Collateral Damage — Stray Bullets from the Temu vs Shein vs Amazon Wars
The online retail industry is witnessing a seismic shift as Amazon, Temu, and Shein assert their dominance, reshaping the landscape and leaving traditional players scrambling to adapt.
This short read is about the consolidation of market power in retail.
Wars do not typically have win-win outcomes. The war between Temu and Shein has a win-lose outcome. The winner, most likely Temu, will proceed to take on Amazon. This second war will have win-win outcomes. If they fight hard, they both win. The losers will be everyone else trying to sell everything else that these two (Temu & Amazon) sell.
Amazon, the leader by a thousand miles, tries to sell everything (The Everything Store). Temu, the challenger, tries to sell anything (The Anything Store).
We are trained to view consolidation as a result of one thing and only one thing; M&As. Well, consolidation can also arise out of wars. The war between the Leader and the Challengers results in the consolidation of market power.
Retail is a ruthless space. The war between the China-based direct-to-consumer e-commerce players and Amazon is a war of dominance. But in this war, it’s not just the warring parties who feel the impact —there is collateral damage. Some regular retail folks caught in the crossfire suffer the most. They’re not the targets, just casualties of a war they never signed up for.
In the end, both Amazon and Temu could survive and thrive as competitors, since their war takes out a lot of players in the space. Brick & Mortar stores are up for some serious competition. It's a real race to the bottom. How do you compete with companies selling everything at a price that is way lower than yours, and are at times willing to give away free stuff just to gain market share?
Most analysts in the US are quick to dismiss Temu as a serious contender because of the quality issues. They don't think that maybe, at this stage of conquering a market, quality is not so relevant. If you are giving away free stuff to get attention, you might as well not be concerned with the quality. Their goal, for now, is to get to the required scale, and they are doing so by force.
If Temu makes a strategic decision to improve on the quality dimension, it will be right up on the edges of Amazon’s turf. If they improve on delivery times for some frequently purchased stuff, they will camp right into Amazon’s territory forcing the latter to fight on the price front as well (instead of being a higher-priced Temu, Amazon chooses to be just like Temu in an attempt to kill Temu).
These two giants (Amazon & Pinduoduo) can sustain a protracted price war, the other players are either unwilling or unable to do so.
Who are these other players? It's anyone else selling anything else that targets the consumer, from clothing, hardware, homeware, craft, electronics, etc. These are the last remaining departmental stores, dropshippers, smaller e-commerce websites, shops at the malls, etc. This is basically, everyone else.
Whilst we will get intrigued and fascinated by Amazon vs Temu, as the war unfolds over the next decade, the reality is that we should be viewing this as Amazon & Temu vs Everyone Else (by this I mean every other retailer).
Taken together Amazon and Temu are all-encompassing. They are selling all consumer goods other than groceries. The two are collectively exhaustive and very competitive.
For illustrative purposes let's say before a full-blown war, Amazon has $500 bn in e-commerce revenues, and Temu has $50 bn. The combined total is $550 bn. After a protracted war, Amazon could be at say $700 bn whilst Temu will be at $300 bn. This will be a win-win situation. But how does that happen?
By fighting against each other, the two expand the market. They bring online a lot of transactions that were happening outside of these platforms onto these platforms.
The resulting combined revenues of say $ 1 trillion represent insane market power consolidation within e-commerce part of retail sales.
And it won’t stop there. The bigger they become, the better they become at deploying advanced AI in operations, attaining ridiculous delivery efficiencies, and insane unit economics. They reach a scale where economists expect diseconomies of scale to creep in, but then advanced AI comes to the rescue, proficient at managing scale.
E-commerce only makes up 15% of retail sales. A war between Amazon & Temu will drive this metric up.
We could see another sharp up move on this graph, similar to the Q1 2020 pandemic vertical line.
Ciao!
