Pinduoduo (PDD 18.08%) is an unusual company. Founded in 2015, the company took only a few years to become the second-largest e-commerce platform in China (by active buyers), behind Alibaba (BABA -1.02%). But as the tech company entered the limelight thanks to all its success, the founder stepped down to pursue his other interests.
Another unusual decision that Pinduoduo took was to invest heavily in the agriculture industry. For example, the company plans to allocate 10 billion yuan of its profits (starting from the second quarter of 2021) to enhance productivity and promote sustainability of the agriculture industry. But why agriculture? Here are two potential factors that likely contributed to that pivot.
1. Agriculture products are great for user retention
In China, the e-commerce industry is very competitive. On top of the three major players, namely Alibaba, Pinduoduo, and JD.com, countless smaller players such as Vipshop and new entrants like Douying and Kuaishou are all eyeing a share of the e-commerce market.
As such, users (and their time) have now become the limiting factor for e-commerce companies, which is very different from the early days of Alibaba. In those days, the platform that had the most products would win. Today, platforms must offer much more -- low prices, entertaining shopping experiences, convenience, and other enticements -- to attract and retain users.
Pinduoduo has kept users returning by offering low prices. But investors have generally not given enough credit to its focus on agriculture products, which has contributed enormously to its user engagement.
The idea is simple: Fruits and vegetables are a daily necessity for almost all users -- this is even more so as many of Pinduoduo's customers live in rural areas. On the Pinduoduo platform, users can find many fresh products at low price points. And after placing their orders, users can either wait for them to reach their homes or get the products sent to a nearby store for collection the following day.
By providing a low-priced, large produce selection conveniently, Pinduoduo keeps users coming back. They come to Pinduoduo for fresh food, to shop around, and pick up other items.
2. Pinduoduo is an early mover in this industry
The agriculture industry in China is massive, employing an estimated 25% of the population. Yet the online penetration for agriculture sales was less than 7% in 2019, much lower than the 23% penetration of all physical goods.
Agriculture is one of the most challenging industries for e-commerce to penetrate. Most farms in China are small, with less than two hectares, and are scattered geographically, making standardization and economics of scale hard to achieve.
Still, Pinduoduo has some early success in this industry thanks to its experience running Pinhaohuo, an online fruit business. In its early days, the tech company's business was buying fruits in bulk and selling them directly to consumers online. Staff had to source, inspect, and purchase fruits directly from farmers; transport the produce to warehouses; and fulfill customer orders. The original business did so well that the company eventually transitioned to its current marketplace model to enable more farmers to sell directly on its platform.
Unlike its competitors, which are mainly focused on manufactured products, Pinduoduo's early experience gave it significant exposure to the agriculture supply chain in China. It will take a lot of time (probably years) and plenty of investments for competitors to catch up. It is even tougher now that Pinduoduo has decided to bet the ship. If Pinduoduo can maintain its lead in the agriculture industry, it has a good chance of building a sustainable business in the long run.
A bumpy ride ahead
Pinduoduo's aggressive pivot into the agriculture industry makes a lot of sense, particularly in the context of the Chinese government's priorities. Still, there is no guarantee that the move will be successful.
First, the competition will be intense. Incumbents like Alibaba and JD will try to build their agriculture e-commerce businesses. Besides, the biggest food delivery company, Meituan, has also made massive bets on the agriculture sector.
Pinduoduo is investing heavily to capture the opportunity, allocating 10 billion yuan to its agricultural initiative program to develop the farming industry in rural areas. It's still too early to tell whether these investments will deliver a positive return over the long run.
Ultimately, investors should watch how the agriculture business evolves within Pinduoduo and helps it bolster its moat in this competitive field.