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Amazon could continue to lose customers to Temu, its currently down by 2.6 million users

4 Mins read

Amazon could continue to lose customers to Temu, its currently down by 2.6 million user

In the battle for U.S. retail shoppers, Amazon is aiming to fend off emerging e-commerce players — such as Temu, according to the Wall Street Journal . 

When it comes to daily active user growth, the winner is Temu. Here are the numbers

  • Temu daily active user change: +51.4 million between the company’s September 2022 launch and January 2024, noted the Journal.
  • Amazon daily active user change: -2.6 million or 3.7% of September 2022 DAUs — to 67 million during the same period, the Journal wrote.Amazon and Temu aim at different groups of customers.

Amazon and Temu aim at different groups of customers. Amazon’s more upscale customers are willing to pay for its Prime service in exchange for fast, reliable delivery.

By contrast, Temu customers — who have lower incomes and are shifting to the online retailer from bricks-and-mortar dollar stores — sacrifice quality and reliable, quick delivery for a much lower price, per a post I wrote last month on Forbes.

If Amazon can win on two fields of battle — meeting the needs of target customers and matching capabilities to customer needs — the giant e-tailer can reverse its DAU decline.

However, if Temu can move upmarket in the U.S. — which the company did against Alibaba in China — Amazon’s user base could keep declining.

An Amazon spokesperson emailed, “We have not seen a decline in usage.”Amazon — which reported a 14% rise in revenue in the fourth quarter of 2023, according to CNBC — could do a better job of satisfying the needs of its customers. Amazon customer surveys have shown “a slip in satisfaction in areas such as product quality” while customers are highly satisfied with the company’s refund services for damaged or defective products, the Journal reported.

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Temu — whose parent company PDD HoldingsPDD +0.2% beat investor expectations while doubling revenue growth in the fourth quarter of 2023, according to Investor’s Business Daily — is benefiting from what the company says is its superior customer value proposition.

“It’s the balance of quality and price that consumers care most about,” Temu’s CEO Chen Lei recently said. “Recognizing this trend, we are more confident about our value proposition of more savings and better service.”

Amazon must determine whether Temu is winning over its core customers or whether the two companies are fighting over different target customers.

This raises questions such as: If Temu is winning over Amazon’s upscale customers, will those customers keep buying from Temu and leave Amazon? Or will customers buy once from Temu and return to Amazon?

Matching Capabilities To Customer Needs

Amazon’s outstanding logistics and wide product selection keep upscale consumers buying. At the same time, Temu’s attention-grabbing consumer marketing and its platform connecting consumers to low-cost Chinese manufacturers grab consumers who are highly sensitive to prices and may well keep them buying.

How Amazon’s Logistics Win And Keep Customer Trust

Amazon’s scale provides a justification for spending heavily on logistics.

“Amazon’s logistics are unapproachable,” Josh Lowitz, co-founder of Consumer Intelligence Research Partners told the Journal. “You have to have a whole lot of volume to justify the infrastructure Amazon has, so it’s going to take a long time for anyone to compete with Amazon on reliable convenience.”

Amazon’s service features customer trust, reliable shipping and easy returns. After upgrading its delivery services “to get even closer to customers and deliver products more efficiently,” the company delivered “more than four billion items [that] arrived on the same or next day in the U.S. in 2023,” the Journal noted.

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How Temu Grabs Low End Customers And Moves Upmarket

Temu’s advertising has boosted the number of consumers who are drawn to its very low prices. After spending billions of dollars on advertising, the company became the top advertiser by revenue on Meta Platforms in 2023, noted the Journal.

Temu’s low prices have opened up a beachhead in the U.S., which the e-tailer could use to move upmarket — cutting into Amazon’s customers.

Those prices are very low. Ties with 100,000 Chinese manufacturers enable Temu to offer “a wide range of goods at startlingly cheap prices, such as an electric cooking pot for $2.14, a retractable kitchen storage rack for $6.58, and a swimsuit for $6.18 with free shipping,” noted the Harvard Business School’s Working Knowledge.

While its low prices could be temporary, Temu’s permanent integration with manufacturers could enable the e-tailer to follow the two-step strategy it used to compete with Alibaba in China.

The first step was to sell its products at low prices and offer heavy promotions to win market share. After gaining a market foothold, Temu’s second step was to get profitable by “scaling back on customer acquisition, generating more advertisement fees from merchants and moving into higher-margin categories,” the Journal noted.

This second step will only work in the U.S. if Temu can keep customers buying — possibly by selling more expensive items such as “iPhones and home appliances,” wrote the Journal. U.S. and European sellers can now use Temu’s marketplace. By cutting shipping costs and introducing higher-priced products, Temu’s up-market move could take customers from “Amazon’s Chinese sellers with inventory in the U.S.,” noted the Journal.

Will Amazon Lose More Users To Temu?

Temu has exposed a vulnerability in Amazon’s strategy by demonstrating that some customers will wait longer to receive some shipments if the price is sufficiently low.

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Amazon meanwhile has not wavered from the idea that “shoppers value quick deliveries and returns and a wide selection that includes trusted brands,” the Journal wrote.

Not all U.S. consumers trust Temu. In online reviews and forums, some Temu customers have “expressed concerns after not receiving quality products. Returning items to the companies is a more complex process than on Amazon,” noted the Journal.

Could Amazon be suffering from a sunk-cost fallacy? This would mean the company invested so much in building a world-beating delivery system that it limited its ability to imagine a retail future where consumers might not place the same value on this service.

If Temu can apply the strategy in the U.S. that helped the company prevail against Alibaba, Amazon may keep shedding DAUs.

For the time being, investors seem to favor Amazon — whose stock has risen about 20% so far in 2024 while shares in PDD Holdings, Temu’s parent, are down 13%.

Investors have higher expectations for PDD Holdings stock.

Sixty-one analysts who cover Amazon set an average 12-month price target of about $208 — representing 15.6% upside, according to MarketWatch. Nine analysts who cover PDD Holdings envision a 43% increase in its stock price based on a 12-month price target of $181 a share, according to TipRanks.

Source : Forbes

 

 

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