Temu gets tamed

by Arthur Goldstuck: Founder and CEO of World Wide Worx, author, speaker, trainer.
Image by Google Gemini Image creator, based on a prompt by Gadget
Global ecommerce upstarts Shein and Temu have been reined in by South African Revenue Services, which has decreed that they will charge VAT and pay higher import duties. The purported reason for this move is that these providers, who fulfil orders from China, have an unfair advantage over local retailers, who have to pay full import duties and have to charge VAT.

However, that is not the full story.

On the one hand, if consumers shop around intelligently, they will discover they can find many of the online stores’ clothing items, for example, at competitive prices in physical stores. Examples range from Pick ‘n Pay Clothes and Mr Price to Ackermans, Pep, Jet and even Makro. And then there are the low-cost retail hubs known as Chinese malls, often even using the China Mall brand.

However, because these chains are not getting their story out to the public, the perception is that they cannot compete.

Secondly, the Chinese suppliers are not necessarily competing on the basis of cheap labour, as is often claimed by both retailers and consumers. While that is certainly a factor, it is only half the story, or even a quarter of the story. Temu, in particular, achieves low prices by cutting out multiple layers of middlemen.

A Temu spokesperson agreed to answer our questions about how the company operates, and how it is able to sell products at seemingly absurdly low prices.

“Temu operates a direct-from-factory online marketplace that connects consumers with cost-efficient manufacturers, delivering affordable prices on over 200 categories of products by cutting out the middlemen,” the spokesperson said

“Consumers are able to shop directly with manufacturers and enjoy wholesale prices without having to pay for the middlemen markups and extra stages of handling, storage and transportation. By shipping directly from source to buyer, Temu reduces the number of times the product has to change hands, lowering the cost without compromising quality.”

Temu is a subsidiary of PDD Holdings Inc, a company listed on the NASDAQ exchange, with a market cap of $200-billion. It began operations in the Unites States in September 2022 and now serves more than 60 markets globally, including North and South America, Europe, the Middle East, Africa, Asia and Oceania. It launched to the South Africa market in January 2024, and offers a wide selection of products, from household essentials and pet supplies to sporting and musical equipment.

We asked it to spell out how it is able to sell products like clothing at such low prices. The following detailed answer was provided:

“Traditional retail involves multiple intermediaries from production to sale, each adding extra costs that are passed on to the consumer.

“Temu optimises this chain by directly linking customers with cost-efficient manufacturers, removing unnecessary intermediaries and associated costs. Our approach ensures products are only shipped once sold, minimising surplus stock and reducing wasteful production. This model not only makes the supply chain more efficient but also more responsive to consumer demands, allowing for better product customisation. This also has the added benefit of reducing over-production, which leads to less waste.

“The large volume of orders processed through Temu allows us to generate economies of scale, leading to more favorable freight and delivery terms, which in turn, lowers the costs for our customers.

“Our pricing reflects our direct-from-factory model. Many of our sellers are manufacturers that traditionally supply brick-and-mortar stores. We use their suggested retail prices, which are based on physical store pricing, as a reference point. This allows us to highlight the significant savings consumers can achieve on Temu. We meticulously cross-check all pricing information provided by our sellers to ensure accuracy and transparency for our customers.

“Temu offers credits that can be used for purchases on the platform. One important use for credits is in refunds. Customers have the option to receive credits instead of a traditional refund to their payment method when returning products. These credits are reflected in the user account within minutes and can be used toward purchases, while refunds to credit cards can take longer depending on the individual financial institution.”

One of the elements of the Temu experience that has attracted criticism is its casino-like approach of inviting users to spin a wheel to increase discounts, or to click on “mystery” links to see what discount they receive. However, the manner in which the discounts are allocated or bundled is itself wrapped in mystery, and one is never sure where an earned discount has been allocated or where a general discount or price drop is active.

We asked Temu to explain this “gamification” strategy.

“The gamification elements in our app draw inspiration from familiar activities often found at funfairs or shopping malls. These are not only common in traditional retail settings but also contribute to the overall enjoyment of the shopping experience. For instance, our time-limited deals mirror the concept of flash sales in physical stores.

“Similarly, our prize wheels and lucky draws take cues from shopping mall promotions, and our interactive games are akin to funfair attractions. The coupon giveaways are common in customer loyalty programs. The idea is to translate these offline experiences into the digital realm, offering a sense of familiarity and fun in online shopping.

“Moreover, these gamification features are designed to provide value to our consumers. Through engaging activities, customers can unlock discounts, making our already competitive prices even more attractive. This aspect is especially important for those who seek to maximize the value of their purchases. We have received positive feedback from many customers who enjoy these interactive elements on our app.”

No doubt, it has also received negative feedback for these elements. Some see them as addictive, but of course the consumer has a choice to be addicted. More likely, it is confusing, as it is impossible to quantify directly, unless one keeps a spreadsheet going. Given the low cost of Temu items, even after VAT and import duty, it is likely that the time and effort involved in keeping track would be far more of a burden than spinning a few wheels.

Originally published on Gadget

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