An online marketplace that’s barely on the investor radar could turn into a big threat to some big U.S. retail names.
That’s according to a Morgan Stanley analysts, who did a deep dive into Temu, a relative newcomer that sells mostly low-priced items and is operated by China’s PDD Holdings
PDD,
A team led by analyst Edward Stanley asks clients to focus on this chart showing the speed of Temu’s disruption on the retail front via web search interest:
“Even making the simple assumption that Temu has not reached its
peak, its inflection to half of its current peak in search activity has been 4x faster than the previous record, 10x faster than H&M’s and 15x faster than Zara’s,” said Stanley and the team, in a note dated Nov. 2.
Since its U.S. launch in September 2022, Temu has expanded to 47 countries, and as of last month, its app was downloaded 223 million times, with 120 million monthly active users and 43% of those coming from the U.S., the analysts noted. It has a cohort of young, female loyal shoppers.
“With most generalist eyes still on obesity baskets, companies perceived to be challenged by a rising Temu threat – notably the legacy incumbents – could plausibly be the next challenged group of stocks the market turns its attention to,” said Stanley and the team, without naming names.
Their verdict on the parent company? “PDD is the clear winner but given the speed of disruption within retail, the team is cautious to price in too much.”
Shares of PDD are up 24% year to date, but have also been exposed to China’s choppy economic progress. Research firm Grizzly Research triggered a 5% drop in shares in September with the release of a short-selling report that called PDD a “dying fraudulent company,” and accused Temu of “cleverly hidden spyware that poses an urgent security threat to national interests.”
PDD didn’t respond at the time. Defending the company, though, Morningstar analyst Chelsey Tam said the owner of Pinduoduo — a major Chinese online retailer — has not been subject to any regulatory action, and that it would improve security of its apps should regulators raise flags. She said PDD was “the best positioned amid value-for-money consumption trends given its strong network of merchants.”
UBS also took a look at threats to U.S. retail from Temu, rivals Shein, TikTok and others in September. “They are growing fast and gaining awareness,” said analyst Michael Lasser and his colleagues.
Their research showed 83% of consumers they surveyed were aware of Temu, with 74% aware of Shein. “Still, fewer consumers have actually shopped at these retailers,” said Lasser and the team, noting that’s 34% who had bought something at Temu and 41% at Shein.
But if those cut-price retailers really start hitting home, they see Walmart
WMT,
and Target
TGT,
most at risk, as consumers they surveyed indicated they were most likely to shift spending away from those names. Dollar Tree
DLTR,
Family Dollar and Five Below
FIVE,
were close seconds.
And assuming those emerging players account for 50 basis points of U.S. retail sales, that would amount to $33 billion in revenues for Temu and the like by 2026 from an estimated $10 to $15 billion currently, said UBS. For comparison, they note that Amazon.com’s
AMZN,
North America sales for full-year 2023 are estimated at around $350 billion, or 6% of total U.S. retail sales and 25% of e-commerce sales.
Still, UBS analysts believe with rising e-commerce in the U.S., the risk is bigger to mall based retailers, meaning Walmart, Target, Dollar Tree, Family Dollar and Five Below are probably in a “better position.”
Other hurdles for those emerging retail players could also limit disruption they say, owing to long delivery times for items, as much as two to three weeks, inconsistent quality, “difficult” return experiences, a lack of physical stores and the healthy traffic seen as of late for those big U.S. retail names.
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