Recently, Pinduoduo's share price has plummeted. On August 26 alone, Pinduoduo's U.S. stock price fell by nearly 30%, also marking the largest one-day decline since its IPO in 2018. As a result, Huang Zheng, the founder of Pinduoduo, has lost his position as China's richest man. Well, Nongfu Spring's Zhong Shanshan must be smiling again.

Of course, the share price decline is directly related to the second-quarter financial report released that day. According to the report, Pinduoduo's revenue in the second quarter was 97.06 billion yuan, an increase of 86% year-on-year, but lower than the market expectation of 99.99 billion yuan. The quarter-on-quarter growth rate slowed to 11.8%. Compared with the previous quarter, both revenue and net profit growth rates declined in the second quarter.

Interestingly, Pinduoduo's management team added fuel to the fire during the earnings call, repeatedly mentioning that future profits would enter a downward trend. The company is still in the investment stage, and it is not appropriate to conduct capital-level repurchases or dividends in the coming years.

While the management's comments are objective and rational from a cautionary perspective, it cannot be ruled out that this stance has also raised concerns among investors about the "pessimistic" signals from management, leading to some investors losing patience with Pinduoduo's shareholder return plan.

Over the years, Pinduoduo has been making rapid progress, but today, with slower growth and declining profits, investors' confidence is waning, giving the impression that Pinduoduo is stepping down from its pedestal.

What is the truth behind this situation?

In recent years, we have seen Pinduoduo's rapid growth, largely fueled by its low-price strategy. However, this has come at the expense of many merchants' interests. According to various media reports, last month, nearly 200 small and medium-sized merchants from Pinduoduo's cross-border e-commerce platform Temu protested at Pinduoduo's office in Guangzhou, citing dissatisfaction with the platform's heavy fines and deductions from their payments.

Many merchants complain that regardless of whether the issue is their fault, Temu will automatically process a "refund only" for dissatisfied buyers and impose fines ranging from 2 to 5 times the payment amount on sellers. China Securities Journal quoted Pinduoduo's response as saying, "The platform does not make money from fines imposed on merchants for violations. Any fines imposed are refunded to consumers." According to a response obtained by Caixin, Pinduoduo stated that customer complaints vary widely, and it is impossible to enumerate all agreements. The platform has provided a complaint channel for merchants and a way to understand the specific reasons from buyers, and there is no lack of transparency in informing merchants about the reasons for fines.

Pinduoduo's overseas version, Temu, has rapidly expanded to 50 countries and regions, including Canada, Europe, and Australia, relying on its low-price strategy. Its remarkable growth has resulted in sales of approximately US$20 billion in the first half of 2024 alone, surpassing its full-year sales in 2023, making it the primary driver of Pinduoduo's growth over the past year.

It is evident that low prices appeal to people worldwide, regardless of nationality, race, or gender. However, the growth achieved through low prices seems to have come at a significant cost to sellers.

Apart from the impact of tactics such as "cut a deal" and "9.9 yuan free shipping" on merchants, let's consider the "auto-price matching" feature launched in May this year, which left many merchants perplexed. This feature, criticized by many merchants, automatically monitors competitors' prices and adjusts a merchant's prices downward within an authorized range to capture traffic and orders whenever a competitor's price is lower.

While this may seem beneficial to consumers, allowing them to purchase the best products at the lowest prices, it presents a challenging battle for merchants. If two merchants activate "auto-price matching" simultaneously, their products can enter a vicious cycle of price wars, eventually undercutting each other's prices to the point of incurring losses. This scenario is intolerable for merchants, akin to operating a charity store. However, merchants cannot opt out as they must participate to maintain sales, even if it means operating at a loss.

If that could be tolerated, the "refund only" policy has truly broken the defenses of sellers. This policy, introduced by Pinduoduo in 2021, allows for full refunds without reason if consumers believe there is an issue with the product.

Originally intended to eliminate inferior products and protect consumer rights, this policy has been well-received by consumers for its attentive after-sales service. Since last year, other e-commerce platforms such as Taobao, Douyin, Kuaishou, and JD.com have followed suit, making refund-only services a standard feature.

However, inevitably, some unscrupulous buyers have exploited this policy for malicious refunds. For example, some sellers report that despite fulfilling orders as required and delivering products without quality issues, buyers apply for refunds only for various reasons, and the platform often sides with the buyer, leaving sellers helpless. Furthermore, Pinduoduo imposes severe fines for merchants' violations, often resulting in merchants losing both their goods and money.

The total fines imposed on the small and medium-sized merchants who protested at Pinduoduo's Guangzhou headquarters reached 114 million yuan, making it difficult for them to continue operating. The refund-only policy has been controversial since its introduction. While the policy itself is not flawed, as consumers have the right to request refunds for poor-quality or misrepresented products, and platforms have the right to supervise and punish violations, merchants are also responsible for the products they sell. However, amid weak consumer spending and economic downturn, e-commerce platforms are engaging in intense competition, from price wars to service enhancements, with refund-only policies increasingly favoring buyers, ultimately frustrating merchants.

In recent years, mainstream domestic e-commerce platforms have shifted away from low prices and toward GMV-driven growth. While this appears to signal an end to internal competition, it is actually a necessary requirement of the industry cycle and a manifestation of ongoing competition in new forms.

For Pinduoduo, it is imperative to recognize the limitations of its current model and the equal importance of both merchants and consumers. It must strike a balance between their interests and address merchants' grievances to prevent merchant attrition. Some merchants may choose to reduce their investments in Pinduoduo or leave altogether if they perceive better opportunities and treatment on other platforms.

In practice, we observe that most sellers endure silently, with some opting to exit. For the platform, as long as new sellers continue to join, the impact of departing sellers can be mitigated.

As Pinduoduo steps down from its pedestal, senior executives emphasize the unsustainability of high revenue growth, the inevitable trend of lower long-term profits, and the sacrifice of short-term profits. While these statements appear rational, they lack introspection.

In an era of stagnant growth and declining profits, Huang Zheng, who is well-versed in human nature, may need to consider the plight of ordinary merchants who have contributed to Pinduoduo's wealth. As they struggle to survive, what more can the platform do to support them, fostering a win-win situation for the platform, merchants, and consumers alike? [End]