese retail event known as double 11 on November 11th, overtakes in scope and creativity the Holiday shopping Season in the West.

According to Technode, Pinduoduo hit another milestone late last week. Pinduoduo displaced JD.com to be the fourth-most valuable internet company in the country. Its market capitalization of $47.6 billion on Friday put it just behind e-commerce leader Alibaba, social networking behemoth Tencent and food delivery titan Meituan in China.

Pinduoduo utilizes group buying and rose to popularity with price-conscious rural consumers in China who do social commerce via the dominant super app WeChat. Pinduoduo being worth more than JD.com in 4 short years is hard to believe and the rise of a new kind of social commerce.

In late August Pinduoduo had already overtaken Baidu to be a top 5 tech company in China. Pinduoduo stock has also risen from around 20 dollars to around 40 in a very short period.

China has a trillion-dollar E-commerce market and Pinduoduo's timing and filling a gap with a viral product has been incredible. The social and group buying nature of the app has also meant Tencent finally found a partner that could take on Alibaba and keep winning. Single's Day is becoming such a global event for the East and Asia, and foot traffic is down in physical stores each holiday season in the United States, it's really a changing of the guard for the future of retail.

As a retail futurist, I cannot overemphasize this enough. China's consumer is already gaining in importance every decade, but now its E-commerce companies are a powerful triad vs. companies like Amazon, Walmart, and Target.

Walmart's entry into E-commerce has really been mixed. Amazon is not a profitable business without the Cloud and Advertising. But China is learning via social commerce (group buying) to do commerce at a different scale with discounts. It's not just off-price, it's collaborative buying and Pinduoduo proves to some extent, it works.

So what makes Pinduoduo so special? According to TechCrunch:

The story of Pinduoduo comes down to growing internet penetration and the rise of social commerce. Pinduoduo, which is known for selling ultra-cheap products, is particularly popular with price-sensitive residents in small towns and rural regions, a market relatively underserved by online retail pioneers Alibaba and JD.com.

This means founder Colin Huang is worth nearly $10 billion U.S. according to SCMP. This app was able to go viral due to its tethering with WeChat, discounts, and the social commerce play that enables people to shop together for steeper discounts. There's nothing like it in the West anywhere near its scale, even as JD.com and Alibaba has sought to copy the business model.

At new highs, Pinduoduo's stock is one of the hottest retail stocks. Hedge Funds adore this growth stock, since it has so much forward momentum.

As a super app WeChat faciliates not just messaging but real commerce and access to services. This is an app that Facebook was never able to clone. WeChat users can access Pinduoduo via the messenger’s built-in lite app, skipping app downloads; they also get deals from group-buying, thus the name Pinduoduo, which means “shop more together” in Chinese. So for rural consumers in China, Pinduoduo has a special place in how they are able to access goods at discount rates. The off-price of China E-commerce app, if you will.

As Pinduoduo learns to target bigger cities better, it could erase its staggering unprofitability gradually. Meanwhile, I expect consumer sentiment in the holiday shopping season of 2019 in the West to be anemic. Amazon did not have a great Q3 Earnings report as 1-day shipping is very expensive to get right. JD.com has not had a good last 2 years, even as it builds a logistics network that is truly impressive.

Alibaba just keeps getting bigger with Double-11, an event it more or less started and keeps scaling into new regions of Asia. Amazon's Prime day event is just a glorified back-to-school sale that's taking off for Western retailers.

Moreover, if social media failed retail in the West, Pinduoduo proves social commerce can exist in China at another level. As great as Pinterest, YouTube and Instagram might be for product placements, they can't hold a candle to a company like Pinduoduo that's a real E-commerce social commerce company. China does E-commerce that must better than the United States, and it shows the elevation of the Chinese consumer will only continue.

Pinduoduo has surpassed JD.com in gross merchandise volume, or the total dollar value of goods sold. It’s unclear whether the companies use the same set of metrics for GMV, for instance, whether the figure includes refunded items. It's all a bit hard to believe from such a young company. E-commerce companies can scale in China faster and social commerce makes it more viral. That's another level of word-of-mouth commerce taking place and could only occur on an app like investor Tencent's WeChat app.

It's unclear if ByteDance will ever create a rival app that could be a social commerce player. It is after all the new king of content in apps leveraging AI that has put pressure on Tencent's ecosystem of apps. Since the apps of ByteDance are aspirational for young people, it only makes sense that they get into social commerce, in one form or another. Though music, gaming, music streaming, and even their own smartphones could come first.

China is innovating and social commerce is a big part of how it's able to do it. With more consumers comes bigger possibilities. That's not something that American companies can clone or even compete with.

It's hard to trust any numbers we get out of China to be honest. Pinduoduo in its second-quarter earnings release that GMV in the twelve-month period ended June 30, 2019, was 709.1 billion yuan (US$103.3 billion), an increase of 171 per cent year-on-year. The YOY growth for Pinduoduo is monumental and one reason investors are getting behind the stock. Growth at that level is hard to fake, even if products on PDD have some controversy.

Pinduoduo might have started as a discount app for social commerce, but it's pivoting towards more mainstream penetration and that should be scary for Alibaba and JD.com. China is proving real innovation is occurring in its retail ecosystem where the winners are likely to dominate all of Asia.