Photo: Prof. Dr. Christopher Tripp

Temu offers experience-oriented demand creation that does not exist yet on European platforms

“The Temu app was at the top of the download charts last year with over 300 million downloads worldwide in almost all major countries - with the exception of China and India. In the Chinese home market, Temu faces intense competition from Alibaba, and many other aggressively priced platforms," says Prof. Dr. Christopher Tripp.

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In this exclusive interview, Prof. Dr. Christopher Tripp talks about how the platform managed to conquer online retail in Germany and what long-term consequences this will have for German retailers.

Natalia Jakubowska, Trans.iNFO: The big boom in e-commerce in Germany seems to be over for the time being. According to the latest figures from bevh, gross sales of goods for the whole of 2023 are in double digits for the first time, up 11.8 percent to 79.7 billion euros, after 90.4 billion euros fell the year before. Why is that? Is it actually just the poor economic situation that is driving away the willingness to buy?

Prof. Dr. Christoph Tripp, Professor of Distribution and Trade Logistics at the Nuremberg University of Technology: No, such developments must always be taken with a pinch of salt. It is true that inflation and energy price increases in recent years have reduced households’ disposable income in the short term and led to real wage losses.

One can speak of a pronounced “consumer triage” in which customers shop across all product ranges in a more targeted manner and in a more price-sensitive manner. At the same time, the numerous European and global trouble spots lead to uncertainty and general reluctance to buy. In addition, there were certain, albeit small, shift effects from online trading, which grew sharply during the Corona pandemic, to brick-and-mortar retail.

One interesting final aspect of note is that B2C parcel volumes increased in the 2023 Christmas peak, while sales in online retail fell. The reason for this is probably the smaller shopping baskets, but also the increasing role of international platforms. So growth isn’t gone, it’s just somewhere else! In the long term, the shift from brick-and-mortar sales to online retail will continue, albeit more slowly than in recent years.

Two years ago, the Statista study Digital Market Outlook 2022 predicted that Germany would become the number one e-commerce nation by 2025. Is that still possible?

E-commerce sales in the USA are around 100 times higher than those in Germany. If you compare the Chinese online market with the German e-commerce market, the differences are even more extreme by a factor of 300 (!).

However, what is relevant when considering the strength of the e-commerce market is not the sales or online sales shares of total retail sales (these are at a comparable level in the USA and Germany at around 15%), but rather the technology competencies, the degree of innovation and the future viability of the business models. Although there is a mature e-commerce market in Germany, there are only a few German companies with international relevance.

There is a lot of talk these days about merging online retail and brick-and-mortar stores. How can you create meaningful synergies between digital and stationary retail – without both channels cannibalizing each other?

The merger of brick-and-mortar and online retail is primarily not about competing channels, but about the customer. With Generations Z and Alpha, demand generation is already taking place intensively via social commerce, social media apps and increasingly in the metaverse.

In the future, a “channel doesn’t care” setting will determine customers’ purchasing behavior. Retailers must become “fit” for omnichannel retail, in which the sales channels are technically and organizationally integrated. According to the motto “customer before channel”, it is about focusing on the customer and not on the feasibility and optimization of your own organization.

Technologies are an essential “enabler” for resolving the tension between efficiency and customer focus. Retailers who are successful in omnichannel have long been offering connecting service options such as Click & Collect, Return in Store or cross-channel customer programs.

But that is not enough, because omnichannel must be thought of holistically. This primarily includes harmonized IT architectures, integrated logistics systems and appropriate incentive systems for branches and employees (especially in structures with independent retailers) in order to successfully operate omnichannel concepts.

Chinese online providers are becoming increasingly popular in Germany. For example, the Temu app is very well received by end customers in Germany. What is behind the success?

Temu follows a so-called “factory-to-consumer” approach. This means that the platforms distribute their goods directly from the manufacturer/distributor in China to customers worldwide via fulfillment centers and air freight transport. The company therefore foregoes further trading levels (cut out the middleman).

Temu and Shein are not typical shopping apps or pure social media applications, but are combinations of both in the form of so-called social media commerce platforms. Temu consciously relies on a mixture of social media-initiated demand creation (e.g. massively via Tiktok), playful shopping (the so-called “gamification”) and an intelligently launched snowball principle (via so-called “affiliate codes”). Data from the US shows that all generations across all income groups are targeted by and order from Temu.

But how is it possible to deliver products to Germany so cheaply?

The prices negotiated with the manufacturers are wholesale prices, which are approximately 50% lower than the actual sales prices. By leaving out further trading levels (cut out the middleman), these prices are sold to end customers with a small markup (so-called “take rate” or commission of the platforms, which is currently still well below the usual market conditions of 15-20%).

In the USA there are estimates regarding Temu that there is a loss of around US$ 5-10 per shipment. So at the moment it’s more about brand building and market displacement than about quick profitability. Experts in the USA assume a 6-year plan for Temu to reach profitability (Amazon needed around 10 years).

So is Temu serious competition for providers like Amazon and Ebay?

The Temu app was at the top of the download charts last year with over 300 million downloads worldwide in almost all relevant countries – with the exceptions of China and India. In the Chinese home market, Temu faces intense competition from Alibaba, and many other aggressively priced platforms.

In addition, the growth opportunities in China are limited to some extent. In this respect, it makes sense that Temu is expanding internationally, especially in markets with particular sales potential. These include the USA, Great Britain, Japan and Germany, where there is still no comparable business model.

Temu focuses on non-food goods (household items, decoration, small household appliances, also fashion) and is in enormous competition with Amazon, Otto and Ebay, with the non-food discounters (Action, Tedi, Kodi) and with retailers who sell promotional items offer (Aldi, Lidl, Tchibo, hardware stores).

