By Casey Hall

SHANGHAI (Reuters) – Shares of China’s largest e-commerce companies—Alibaba (NYSE:BABA), JD (NASDAQ:JD), and PDD Holdings—dropped this week amid concerns about profit margins after low-cost vendor PDD announced plans to increase discounts.

These three firms sell a wide range of products, from beauty items and electronics to food, reaching hundreds of millions of consumers monthly and serving as indicators of Chinese consumer sentiment.

Since 2021, the impact of COVID-19, a sluggish economic recovery, and a prolonged property market downturn have negatively affected consumer confidence in China, leading to different outcomes for these companies.

PDD has emerged as the biggest beneficiary during this period, showing significant revenue growth and increased market capitalization, largely due to its discount-focused platforms, Pinduoduo (NASDAQ:PDD) for domestic sales and Temu internationally.

Cost-conscious consumers have flocked to Pinduoduo for inexpensive electronics and clothing, replacing pricier branded items with unbranded alternatives.

However, PDD’s recent failure to meet quarterly revenue estimates, despite an 86% revenue growth and exceeding profit expectations, raised concerns about the potential decline in low-price consumption in China. The company lost $55 billion in market capitalization after executives suggested that revenue growth and profits would face challenges due to rising competition and the necessity to invest to attract high-value merchants.

M Science analyst Vinci Zhang emphasized that the domestic demand scenario is unlikely to improve soon and criticized the government’s failure to enhance consumer spending effectively due to stagnant household incomes.

Alibaba and JD.com are also struggling with revenue growth in recent quarters, but they have managed to maintain their market share against Pinduoduo by offering value-oriented products.

Despite PDD’s revenue being less than half that of Alibaba and one-third of JD’s, its strategic reliance on third-party vendors has secured it a superior operating margin of 34%, compared to Alibaba’s 15% and JD’s 3%. PDD achieves this with just 17,400 employees, while Alibaba and JD employ approximately 200,000 and 517,000 respectively.

Jacob Cooke, CEO of WPIC Marketing + Technologies, noted that Pinduoduo’s focus on unbranded products remains strong, but low prices may not ensure customer loyalty as competitors also offer discount prices. He stated that JD.com, Douyin, and Alibaba are leveraging their competitive strengths, focusing on high-value branded goods, enhanced customer service, and content-driven commerce.