Temu's Big Ad Spending Causes U.S. Retailers Pain

"Temu's rise as one of America's most popular places to shop is powered by ultracheap goods and billions of dollars of advertising, including in this Sunday's Super Bowl.

Backed by its Chinese parent, the discount marketplace has been on a shopping spree for ad space, outbidding rivals from decades-old bricks-and-mortar shops to specialty e-commerce platforms.

That is good news for Meta Platforms and Google, which are seeing revenue growth from Temu and its Singapore-based fast-fashion rival Shein. It is a wrecking ball for some U.S. retailers, threatening online marketplace Etsy and dollar stores by driving up ad prices and luring away shoppers. Lately, Temu has been gaining ground on behemoths such as Amazon.com.

Its marketing bill reached $1.7 billion in 2023 and will grow to nearly $3 billion in 2024, JPMorgan analysts estimate. Last year, Temu's marketing spending contributed to an average loss of $7 an order, Goldman Sachs estimates. A Temu representative said the idea it sells at a loss to gain market share isn't accurate, declining to give details.

Temu ranked fifth in digital-ad spending in the U.S. in the fourth quarter, up from 67th a year earlier, according to research firm Sensor Tower. Shein also rose, to 17th. Amazon, the world's largest e-commerce company, was the top spender.

In late September, the price of an advertisement to reach every 1,000 people on one webpage on Meta was up 24% from a year earlier, according to Gupta Media, an online advertising price tracker. Meta said earlier this month that China-based advertisers contributed to 10% of its 2023 sales, or about $13.7 billion, almost doubling its 2022 revenue from China. It didn't specify the advertisers.

"I think every major retailer will be spending more to acquire the same shoppers this year," said Juozas Kaziukenas, founder and chief executive of Marketplace Pulse, a business-intelligence firm.

Brooklyn-based Etsy said in December it would cut 11% of its workforce as part of a cost-saving restructuring. Chief Executive Josh Silverman said late last year that Temu and Shein were "almost single-handedly having an impact on the cost of advertising."

Analysts say Temu is disrupting U.S. e-commerce with tried-and-true tactics used by Chinese companies: earning razor-thin profits or losing money in exchange for market share and gradually squeezing out competitors.

Temu, which launched in September 2022, has deep pockets thanks to parent PDD Holdings. Its growth strategy is reminiscent of the one PDD used in China to rival Alibaba -- drawing shoppers with rock-bottom prices and extraordinary subsidies. After carving out its market share, PDD turned profitable as it scaled back on customer acquisition, generated more advertisement fees from merchants and moved into higher-margin categories.

Some analysts are skeptical. If Temu can't find a way to generate recurring revenue, the subsidies could hurt PDD's profitability, said Ivy Yang, founder of Wavelet Strategy, a China tech-consulting firm.

Also, changes in U.S. tariffs and tax policy on imports may hinder its prospects. The sheer volume of low-cost goods it sells overseas could trigger antidumping investigations in the U.S. and the European Union, Yang added.

The Temu representative said the company "competes fairly" and complies with laws.

Temu is now the second-most popular shopping app in the U.S. as measured by monthly users, behind Amazon. In the last three months of 2023 -- when its digital ad expenses increased more than three times, according to Sensor Tower -- users were up 950% from a year earlier.

There are signs that Temu's voracious ad buying is taking shoppers from other retailers. A study of more than a half million Dollar General shoppers found that their spending at Temu in December was 10% of their total spending, up from 1% a year earlier, according to market-research firm Earnest Analytics. During the same period, shares of their spending at Dollar General and Dollar Tree both declined.

Temu's Chinese sister platform Pinduoduo, launched in 2015, spent more on marketing than the sales it brought in as it took on e-commerce giants Alibaba and JD.com. It first attracted buyers with low-cost toilet rolls and unbranded socks and now sells big-ticket items including iPhones and home appliances.

Temu hasn't yet made a dent on Amazon, analysts say. But as it grows, "it is a threat Amazon needs to watch," said Neil Saunders, a retail analyst at research firm GlobalData." [1]

1. EXCHANGE --- Temu's Big Ad Spending Causes U.S. Retailers Pain. Shen, Lu.  Wall Street Journal, Eastern edition; New York, N.Y.. 10 Feb 2024: B.9.