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Breakingviews - Pinduoduo rises to China's grocery challenge

FILE PHOTO: The logo of Chinese online group discounter Pinduoduo is seen next to its mobile phone app in this illustration picture taken July 17, 2018. REUTERS/Florence Lo/File Photo - RC2N1K9SEMEA

HONG KONG (Reuters Breakingviews) - Pinduoduo is rising to China’s grocery challenge. The e-commerce company unveiled plans to raise as much as $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 $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%, or nearly 1 trillion yuan ($152 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% 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 $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 $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.

Breakingviews

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