Race to the bottom? Temu takes on Shein worldwide

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By Junjie Wang

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Chinese cross-border e-commerce giants Shein and Temu operate different business models, but they share some things in common — their products are ultra-cheap and their appeal is global.

Temu is a marketplace app that serves as a platform for third-party sellers while Shein retails its own developed products. Both players have found huge traction in international markets, boosted by the cost-of-living crisis hitting consumers hard in many countries. However, the path ahead may be more challenging as multiple issues mount up — from product quality to alleged intellectual property infringements and concerns over the impact on the environment.

For the moment, the figures are impressive. According to estimates from Business of Apps, a global app industry information platform, Temu could hit $1 billion monthly GMV by the end of 2023, compared with Shein’s GMV of $30 billion in 2022. The Shein app was downloaded 200 million times in 2022 in the US, making it the most downloaded shopping app of that year. This year, Temu has hit 100 million downloads, the majority in the US.

While Shein was founded 15 years ago, Temu is a newcomer, launched in September 2022 by Chinese e-commerce giant PDD Holdings, owner of Chinese online retailer Pinduoduo.

The battle for dominance is fierce. Temu and Shein have filed lawsuits against each other in the US, citing alleged violations of antitrust laws. Other Chinese operators want in: TikTok is investing in TikTok Shop, while Alibaba’s Aliexpress has increased investment in overseas markets.

Temu entices customers through games and incentives. When you open the app, what catches the eye is not a product catalogue but a pop-up window that proclaims, “Spin to Win $100”, prompting the user to “spin” to win a $100 coupon. New customers are encouraged through a “first pick bonus for new users” and a “first order allowance”. Prices of first-order discounted items are all less than $10. Discounted product categories are broad, ranging from mobile phone chargers to fashion accessories.

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The exceptionally low prices are the big attraction. Ivy Yang, founder of Wavelet Strategy, a strategic consulting firm, says: “Low prices attract customers to buy household necessities and small commodities that satisfy shopping desires… especially [at a time of] declining purchasing power in North America.”

Can Temu overtake Shein? Jacob Cooke, co-founder of WPIC Marketing and Technologies, a marketing agency, highlights the differences between the two companies. “Temu provides the cross-border infrastructure and marketing spend to facilitate Pinduoduo merchants selling abroad,” he says. “Shein spends huge sums of money to research and develop its own products and brands — its success is based on this kind of immediate product research and development.”

Contrasting with Shein’s self-operated model, Temu enables third-party merchants to sell on the platform. It has recently opened up to local merchants in the US, further broadening its goods offer.

Temu’s user growth is linked to heavy conventional advertising spend rather than viral social media marketing. It has a close relationship with Meta — according to Meta data, in August alone, so far, Temu has placed more than 8,000 advertisements across Instagram, Facebook and Whatsapp. Shein tends to rely more on viral word-of-mouth marketing from its community, benefitting from KOLs on platforms including YouTube.

Both companies draw heavily on the allure of TikTok in user content operations and algorithm recommendation. Shein collects user data to customise users’ homepage item recommendations and optimise search results. Temu has a ‘For You’ list, similar to TikTok, on its app. Its single product recommendation page is based on user search and click results.

Wavelet Strategy’s Yang is sceptical about Temu’s strategy to sell many of its products at a loss, with heavy discounting in the US that is intended to build market share as rapidly as possible. She points out that Shein (which has been selling in North America for nearly a decade) has a more stable setup. “Although [Shein] has also encountered IP and environmental protection issues, its core business is not driven solely by massive capital investment and subsidies,” she says. “With Temu, in the United States, the average loss on each order is $30. This strategy, driven by heavily subsidised sellers and consumers and widespread social media advertising, is clearly not sustainable in the long run.”

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Logistics is another challenge. In the US, Temu uses only third-party providers such as USPS, UPS and DHL. It has not created its own storage and distribution base in the US. While this asset-light model has been adopted by most Chinese cross-border e-commerce companies, including Shein, in the long term it’s a precarious approach. Also out of the control of both companies is the threat of long-term geopolitical risks if US-China trade relations further deteriorate. Both Temu and Shein have, so far, evaded customs scrutiny in the US by shipping only small packages, worth less than $800, which are exempt from review. However, a recent report by the US House Select Committee on the Chinese Communist Party raises concerns about the exploitation of this loophole.

The deep discounting strategy of Temu is likely to come at the expense of profits. Its contribution to PDD’s Q1 revenue of RMB 37.64 billion ($5.2 billion) was not shared by the parent company, although executives stressed that the business remains in its early stages and its contribution to overall revenue is “small”.

How sustainable is all this? Both Shein and Temu may face a consumer backlash in an era of concern over the environmental consequences of production of huge volumes of cheap products. That’s not all. “Many problems lurk behind the rapid development of Temu,” suggests Wavelet Strategy’s Yang, who highlights warehousing issues, product quality problems and alleged intellectual property infringement concerns. Heavy spending on advertising in the US by Temu has had mixed results. A Super Bowl ad, worth an estimated $14 million, that ran earlier this year was ranked second to last by viewers according to a poll by USA Today. Suppliers are also reported to be unhappy at bearing the loss of returned goods and sharing shipping costs.

Temu needs to deepen its understanding of the international business environment and communicate effectively with policymakers and customers as well as the media, says Yang. “Temu will face the challenges Alibaba and Shein faced, whether it be platform governance, intellectual property issues, product quality or security issues. Short-term success does not allow it to sit back and enjoy the benefits — the road to global success has a long way to go.”

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