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A $5.93 mobile phone holder seemed like a gamble worth taking for Michelle Zhang. During the past year, she has become a regular shopper on the cut-price ecommerce app Temu, mostly purchasing home and kitchen appliances. “Things on Temu are usually less than half of their prices on Amazon, and you don’t have to purchase in bulk,” she says, “even though some cups I bought broke easily, I got refunded pretty conveniently.”
Since launching in the US in September 2022, Temu—owned by the Chinese internet giant PDD Holdings, which also operates the massive ecommerce platform Pinduoduo—has leapt to the top of app stores, largely on the back of consumers like Zhang, who lives in Texas. The mobile phone holder she bought was heavily discounted as part of “up to 90 percent off” Black Friday deals on the app, which is investing heavily in Black Friday and Christmas promotions as it tries to compete with rivals Shein and Amazon and break the American market.
Temu is now live in 47 countries. The app launched in the Japanese market in July, and entered the Middle East, via Israel, and Southeast Asia, via the Philippines, in August. By November, it had been downloaded 250 million times, according to data from the consultancy Business of Apps. The company’s strategy of deep discounting via coupons and subsidies, and of spending big on advertising, seems to be paying off, at least in the short term. At the start of 2023, Temu set itself a target of $10 billion in total sales globally. Analysis from investment management company CICC forecasts that with a successful holiday season, sales will surpass $18 billion this year.
But that rapid growth has come at a cost. Sellers say Temu is struggling with warehouse capacity as it tries to fulfill orders and process returns. And, the company is still losing a lot of money. According to the Chinese news outlet 36kr, Temu makes a loss of around 30-35 percent on each US order, and an average of 40 percent on orders globally. The company budgeted 20 billion renminbi ($2.76 billion) in net loss for 2023, now it has increased that to 23 billion renminbi ($3.17 billion), according to 36kr.
When presented with reported estimates from 36kr and other similar projections for comment, Temu representatives responded that the figures are "significantly inconsistent with the facts," but declined requests to be more specific. But a source with knowledge of PDD’s financial position, who spoke on condition of anonymity because they aren’t authorized to talk to the media, confirmed the numbers. Temu’s runaway spending has led to concerns among analysts—echoed by the company source—that the company may struggle to turn a profit from its enormous user base.
Jeff Li, a tech analyst and former director at consultancy Accenture China, thinks this is a signal of high risk: “If Temu expands to 47 countries in a year, but no country has a clear break even timetable, that would be quite dangerous.”
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Temu has spent enormous sums on trying to reach American consumers. In February 2023, Temu paid a reported $14 million for two 30-second slots during Super Bowl LVII; it is spending as much as $10 million every day to pay for advertisements on Meta and Google, according to an analysis published by Tencent.
Earlier this month, the Chinese business news outlet Latepost reported that around 9 percent of Americans have bought something from Temu. The company is benefiting from a trend in American shopping dubbed “trading down,” as consumers continue to spend, but drop down categories in search of value. In consultancy McKinsey’s Consumer Pulse Survey published in April, 80 percent of respondents had changed their shopping behavior by trading down.
In May, WIRED reported that Temu wanted to expand its demographic to attract buyers from higher-income demographics, and to increase its order sizes—which, at that point, averaged around $25. The source confirmed that the average order size in the US has increased to $37. Temu did not comment on this figure.
Upping the order sizes would increase its chances of breaking even. A significant proportion of the company’s expenses comes from international shipping, since Temu offers free delivery on almost all items as one of its main selling points.
Temu currently bears around $10 in shipping and handling expenses per package: $1 to move items from sellers to warehouses in China, $5 in shipping from those warehouses to foreign countries, and around $3 to $4 shipping to the consumers, according to WIRED’s analysis earlier this year. Analysts think that cost is likely to rise. Temu previously relied on a relationship with another startup, J&T Express, to handle a lot of its global shipping.
J&T heavily subsidized shipping for some of its clients as it chased growth, leading to a net operational loss of $ 1.39 billion in 2022. The shipping company went public in Hong Kong on October 27. According to Reuters, J&T’s initial public offering valued the company significantly below its valuation at its last funding round in 2021. With less financial firepower, and a need to turn a profit, J&T is likely to cut back on its subsidies, according to Veronica Si, a researcher specializing in ecommerce platforms. “It is almost certain that J&T Express would subsidize less, which would affect Temu,” Si says.
