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Pinduoduo rises to China's grocery challenge
[HONG KONG] Pinduoduo is rising to China's grocery challenge. The e-commerce company unveiled plans to raise as much as US$6.1 billion partly to expand next-day delivery for fresh produce. Competition is fierce and building out logistics will be costly, but its model of matching farmers to shoppers could give it an edge over rivals. And boss Chen Lei has successful experience as an underdog.
The US$177 billion company is striking while the iron is hot with both equity and convertible bond offerings. Pinduoduo's shares have more than tripled this year and it recently turned its first adjusted quarterly net profit since going public in 2018. Annual active buyers have reached over 730 million, just shy of Alibaba's 757 million.
It now plans to expand its business operations and invest in new warehouse service providers, and delivery fleets for cabbages, apples and other produce. Duo Duo Maicai, the self-pickup service it started in August, may contribute 15 per cent, or nearly one trillion yuan (S$203.22 billion), of Pinduoduo's gross merchandise value, the total value of goods it sells, by 2025, according to JPMorgan analysts.
Though a low-margin business, the sheer volume represents a tantalising opportunity. The proportion of China's grocery shopping done online will swell from 20 per cent to half in five years, Goldman Sachs reckons. That's equivalent to 260 million orders daily. Deep-pocketed operators with supply-chain expertise in a fragmented industry suggests a costly battle is brewing.
Behemoth Alibaba, which runs supermarket chain Hema, said last month it would invest US$3.6 billion to buy control of hypermarkets operator Sun Art Retail. JD.com, which owns 7Fresh, is also experimenting with collective orders known as community group purchasing.
There is a lot to play for, though. Pinduoduo brings a proven ability to spur demand for fruit and vegetables directly sourced from growers, effectively eliminating the middleman and cutting layers of distribution. That has also allowed it to sell fresh food at cheap prices, undercutting competition. Last year, its customers placed orders for about US$21 billion of agricultural products.
What's more, Pinduoduo has proven it isn't intimidated by China's e-commerce giants. In five short years, it became a formidable challenger to Alibaba by targeting the country's more rural regions. It may pull off a similar feat again.
Chinese e-commerce company Pinduoduo said on Nov 18 it would raise US$6.1 billion in convertible notes and equity, including the overallotment allocated to its underwriters. The company was targeting a Nov 20 completion, but had not confirmed the final details as of Nov 30.
It offered a US$1.75 billion convertible bond due in 2025 and priced 28.7 million American depositary shares (ADS) at US$125 each.
The company will sell an additional US$250 million in notes as well as 4.3 million ADS if the so-called greenshoe option is fully exercised.
Pinduoduo said it plans to use the proceeds to strengthen its balance sheet and make strategic investments in infrastructure, expand its business operations, make future acquisitions and enter partnerships.