You open the Amazon app when you need something specific. You open the Temu app without knowing what you are about to buy. Temu focuses less on meeting needs that have previously been known in online retail, but rather on the strategy of creating needs and spontaneous purchases pursued by many, especially brick-and-mortar retailers.

But surely Chinese online platforms have to have some vulnerabilities?

There is criticism, especially regarding customs clearance. It is assumed that both companies are deliberately exploiting the customs limit (in the EU (150 €, in the USA the “de minimis” limit of US$ 800) (e.g. by splitting shipments). There are also reports of quality defects, lack of quality inspection and missing CE marking, data protection, consumer influence (wheels of fortune, etc.) and of course shipping by air freight. This causes approx. 50x more CO2 for a 1 kg package than consolidated transport by sea freight (can be calculated on according to the DIN standard 14083:2023).

However, Temu is obviously considering setting up fulfillment centers in the USA and Europe in order to reduce the currently enormous delivery time disadvantage (7-9 days). In the USA, Temu has already opened the marketplace to US retailers ( currently around 1,000 Chinese dealers with warehouses in the USA), European dealers/manufacturers are to follow.

What influence will Temu and others have on German and European e-commerce in the long term?

I estimate that 1-2 million Temu shipments are currently delivered in Europe per day. With Temu’s estimated marketing budget of US$3-5 billion for 2024, significant volume increases can be expected in the short term. However, it is not the volume development that is crucial, but rather the associated trend from classic online trading to social commerce.

To date, only a few companies have relied so intensively on social media channels when addressing customers, such as TikTok or Instagram, on which millions of people spend an increasing amount of time every day. Triggered by social media, people check the apps several times a day and are inspired by new articles and special offers.

This is experience-oriented demand creation that does not yet exist in this form on other platforms in Europe. The possibilities offered by such live shopping formats are probably enormous. Retailers should not see Temu & Co. exclusively as a threat to their own business model, but rather consider what they can learn from it for their own online trading and how they can position themselves (value orientation and sustainability).

Doing nothing would be fatal, because there is a risk that European trade would otherwise miss the development of a new market standard and would once again only be a laggard and not an innovation leader.

TikTok Shopping, a new platform in European online retail with a comparable business model, will soon be launching. TikTok Shopping is already available in the UK. All other major platforms, such as Meta with Facebook, Instagram and WhatsApp, have been thinking about and testing for many years how they can specifically use their unique user base for shopping applications.

However, the largely unsuccessful attempts by Facebook and Instagram to date show that this is challenging for customers who are focused on social media communication. The majority of users of social media platforms are primarily concerned with communication and information, not with purchasing goods. In this respect, an excessive focus on e-commerce businesses that are integrated into social media apps can lead to loss of users.

Temu’s strategy can be assessed differently: They intelligently and data-supported link social media content with a separate shopping app and give users more freedom of choice when it comes to possible purchases. Overall, this is probably more promising.

In an article for the Deutsche Verkehrs-Zeitung you described Temu’s model as a discount-oriented social commerce model. Is this the marketplace model of the future?

No, you can’t say that. Above all, the focus on the cheapest and as many items as possible only appeals to certain, price-sensitive customer groups that are not concerned about sustainability. Of particular interest, however, is the pronounced cut-out-the-middleman strategy, in which no further trading stages are interposed.

Similar structures can be found in the direct-to-consumer models (D2C) of many consumer goods manufacturers, which have grown significantly in recent years and sell directly to end customers via their own online shops (such as Adidas, Nike, Olymp, etc.). Temu in particular follows a real “seller playbook” in that it wants to make docking with the platform and logistics as easy as possible for manufacturers.

In this respect, Temu (or the logistics service providers working for Temu) currently takes on many logistical tasks and has comparatively low logistical requirements for the manufacturers (unlike Amazon). This could be interesting for many small manufacturers and retailers and make Temu an alternative to the other marketplace providers.

How has purchasing behavior changed in recent years?

Increasing digitalization in all areas of life is causing the importance of convenience to continue to increase. An “on demand” understanding has developed in which customers expect a maximum product selection and high or rapid availability. At the same time, the need for individual or curated and ecologically sustainable offers is increasing, from customer contact or search to receipt of the goods.

What is particularly challenging for retailers, however, is the increasing disloyalty of customers who – especially in online retail – can make international price and service comparisons and change retailers with little effort. Many retailers respond to this with comprehensive bonus programs (e.g. Amazon Prima, Douglas Beauty Card, etc.) and try to increase customer loyalty by increasing “switching costs”.

As a result, delivery services are becoming more individualized in terms of customers’ locations, times and delivery days. There will be more and more business models in retail that offer even more intensive personalization of services according to the principle “Sell everywhere, deliver anywhere”.

Customer proximity is essential for delivery, geographically and data-related. This primarily means data about purchasing behavior along the customer journey, logistical preferences, customer-specific life situations, regional product range specifics and future needs. This underpins the trend towards further decentralization of logistics networks that has been evident for years.

Will GenZ determine the future of e-commerce?

They’re already doing that today! Generation Z represents around 13% of the population in Germany and will generate around 30% of gross labor income in 2025. When it comes to the future, the young people of Generation Alpha born after 2011 are more relevant.

They have an even more pronounced “always on” and “mobile first” mentality than Generation Z and are completely digitally socialized. However, it is important to take into account that many of the young people in generations Z and Alpha are or will not only be customers, but also decision-makers in companies (suppliers, business customers)!

About the interviewee: Prof. Dr. Christoph Tripp is 49 years old and teaches as a professor of distribution and trade logistics at the Nuremberg University of Technology. He has many years of practical and consulting experience and works as a speaker, expert, moderator, podcaster and columnist. He is also the author of the book “Distribution and retail logistics – strategies for omnichannel distribution in retail.”