Black Friday videos of shoppers busting through doors to fight each other for discounted TVs used to be a staple for US news networks this time of year. But behind the phenomenon of Black Friday pandemonium is an open secret in the retail industry: high markups. Retailers routinely charge at least double the wholesale price – a practice known in the industry as “keystone pricing” – to ensure a profit after accounting for costs like rent, labor, and marketing.
American retail executives on a fact-finding trip to China came across an apparel factory that produced $9 sports coats for an American brand, which then sold them for $500 each. The factory also sold a variation of the sports coat online for $90 and still made a good margin. The executives realized that massive disruption was coming to retail. The business model of relying on a brand name to justify charging 10 to 50 times what the products cost to make is on its way out. Factories that used to produce merchandise for some of the world’s best-known brands have hired in-house engineers and designs and now offer original designs for brands to re-label. They are also going direct to consumers with their own private labels through e-commerce and winning converts.
Temu, the US online marketplace started by PDD Holdings, is one of the champions for such manufacturer brands. With PDD Holdings’ network of more than 11 million suppliers, Temu has access to some of the world’s top manufacturers that offer original equipment and design manufacturing to the world’s best-known brands. By offering generic “white label” brands of identical or comparable quality at much lower prices, Temu is essentially offering consumers the choice of paying $9 instead of $500 for the sports coat. For general merchandise where branding plays a lesser role in consumer decisions, quality and price may be enough to persuade consumers to give lesser-known brands a try.
Launched in September, Temu keeps its strategy cards close to its chest. PDD Holdings Chairman and CEO Chen Lei said on the company’s third-quarter earnings call that with Temu, the group will “start from the fundamental needs of consumers and apply the operations and supply chain know-how that we have gained over the years, and strive to create our own unique value.” He also reiterated the need for constant experimentation and counseled patience, saying Temu will strive to create “long-term value” for its consumers and partners. Selling cheaper generic brands to value-savvy consumers is the first part of the equation. To truly create value, Temu would have to work with manufacturers to reduce the guesswork in product development and consistently create hit products.
PDD Holdings, which also operates the Pinduoduo e-commerce marketplace, has helped to incubate nearly 1,000 factory brands through technology since its founding in 2015. The group has used its pioneering “team purchase” to band consumers together to purchase items, enabling it to consolidate diffuse consumer demand and direct it to manufacturers to produce to specification. “We have leveraged digital technology to shorten the product development cycle, and help manufacturers create products that closely match market needs. This can help manufacturers to build their brands,” said Chen.nIf Temu can take its “Next-Gen Manufacturing” approach and apply it at scale, it could go a long way toward solving one of retail’s biggest headaches.
One of the biggest reasons retailers have to mark down their wares and hold “end-of-season” doorbuster sales is that they misjudge demand. From ordering the wrong toys to having too few of the right sizing or color, all of the costs of this mismatch in demand and supply are eventually borne by the consumer. If Temu can successfully deploy digital technology to improve the efficiency of matching demand and supply, the reduction in unsold inventory will lead to lower consumer prices. A marketplace with products that consumers want would also give them a reason to return. By marketing Temu as a shopping destination where “Every day is Black Friday,” it is telling consumers they don’t have to wait all year to trample over each other to get a discount.
Presented by: George Nellist