HONG KONG (Reuters Breakingviews) - China’s Pinduoduo is in for a long fight that may now have multiple fronts. The e-commerce startup lost nearly $11 billion of market value on Wednesday after reporting a bigger quarterly loss than shareholders were anticipating. The rising cost of wooing consumers is to blame, as it takes on Alibaba in bigger cities.
Four-year-old Pinduoduo more than doubled sales in the three months to September, to 7.5 billion yuan ($1.1 billion) from a year earlier. Operating expenses also ballooned, dragging the company further into the red. Its adjusted net loss for the quarter nearly tripled to 1.7 billion yuan.
The spending caught investors off-guard and Pindudouo shares tumbled by a fifth. Boss Huang Zheng stressed that his company was ploughing funds into marketing, subsidies, and promotions to grow its so-called active customer base, which now stands at 536 million. He also blamed unnamed “dominant” rivals for forcing brands and merchants to choose between shopping sites.
Alibaba makes for a likely target of Huang’s criticism. His outfit now chases many of the same Chinese consumers as its 20-year-old rival. Known for its Groupon-like app that allows shoppers to band together for discounts on everything from fresh fruit to lipstick, Pinduoduo’s rapid growth came mostly from less urban areas. It is now eyeing higher-spending customers in wealthier metropolises, where Alibaba dominates with its Taobao and Tmall sites. Average annual spending per user in so-called tier one cities, including Beijing and Shanghai, is roughly three times more than Pinduoduo’s overall average.
Pinduoduo is betting that generous subsidies for such upscale products as Dyson hair dryers and Apple iPhones will help it get bigger. To that end, Huang has turned to the market: since raising $1.6 billion in an initial public offering in July 2018, the company already has followed up with a $1.4 billion secondary offering, and more recently, sold $1 billion in convertible notes.
Until Wednesday’s selloff, the company’s shares had more than doubled over the past year. Even so, the slide suggests not everyone will have the patience for a protracted fight with a goliath like Alibaba. Tech investors are rethinking the balance between growth and profitability, spurred in part by many SoftBank-backed ventures. That could make Pinduoduo’s strategy an even tougher sell.
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