By
Bloomberg
Published
Feb 17, 2024
The business of selling cheap odds and ends online might prove to be just as short-lived as a polyester sweater from a fast fashion company.
After years of decline, ContextLogic Inc. announced this week that it sold the buzzworthy discount marketplace Wish to Qoo10 Pte. Ltd., an e-commerce platform serving Asia. Wish was let go for $173 million in cash — just a fraction of thefully diluted valuation of $14 billion it reached at the end of its first day as a publicly traded company in December 2020.
The sudden decline of Wish, going from an e-commerce force to a clearance-priced business, should serve as a warning for up-and-coming online discounters, particularly PDD Holdings Inc.’s Temu. Its strong advertising game, including during the Super Bowl, may have everyone talking, but the long-term success in selling a mishmash of cheap stuff online can be unsustainable.
When Wish was founded in 2010 by Piotr Szulczewski and Danny Zhang, the goal of selling online goods to value shoppers tapped into Americans’ love of bargains. And by cutting out the middle man and directly shipping orders (albeit slowly) from manufacturers in China, the company was able to offer low prices on its wares. It expanded its customer base through social media marketing, reportedly spending $100 million per year on Facebook ads at one point. The year it went public, it had 107 million monthly active users and $2.5 billion in revenue, a 34% jump from the year before. It seemed unstoppable.
A closer look at its finances shows the company was coming apart at the seams. At one point, Wish was losing $190 million a year and said it would be profitable if it weren’t spending so much on marketing. Its hefty advertising budget aside, Wish lost consumers who were turned off by their shopping experience. Some shoppers complained about receiving products that didn’t match descriptions or delayed shipping times. The quality issues caught the attention of French regulators a couple of years ago after they found some Wish products were dangerous, including electronics that caused electric shocks and jewelry that had alarming levels of lead and cadmium.
By the time the company began improving its product quality and delivery times, it was already the butt of jokes — the “wish version” of something or someone is now part of our lexicon — and competitors with a similar shipping and cost model took hold of customers’ attention. Shein Group Ltd. led this wave, going from an obscure Chinese fast fashion site founded in 2008 to an online retail powerhouse now reportedly seeking as much as a $90 billion valuation in a US initial public offering. With such jaw-dropping numbers, it’s clear why PDD Holdings followed suit and launched Temu in the US in 2022.
Moving in on Shein’s territory won’t be easy. It has the upper hand with shoppers via the massive clothing hauls that have become viral on TikTok, racking up billions of views. In a marketing gift that keeps on giving, fashion and beauty influencers try on hundreds of dollars worth of clothes, shoes and accessories from the retailer. While people do hauls for Temu too, the Shein videos have become their own trend, giving the company the advantage of earning views — on posts they’ve paid for and the ones done for free. The average cost for a paid TikTok post was roughly $2,700, according to a report published last year by influencer marketing analytics firm Izea. Either way, the influencer route sure seems like a more cost-effective strategy compared to Wish’s $100 million social media spending.
Already, Temu is making similar conventional ad investments that doomed Wish. Just take Temu’s marketing strategy during the Super Bowl. It ran six 30-second spots during football’s premier event that went for $7 million each. Break out the calculators and do the math, and you’ll see that, similar to Wish’s early years, Temu has been pouring money into marketing.
At the same time, it’s also facing some of the same quality concerns. Temu customers have complained that when they open their order, the product is sometimes damaged or wears out quickly. Shein faces similar criticism, but the company has been able to leverage its popularity and partnerships with influencers to drown out much of the carping. Temu doesn’t quite have that same grip over shoppers.
For now, it might be able to afford its ads and promotions, but that can lead the company down a dangerous path where marketing spending to acquire new shoppers eventually outpaces profits.
All of this without a guarantee that it will pay off. A Morgan Stanley report of Alphawise data found the number of households who shopped at Temu fell to 21% in January from 27% in September when it first began tracking this data. Temu’s US web traffic and visitors have also “remained flattish,” the analysts wrote in their January note. During the critical holiday season between October and December, Temu’s total US visitors increased by 11%, which is less than the 13% growth in total e-commerce visits. That isn’t the kind of impact you’d want to see after a year of non-stop ads.
As Temu continues to try to dominate the world of cheap retail, it’s smart to keep an eye on Shein and try to replicate its success. The other eye, however, should be on the mistakes of Wish and avoiding unnecessary spending that could cause it to find itself being sold at a bargain one day, too.
