The Future Of Online Shopping | CNBC Marathon
- How Temu Makes Money From $10 Smartwatches from China (Published August 2023)
//Summary//
CNBC Marathon explores how companies like Amazon, Walmart and their competitors are shifting their marketing and business strategies to compete in today's economy.
Quietly launching its app in September 2022, Temu only took a few weeks to top app store charts, edging out Amazon, Walmart, and even fast-fashion brand Shein. By February 2023, the 5-month-old company made its T.V. debut during Super Bowl LVII, airing two commercial spots totalling an estimated $14 million. With an annual advertising budget of about $1.4 billion, Temu is focused on aggregating a user base of nearly 100 million people by year-end.
Walmart employs more people than any other company and is the country's largest grocer. But when it comes to e-commerce, Amazon is the clear leader, with 39.5% of the market share compared to Walmart's 7%. Now Walmart has ambitious plans and new leadership to try and catch up.
Livestream shopping took China by storm during the pandemic, growing into an estimated $423 billion market in 2022. The trend has caught on more slowly in the U.S., but now Amazon, TikTok, YouTube and Shopify are making significant investments in hopes it takes off. CNBC goes behind the scenes with creators like Myriam Sandler to find out what it's like to sell via livestream and what it'll take for the emerging model to become a mainstream way that U.S. consumers shop.
1)
Temu has become the most downloaded shopping app in the United States. Temu is cheaper, aggressively promoted, programmed to sell useless stuff, and addictive. It's going live on Amazon.
Think of it as the home shopping network for Gen Z and millennials, all online, hosted by famous creators like Sandler, with millions of followers on social platforms.
2)
Walmart is doubling, tripling down on their e-commerce business, trying their best to take market share from Amazon or catch up with them. But the truth is, they still have a long way to go.
It's 12 February 2023—the Super Bowl. Philadelphia Eagles versus Kansas City Chiefs and a record-breaking 200 million people are watching.
3)
Wait, no. Rewind. Download the Temu app and shop like a billionaire - right there! Pause it. What is Temu? It's 12 February 2023—the Super Bowl.
And Temu, a shopping app that launched just five months ago, is making its T.V. debut on one of the biggest advertising nights of the year, promising bargain prices and the chance to shop like a billionaire with not one but two commercials totalling $14 million.
3)
The Super Bowl ad catapulted the up-and-coming shopping app into the mainstream, with app downloads up 45% and daily active users up 20% just one day later. By the end of the first quarter, Temu had reached 19 million downloads in 2023.
I'm sure you've heard of Temu, right? Shopping app Temu has become the most downloaded shopping app in the United States.
4)
Temu is cheap, aggressively promoted, programmed to sell useless stuff, and addictive. The company says it can pass those cost savings on to American consumers. Wish.com, AliExpress and the others started a decade ago. They were like MySpace paving the way for Facebook or BlackBerry for an iPhone.
5)
But where did Temu come from, and how does it make money selling dirt-cheap products? And how did a relatively new shopping platform end up at the centre of a political firestorm targeting Chinese e-commerce?
So, you see the Super Bowl ad and download the app. You're probably going to get something like this.
6)
Spinning wheels, countdown clocks, $100 coupons, 25% off, 50% off, under $0.99, act now, hurry, fast. And even without these discounts, you notice that things are cheap.
It's cheap. $19 headphones, $10 designer knockoffs, and housewares for pennies on the dollar. Whoa, is that a $10 smartwatch? Let's put that in the basket.
7)
It's socialised extreme discounting with mega variety, gamified and socialised to drive traffic, but most importantly, to build a registered base and get consumers to download their app.
Temu is an online marketplace for bargain shopping. Like Amazon, individual sellers list products at heavily discounted prices.
8)
Based in Boston, Temu quietly launched in the summer of 2022, and within a few weeks, the app was at the top of the Apple App Store charts, beating Amazon, Walmart and even Shein. All this is thanks to a humongous advertising budget focusing on social media.
In January alone, Temu bought 8,900 ads on meta platforms, and it's all part of a larger user acquisition strategy because right now, Temu isn't worried about sales; it's concerned about you.
9)
They pay big bounties and referral fees for you, me, and any other consumer to bring someone to the site, download the app, and make that first purchase. You could go through the social sphere and find people recruiting others to make up to $100 a day in referral fees.
10)
Or, if you're an influencer, you can make up to $5,000 a month. The idea is that once you get people on the site, they start browsing around and see all these different kinds of gadgets, gizmos, and things on offer. They see the low prices and think, well, let's try that.
And Temu has found that once people have tried it, they keep returning and buying more. Some people have become pretty addicted to Temu.
