Amazon has become a retail behemoth, driving out much of the retail competition. It did this by providing low prices for an immense array of goods and fast delivery, and with those methods managed to develop a huge customer and supplier base. The way it did that was by selling below cost and offering incentives to sellers and in the process running up huge deficits in the initial years. By those methods, it persuaded manufacturers and other retailers to sell through the site. I read about a company that sold diapers online and was doing well. Amazon tried to buy the company but when the company turned down its offer, Amazon cut the prices of its own diapers well below cost and drove the rival out of business. That kind of tactic is only possible for companies with large cash reserves or huge amounts of venture capital and other financing.

Initially, both manufacturers and consumers got a good deal. But once they all got hooked and Amazon became almost a monopoly, Amazon started squeezing them by raising prices. It is an old trick. Since manufacturers who sold through it had to guarantee that their product would not be available cheaper anywhere else, what they did was raise the price of their product everywhere outside of Amazon to be higher. Someone I know recently went looking for a part to fix his dishwasher. He found that Amazon had the lowest price but that the part at the manufacturer’s own site was a few cents more.

The Federal Trade Commission is currently suing Amazon for this and other monopoly practices.

But recently I have been noticing little online adds on many of the websites I visit for a company named Temu that also seems to sell pretty much everything, since each ad seems to promote a different offering. This article describes its meteoric rise and it seems to be following the Amazon model of using deep pockets to run at a loss initially.

By June 2023, Temu had a monthly gross merchandise volume (GMV) — the total value of the goods it sells — of $1 billion, according to Business of Apps. That pales in comparison to Amazon’s estimated annual GMV of about $477 billion, but it’s head-spinning for a company that hadn’t even reached its first birthday. Shein, which launched in 2008, had an annual revenue of about $610 million in 2016, based on Business of Apps’ data; it didn’t really explode in popularity until the pandemic.

How could a fledgling retailer grow so quickly? Because it can stomach selling at extremely low prices, thanks to its parent company PDD Holdings, a juggernaut of Chinese e-commerce that also owns Pinduoduo, a massively popular Chinese online shopping site. PDD is listed on the Nasdaq, and its market cap is roughly the same as Verizon’s. “This is just the international expansion of a $155 billion company,” says Ma. Among the various fiefdoms of internet retail in China, where online shopping is far bigger than it is in the US, PDD is currently the third-largest company, but it’s on track to outgrow its competitors soon, largely due to Temu’s foreign push, according to Morgan Stanley.

For PDD, creating a billion-dollar business is simple: Just have many billions to start with and be willing to spend it.

According to Wired, Temu loses about $30 for every order placed. When reached for comment, Temu said that figure was outdated but declined to provide a current estimate. Chinese news site 36kr suggests the company currently loses about 30 to 35 percent on every US order. It only loses that much, instead of much more, thanks to how aggressively it pressures to cut prices the thousands of third-party sellers it works with.

Unlike Amazon, which sells a large chunk of its goods directly, Temu is entirely a third-party marketplace: an online platform that essentially matches sellers with consumer demand. The attraction for sellers is that Temu provides all the know-how and marketing necessary to get their products in front of customers. It’s also much easier to start selling through Temu than Amazon, which has stricter requirements for sellers to join its marketplace. Yet sellers who work with Temu also report how cutthroat it is about slashing prices — to the point of being unprofitable for sellers.
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The other big factor driving Temu’s success at selling cheaply is what sets it apart most from Amazon: slow shipping. A Temu order can take weeks to reach a US customer, arriving at a snail’s pace for anyone accustomed to Amazon’s shipping speeds. But that slow shipping lets Temu avoid import taxes that could otherwise be prohibitive, and would likely be passed on to the consumer. Each customer’s order is shipped out directly from the factory to the customer, so sellers don’t have to keep bulk container loads of inventory stored in US fulfillment centers for quicker delivery. With no need for large shipments, sellers avoid current US law requiring duty on shipments over $800. US lawmakers have also argued that Temu’s use of this exemption allows it to effectively evade customs scrutiny. (In response to specific questions about the customs allegations, the company re-sent its previous statement.)

Amazon’s drive to attract customers with extremely short delivery times results in it having to create a massive warehouse and delivery structure that is expensive. Temu seems to be targeting lower prices at the expense of longer delivery times. It may well work, since there are really very few things that one needs quickly.

Since Temu acts as a go-between between matching buyers and sellers, it does not need as many direct employees as Amazon does. While it is good that Amazon has competition, it is not clear as yet if Temu suppliers abuse their workers the way that Amazon does. Its success is going to bring their supply chain under scrutiny and I would not be surprised to find that it does. When companies start competing on prices, they squeeze their workers, paying low wages, fighting unions, and providing lousy working conditions in their effort to cut costs and increase profits. Temu has not been around long enough to face a lot of scrutiny for their practices but the laws of rapacious capitalism suggests that their arc will be similar.

Since I never shop at Amazon because it is an awful company for its predatory practices and for its abusive treatment of workers and its union-busting methods, I decided to check out Temu. I decided to do a small test and bought a small gadget for my computer although I did not really need it. Temu was selling one for just $1.78 plus 17 cents in tax, with no additional shipping or other charges. They also offer free returns. I ordered it on December 9th and received it on the 16th, delivered by the postal service.

There is no chance that this represents the actual cost. The cost of overseas postage alone would be much greater. It is obvious that they are willing to heavily subsidize at least some items in an effort to build market share, exactly the same strategy that Amazon did in its early days before they became a near-monopoly. If Temu manages to become comparable to Amazon, will they also start raising costs for their suppliers and customers? Very likely, if they can get away with it.

After I placed my order, Temu keeps bombarding me with emails for other offers and gimmicks for stuff I do not want or need that I immediately trash. The company clearly knows that US consumers love to buy stuff whether they really need it or not, and find it hard to resist offers that make them think they are getting a bargain.