J&T did not respond to a request for comment.
Temu’s rapid expansion has also tested the limits of its warehouse space, according to business news site 36kr, which reported that the company maxed out its capacity in March, after its Super Bowl advert prompted a rush of orders.
Some sellers on the site say that they have found they aren’t able to ship their products because there isn’t space at the company’s premises.
“When I want to ship my products, the website either shows ‘there are too many people who want to send products over now, please try again later’ or ‘there is no address to receive inventory found,’” says Tai Shi, a seasoned Pinduoduo and Temu seller who asked to be identified by his nickname to prevent reprisals. He told WIRED that some sellers would write a computer programme to keep refreshing the website, but “even by doing so, they can only send a few out of a few dozen orders in per day”, “some of my products are selling well (on Temu), but all the momentum will die if we cannot send products over.”
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Logistics constraints already mean that often when customers ask for refunds on their purchases, they are processed without the goods being returned. Temu is reportedly planning to build two new warehouses in the United States, one on the east coast and another on the west, to ease the bottleneck.
According to a source with knowledge of Temu’s PR contracts in the US, who spoke on condition of anonymity to avoid jeopardizing commercial relationships, the company is also spending a significant amount of money on lobbying the US government to head off criticism of its supply chain in China. Earlier this year, the US House Select Committee on the Chinese Communist Party warned that there was a “high risk” that products on the site were being made by forced labor.
Despite being a subsidiary of Chinese company PDD, Temu doesn’t want to be identified as a Chinese platform by consumers, because many Americans associate Chinese companies with security risks, the source says. The US – China Economic and Security Review Commission warned in April about potential data security risks for users of the Temu app. (Li told WIRED that he downloaded the app but has never registered or purchased anything on it, “because I also worry about data security, especially sensitive personal data including delivery address.”)
Temu has also been involved in legal disputes with Shein, which last December filed a lawsuit in the US District Court for the Northern District of Illinois, alleging that Temu engaged in improper marketing practices. Temu denied the allegations. This July, Temu filed a lawsuit against Shein, claiming that Shein punished merchants for working with Temu. Both suits have since been shelved.
The two companies are increasingly competing for the same customers in the US. Shein focuses on apparel, while Temu aspires to be a much broader, full-category platform like Amazon. Growing higher-value, higher-margin categories like fashion, luggage, outdoor products, and sports equipment might help to move Temu closer to profitability, analysts say. “Right now, Temu has already lowered their net loss percent, they will do better by selling products with higher asp(average selling price),” Si says.
Chinese news outlets have reported that Temu is trying to enter Shein’s market by placing more advertisements aimed at Shein’s user groups and investing in fashion and lifestyle products. In September, Temu announced that it would hold training sessions for people working in the women’s clothing industry, to help them sell on the platform.
The sheer scale of Black Friday means that it is the focus of enormous competition between e-commerce brands. Consultancy Deloitte predicts that e-commerce sales will grow between 10.3 to 12.8 percent during the 2023-2024 US holiday season, potentially hitting $284 billion.
Last year, Temu announced itself with Black Friday deals, including offering 30 percent off users’ first orders, which helped propel it to the top of Apple’s App Store. According to conversations WIRED obtained from a Temu seller WeChat group, the platform has been laying the groundwork since August, recruiting sellers in China to prepare Christmas gifts and decorations. On November 9th, the company held a conference to help sellers prepare and plan for the upcoming Black Friday and Christmas.
This time, Temu is facing its own new challenger—TikTok shop, which launched in the US in September, and is reportedly planning to offer huge discounts to bring in new customers. That is likely to mean that both companies spend big, and lose even more money in the short term. But, ecommerce expert Li says, building a long term, sustainable business means doing more than burning cash. Temu will need to figure out how to thread the needle between keeping its prices in line with what its core demographic wants, and actually turning a profit. “The high volume caused by spending money on heavy promotion isn’t that impressive,” he says.
