2025 Primer: It's a Walmart and Temu Economy, We Are Just Living In It
What Are Walmart's Recent Strategies in the Current Retail Climate?
Dick's Sporting Goods and Dollar Tree both warned yesterday about uncertainty and election items. Almost everyone is cautious except two players.
Walmart is running a masterclass in a slow-follower strategy leveraging its scale to pick up the best items in Amazon's playbook. In the last year, the pressure on consumer pocketbooks has been a perfectly good storm for them - wealthy consumers trading down to Walmart enjoying the new-found convenience-oriented services.
How Is Amazon Adapting to the "Temu Effect"?
If you can target wealthier consumers trading down (hello dupes!) then there is still growth to be had out there.
Amazon is essentially treading water in retail - higher transactions, lower AOV. Call it the Temu effect. They are working on cost to serve to ensure they aren't priced out of this market by Walmart (the low price leader) and Temu (the low cost to serve leader).
What Are the Key Financial Insights for Temu?
Let's talk about Temu for a second. Their parent company PDD missed earnings and the market freaked out. Unnecessarily in my view. Here's what happened:
Temu's transactional revenue (fees charged to sellers) grew 234% y/y due to growth (this is a proxy for GMV).
Temu's marketing services revenue grew 29%.
But they are spending so much on ads you say. Their marketing expenses did go up 48% y/y but their overall revenues also went up 86% y/y. Ultimately the judge is cash. And the company's cash position went from $30B last year to $39B now according to their financial release.
Is that a lot? Just to give you some idea, Amazon has $89B on its balance sheet. Shopify? Just $5B.
How Is Temu Handling Challenges in the Chinese Market?
You might have heard the Chinese economy is in the tank - true. That is primarily PDD. Outside China, Temu is having no issues and the PDD balance sheet is built to weather a storm. Expect them to spend that $39B cash pile squarely targeting Amazon. Right on cue, Temu has started recruiting US sellers this year.
What Should Brands Focus on Moving Into 2025?
Simply, unless you are a brand that is catching lightning in a bottle (there are some!) this economy is built for Temu and Walmart. And Temu is poised for more growth despite the quality issues, government issues, doom and gloom, "minimal lead" and all the rest etc.
What does this mean for 2025?
For brands, combined with this election this creates a lot of uncertainty. It's unclear if interest rate relief will provide much consumer refuge looking into 2025. More people will move, but the cost of housing will not get cheaper until there is more supply.
The biggest mistake any business can make right now is simple: hiring and investing ahead of cash flow returns. If you are going to invest, reprioritization is the best way forward. Time to shed investing in those product lines you have been leaving around hoping they would turnaround. We all still have parts of our business that we need to optimize.
Ensuring that the vast majority of your portfolio of bets is against growth segments is paramount in this environment.
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