Pinduoduo, the Chinese e-commerce giant that has maintained impressive growth over several quarters, is now witnessing a noticeable slowdown in its expansionRecent disclosures about its financial performance reveal that in the third quarter, Pinduoduo generated revenues of 99.35 billion yuan, marking a 44.33% increase year-on-yearIts net profit reached 24.98 billion yuan, translating to a 60.78% growth compared to the previous yearHowever, this performance pales in comparison to the astonishing growth rates of 85.65% in revenue and 144.2% in net profit recorded in the previous quarter.

The announcement of these figures triggered a sharp decline in the company's stock priceOn the day the financial report was released, Pinduoduo's share price closed at $104.09, reflecting a decrease of 10.64% in value, consequently erasing over 120 billion yuan from its market capitalizationSince the beginning of October, Pinduoduo's stock has plunged more than 28%, with a staggering market value loss exceeding $62.5 billion, equivalent to approximately 453.8 billion yuanOnce hailed as an exceptional performer amidst the growth struggles of e-commerce behemoths like JD.com and Alibaba, Pinduoduo now finds itself facing an impending challenge: whether its low-price model can continue to deliver success in a changing market landscape.

Peeling back the layers of its financial report reveals that the stagnation in Pinduoduo's growth can be predominantly attributed to a decline in commission revenueThe company's income chiefly comes from two segments: advertising and commissionsIn the third quarter, Pinduoduo reported advertising sales of 49.4 billion yuan and commission income of 50 billion yuan, which fell short of expectations by 3 billion yuan (analysts had projected commission revenue to be around 53 billion yuan). This decrease also impacted Pinduoduo's gross profit margin, which declined from 65.28% in the previous quarter to 60.03% this quarter.

The decline in commission revenue has various catalysts, primarily linked to Pinduoduo's decision to enhance subsidies to its merchants during the third quarter

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Reports indicate that the company invested heavily in ecological development, launching initiatives including “Billion Subsidy,” “E-commerce-Promoting Western Markets,” and “Support Programs for New Merchants” among othersThese measures aimed to boost support for high-quality agricultural product vendors, especially around the Mid-Autumn Festival, where Pinduoduo allocated 1 billion yuan in subsidies and offered 2 billion yuan worth of traffic resources to assist seasonal agricultural products in reaching urban markets, thus helping to elevate the incomes of agricultural regions.

Interestingly, Pinduoduo’s low-price strategy is beginning to backfireThe foundation of Pinduoduo's previous successes lay in its group buying mechanism (“Cut One Knife”) and its aggressive subsidy campaignsHowever, this model, reliant on continual pressure on merchants' profit margins, is becoming increasingly unsustainableIn a homogenous competitive landscape, the more profits are squeezed, the lower prices can go, enhancing Pinduoduo’s competitive position within the platform—but this is a double-edged sword that cannot hold in the long run.

In recent years, disputes between Pinduoduo and its merchants have been mountingIn March of last year, when Pinduoduo launched its self-operated “DuoDuo Welfare Store,” many small merchants under the platform engaged in malicious order placements, inundating customer service with refund requests and leading to the store's rapid shutdown within hoursEarlier this year, in May, numerous merchants experienced significant losses due to constant penalties following the introduction of new pricing regulations by Temu, further escalating tensions.

For Pinduoduo, it is essential to recognize that both advertising and commission revenues stem from merchantsWhile low prices attract consumers, maintaining merchant satisfaction is equally crucial

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The challenges facing Pinduoduo are just beginningWith a quarterly revenue of 99.35 billion yuan, it remains just shy of the “one trillion” mark, so optimizing its previously simplistic low-price model is a rational move as its scales grow.

During the most recent earnings call, Pinduoduo's management outlined a dual approach of “support and governance” intended to bolster ecological development while preparing for long-term investmentsYet, it is important to note that Pinduoduo's expenditure is significantly increasing as wellAccording to the financial report, the total cost of revenue for the third quarter surged 48% year-on-year to 39.7092 billion yuan, with total operating expenses rising 39% to 35.3527 billion yuan compared to the same period in 2023, marking a quarterly increase of 14.79%. Marketing and sales expenses alone rose by 40%, reaching 30.4838 billion yuan.

More starkly, the personnel costs associated with Pinduoduo have seen dramatic increases this year, with the second quarter showing a year-over-year hike of 208%, and the third quarter reflecting a 138% increase to 1.8056 billion yuanThis exponential growth in expenses does not bode well for Pinduoduo, which is already grappling with decelerated growth trendsIf costs continue to mount, it is only a matter of time before profit margins are squeezed even tighter.

Apart from internal financial strains and burgeoning expenses, Pinduoduo is also contending with intensified competition in the industryIn recent years, the company's commendable performance has rendered it the envy of numerous platforms, prompting rivals to emulate its successful strategiesFor instance, JD.com has launched a similar “Billion Subsidy” initiative focusing on low prices, while Taobao is ramping up its investments in price-sensitive sectors, particularly in beauty products, daily goods, and food categories, through its “Giant Can Subsidize” campaign, often offering better discounts than Pinduoduo to win back price-sensitive consumers who shifted to the latter.

Additionally, in response to Pinduoduo's international venture, Temu, the global e-commerce leader Amazon has introduced a dedicated line of lower-priced private label products sourced from China, strategically targeting hot-selling items on the Temu platform

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