11)
It's straightforward to shop, and it's also straightforward to do it in a very carefree way because you're not spending hundreds and hundreds of dollars on things. The individual price points are low, so many people order in vast quantities. Some estimates are that Temu will spend $1.
12)
Four billion on North American advertising in 2023 alone, and it hopes to grow its user base by an estimated 100 million people.
The value of a monetisable daily active user, as we call it more in the industry, is worth somewhere between $236 and $726 per active user per year in revenue, and they're acquiring these customers at a fraction of the cost of what Amazon or anyone else had to pay to get them.
13)
So again, the question is, where did Temu come from, and how did it get all this money? If you haven't heard of Temu, you've probably heard of its parent company—Chinese e-commerce company Pinduoduo, which is going public on the Nasdaq this morning.
Pinduoduo, one of China's big three e-commerce sites with a market cap of over $100 billion, Temu is the retailer's first major push into the overseas market, where rival J.D.com and Alibaba already have a presence. Pinduoduo used its already-established strategy and logistics network to get Temu up and running quickly.
14)
This means that although Temu is based in the U.S., its products come from distributors in China. They have a supply chain advantage built on the success of Pinduoduo in China, which started by representing rural farmers, pros, dancers, and agricultural suppliers and built that out to every small merchant in China. And now they've extended that to North America.
15)
The Temu is the linchpin of China's strategy. Many of the products sold in Temu are made in China. They're shipped directly from China to the U.S., So those labour costs are meagre compared to manufacturing in the U.S. and elsewhere. So Temu has been able to keep those prices very low for customers.
16)
So, this $10 smartwatch is probably from a factory in China. And just like other Chinese bargain e-commerce sites, Temu can sell items at low prices. What Temu sells is very generic. It's not a well-known brand. So that again keeps the costs very low because you're not paying for the brand names.
17)
But the reputational risks plaguing other Chinese retailers like Shein could find their way to Temu. And as far as Temu is concerned, its problems have just gone federal. So you downloaded the app, spun the wheel, waded through the discounts, ordered your $10 smartwatch, and now you're waiting for your watch to arrive from a factory in China.
18)
But there's a problem. Not all Chinese manufacturers can sell goods in the U.S. There's a genocide going on against the Uighur people in a place called Xinjiang province, in the northwest corner of China. Twenty-three million Uighur people are having their cultural identity erased, and over 2 million are in concentration camps.
19)
As a result, we passed something called the Uyghur Forced Labour Prevention Act because one of the things that's happening along with the genocide is that hundreds of thousands of Uyghurs are being forced to work in factories making all kinds of goods. Countless goods are coming into the United States, violating the law.
20)
In a recent report, the U.S. House of Representatives found instances where items on Temu's website were sold or made with materials from China's Xinjiang region, directly violating U.S. import laws.
Our American companies and others who follow the law and ensure their goods are not sourced from Xinjiang are now at a real competitive disadvantage to those fast fashion companies who do not follow the law.
21)
Most online e-commerce retailers and marketplaces have policies that directly prohibit the sale of products from the Xinjiang region. Still, the U.S. government found that Temu only had vague, boilerplate language that did not directly mention Xinjiang. When pressed on this, Temu's defence was "Temu is not the importer of record", meaning they're a marketplace.
22)
They don't make the products; they sell them. Yeah, that's not going to work. They've got 80,000 sellers, and they're pointing the finger at them and saying it's up to them to police this situation. But, you know, that's not going to work. And it goes beyond that. Remember those ultra-low prices? They help Temu take advantage of de minimis shipping, which the government is also quite sceptical about.
23)
Under our Customs and Border Protection Act, goods under $800 shipped directly from China to residences escape all tariffs and duties, and they don't have much information about where they're coming from. So, they may also be able to get around the laws banning goods from Xinjiang.
24)
To put it in perspective, other companies like H&M and Gap spent hundreds of millions of dollars on import duties at the U.S. borders in 2022. Temu and Shein paid nothing. Together, they accounted for between 30% and 50% of all de minimis shipments to the U.S. That's an estimated 600,000 packages a day dodging customs, not paying import duties and flying under the radar.
25)
CBP is already under a lot of pressure to inspect the packages that are $800 and above. So when you have this explosion of packages under $800, along with the fact that they don't have the data that would otherwise be required to do a targeted inspection regime, you make it almost impossible for CBP to do its job.
26)
It also puts other companies at a distinct disadvantage. If you don't have those tariffs or duties in place, those goods look much cheaper than other goods. And so not only are the taxpayers losing the taxes, but American companies and others doing the right thing are potentially losing business.
27)
Not only do companies like Temu and Shein take advantage of this rule, but it's directly linked to the rapid success of these types of companies. If the de minimis rule were to be changed, it would put a huge crimp in Temu's operations. It would be very disruptive to Temu because it would mean that packages would have to come to the U.S. and go through a complete customs process, which would cost a little more.
