Shares of China's biggest e-commerce companies - Alibaba (9988.HK), JD.com (9618.HK) and PDD Holdings (PDD.O) - were dumped earlier this week on worries about pressure on their margins after low-price vendor PDD pledged to invest more for offering discounts.
The three firms sell everything from beauty products, household items, electronics and food to hundreds of millions of people each month and are seen as barometers of Chinese consumer sentiment.
But since 2021, as COVID-19 and a lacklustre economic recovery, combined with the prolonged property market slump, hammered consumer confidence in China, the three have seen their fortunes diverge.
The biggest winner over that period in terms of revenue growth and market capitalisation gains has been PDD, which operates discount focused platforms Pinduoduo for the domestic China market and Temu internationally.
Belt-tightening consumers have flocked to Pinduoduo's cheap electronics and affordable clothing basics, as they substituted more expensive items for unbranded versions.
But this week, PDD's surprise miss of analyst estimates for quarterly revenue (even after posting an 86% growth in revenue and beating profit estimates) was enough to see some people question whether even low-price consumption in China was starting to suffer.
"The domestic demand picture will probably not change much in the coming months," said M Science analyst Vinci Zhang. "Despite China's government saying that they're committed to boosting consumer spending...they are failing to address the core problem, which is weak household income."
Alibaba and JD.com too have struggled to find significant revenue growth in recent quarters, with a revenue base much higher than PDD's. But they have, to some extent, stemmed the market share bleed in favour of Pinduoduo by focusing on value-for-money offerings.
Although PDD's revenue is less than half of Alibaba's and just one third of JD.com's, PDD's lean structure of relying heavily on third-party vendors has allowed it to enjoy better margins.
PDD's operating margin is the highest at 34% among the three, followed by Alibaba's 15% and JD.com's 3%, as it has a comparatively small team of just 17,400 employees. By contrast, the Alibaba Group has a workforce of around 200,000 and JD.com's workforce stood at 517,000 including 355,000 delivery personnel.
According to Jacob Cooke, CEO of e-commerce consultancy WPIC Marketing + Technologies, Pinduoduo's strength continues to be focused on unbranded goods. But low price alone might not be enough to engender customer loyalty in an environment in which everyone is now offering rock bottom prices.
"While there’s been a lot of noise around aggressive discounting from PDD’s competitors, we’re now seeing JD.com, Douyin, and Alibaba lean in more on their own unique competitive advantages - namely that these platforms are stronger in higher-value branded goods, customer service, and content-driven commerce," he said.
