Last year was pivotal for Pinduoduo (PDD 2.80%), an up-and-rising e-commerce platform in China.
After delivering its first operating profit in the second quarter of 2021, the company sustained its profitability in the next two quarters. It also grew revenue (excluding merchandise sales) by 28% year over year in the fourth quarter of 2021.
But there's more to these headline-grabbing numbers. Here are some major takeaways for the company in 2021.
Image source: Getty Images.
Pinduoduo's 2021 performance
Pinduoduo was an unexpected player in China's e-commerce industry. When everyone thought the industry had settled with two players, Alibaba (BABA 0.59%) and JD.Com (JD 6.12%), the social e-commerce upstart came from nowhere to become a top-three player, rivaling Alibaba in terms of active buyers.
The company continued its winning streak in 2021. To start, the young tech company grew gross merchandise value (GMV) by 46% to 2.4 trillion yuan ($383 billion). The revenue growth came in even better, up 58% year over year to 93.9 billion yuan ($14.7 billion) due to an increase in GMV and better monetization.
Pinduoduo delivered another milestone in 2021 with a full-year net profit of 7.8 billion yuan ($1.2 billion), a turnaround from a loss of 7.2 billion yuan in 2020. The net profit bolstered the e-commerce company's already solid balance sheet -- cash, cash equivalents, and short-term investments reached 92.9 billion yuan ($14.6 billion) as of Dec. 31, 2021.
Users are becoming more loyal to Pinduoduo
There has never been a lack of criticism around Pinduoduo's business model. One of the biggest complaints was that Pinduoduo's excessive sales and marketing spending -- through subsidies and discount vouchers -- was unlikely to be sustainable in the long run in retaining users. Skeptics argued that users who came because of those discounts would leave when the tech company reduced its subsidies.
While the argument is not baseless, there are signs that Pinduoduo is gradually proving the cynics wrong. User spending has been growing year after year. Annual spending per buyer was 1,127 yuan in 2018, but it reached 2,810 yuan by 2021. Higher spending per user indicates that customers are coming back to Pinduoduo and consuming more over time.
Another thing to note is that sales and marketing costs grew only 9% in 2021 when average spending per user rose by 33%. Sales and marketing costs fell by 23% year over year in Q4 2021 and were slightly lower than the third quarter.
In short, there are early signs that Pinduoduo is winning customers' trust -- which explains their willingness to spend more even as the tech company scales back on its sales and marketing activities.
What is next for the company
Historically, Pinduoduo has relied on user growth to propel its business expansion. But as the company's annual buyers hit close to 900 million, the focus will inevitably shift to user retention and improving user spending.
To this end, the e-commerce company is adding new features -- such as short videos and new games -- to its app to improve user engagement. Going forward, investors should keep a close eye on user spending in 2022. A sustainable increase in user spending will indicate that Pinduoduo is moving in the right direction.
Besides, Pinduoduo is betting that the digitalization of the Chinese agricultural sector will be the next growth frontier. It is actively positioning itself to ride on this growth, which includes helping farmers expand their reach to the market, developing smart agriculture technology, and bringing more tech-savvy young people into the sector. With its 10-billion-yuan investment plan, the tech company is betting that agriculture will lead it to a new high.