28)
More importantly, it would take a lot longer to get to the end user, or they'd have to build some warehousing capacity in the U.S. because that comes at a cost, and it starts to undermine some of the low-cost models important for those low prices.
29)
It's not just the federal government that's worried. Some states have taken action against the app itself, citing cybersecurity concerns. Earlier this year, Montana banned the app from government devices, along with TikTok, WeChat and Telegram.
In a statement, Montana Governor Greg Gianforte said Temu, along with several other apps, is linked to quotes from foreign adversaries and cited the fact that Temu's parent company, Pinduoduo, is headquartered in Shanghai, China, as evidence that these concerns are not unfounded.
30)
Pinduoduo came under increased scrutiny this year when it was pulled from the Google Play store in March after app versions were found to contain malware. According to a U.S. government report, the malware was used to exploit vulnerabilities in Android phones to access users' text messages, change settings, view data from other apps and even prevent users from deleting the app altogether.
31)
So the question is, what does Temu do with your data? Let's recap. You downloaded the app, scrolled through hundreds of listings, and decided to take a chance on a $10 smartwatch. It's then manufactured by a Temu supplier and sent to a Temu warehouse in China. The warehouse then ships the watch from China to the U.S., paying $0 in customs.
32)
It will then be shipped to its destination via the US Postal Service, all in the space of about a week. So yes, we bought a $10 smartwatch from Temu. It took almost a week to get from China to New Jersey. And yes, it only costs about $10—first impressions from the box.
33)
It looks and feels like an Apple box. We know from the ads we saw for the original watch that this was the look and feel this company was trying to replicate because the watch's face looks very similar to other smartwatches on the market. The ring on the side and the buttons are almost identical to what you would find on an Apple Watch.
34)
The wristbands are also rubber, very similar to the Apple Watches. The only significant visible difference is the charging port. Although it has a circular charging port, it requires a two-pronged charger, which is very cheaply made. The watch also switched on immediately. The apps looked almost identical. The honeycomb effect is very similar to the current operating system on Apple Watches.
35)
Overall, the watch seemed to emulate an Apple Watch almost precisely. Even the icons for some of the internal apps were virtually identical. All in all, it's a pretty good imitation. I'd probably get this if I were in the market for a smartwatch and didn't care about quality.
36)
To most people on the street, it just looks like an Apple Watch. Every app needs a killer app. The killer app here is this mega variety of deep discounts. That's what brings them in. But they've married product sales with social.
And they're starting by leveraging the existing social network in North America. But they will create their social network when they open up team payments like they did with Pinduoduo in China.
37)
Team Payments is the viral catalyst to ignite this to a billion users beyond China. Remember when we said Temu doesn't care about sales; it cares about you.
Marketing and e-commerce experts say that's no mistake. Temu is spending so much money to aggregate a user base.
38)
Many suspect that Temu is preparing to launch social shopping here in the U.S., a highly successful shopping model used by Pinduoduo in China. Pinduoduo in China takes it to another level. They use group buying, where you can get together with friends and family to get volume discounts. It's called team up, price down.
39)
This social commerce aspect has allowed them to grow to number three in China with almost a billion users. Temu hasn't released the team buying feature in the U.S. yet, but you can see them laying the groundwork for it because they're social marketing experts.
So, as Temu continues to grow and expand its user base, it could be getting ready to change the shopping experience for U.S. retailers.
40)
But will we consumers bite? The potential for social shopping is there, and it's going to grow, but it's not going to be on the same scale in China. It's a different type of consumer; it's a different type of market. But I think it's undoubtedly a sensible thing for Temu to add. And even if Temu continues to grow its U.S.
41)
Can the user base survive the regulatory and legal scrutiny to continue operating? 92% of us say we trust a recommendation from a friend or family member, and that's what social marketing does.
So whether a Chinese company owns Temu or not is irrelevant because what you're buying is the trust and recommendation of a friend or family member based on a socialised promotion.
42)
And on top of that, we'll give you $20 for everyone you bring in. The boxes that fly through this 2.3 million square foot distribution centre are sorted, scanned and labelled, then loaded onto trucks destined for the shelves of the country's largest retailer.
The Future Of Online Shopping | CNBC Marathon
https://www.youtube.com/watch?v=STjQyl7Kr2s&t=1119s
Chapters:
00:00 Introduction
00:37 How Temu Makes Money From $10 Smartwatches from China (Published August 2023)
16:57 How Walmart Is Betting Big On Stores To Catch Amazon In E-commerce (Published June 2022)
34:26 Will Live Shopping On TikTok, Amazon And YouTube Take Off In The U.S.? (Published February 2023)
