Temu has been in the media spotlight since its launch in the US last September. The online marketplace, which is known for its wide selection of quality and affordable merchandise, has since expanded to Canada, Australia, and New Zealand in quick succession.
Although Temu attracted a lot of attention by advertising during the Super Bowl in February, the company is growing primarily through word-of-mouth referrals from customers who were surprised by the quality and affordability of its product range, which includes clothing, home appliances, and pet supplies. They are sharing their discoveries with friends and family and driving new users to try out the Boston-based online marketplace.
Underpinning Temu’s success is a business model called Next-Gen Manufacturing (NGM), which the company says is the core reason why its prices are significantly lower than elsewhere. Consumers are largely unaware of the costs that go into designing, making, moving, and selling a product, and the degree of inefficiencies and waste that accompanies each stage of the supply chain.
Manufacturers routinely produce too much of a product, hoping that it will sell, leading to excess inventory and waste. One of the key reasons is that retailers find it difficult to predict demand accurately. Forecasting errors can result in overstocking, where retailers procure more than necessary and have too much stock that cannot be sold or run out of stock if demand exceeds expectations.
Early last year, for example, many US retailers placed large orders and expedited transportation to overcome bottlenecks, only for this approach to backfire as consumer spending shifted to services instead of goods, according to the Wall Street Journal. The errors in prediction and production left retailers with surplus inventories crammed in warehouses and an excess of unsuitable items in the wrong locations.
These inefficiencies and waste all find their way eventually into the final prices that consumers pay, as retailers adjust their pricing to cover the losses. Yet, by and large, the average consumer is unaware of these “hidden costs” and has come to accept them as the norm. When prices are much lower than this “norm,” as was the case when Temu burst onto the scene with what Wired described as “mind-bending” prices, the first reaction is often skepticism that the lower prices mean poorer quality or cut corners.
Temu is seeking to address this misconception by being transparent about how it is able to offer prices lower than elsewhere. A recent report by Tom’s Guide, the widely followed online product reviews and price comparison site, found that “Temu does deliver cheaper prices in many cases compared to Amazon, Walmart and other retailers.”
Reducing guesswork, improving forecasts
According to Temu, NGM makes use of real-time trend to give manufacturers deep insights into fast-changing consumer preferences. This allows them to design products to consumer tastes, reduce guesswork, and improve forecasts on how much each item would sell. Armed with more precise market understanding, manufacturers can order materials and plan their production runs more accurately.
NGM enables merchants to organize the most cost-efficient way of moving the product from the factory to the doorstep, reducing the need for large warehouses and improving last-mile fulfillment. There is also less need for the same level of marketing spending, which accounts for a sizable chunk of the final sticker price, because consumers need less convincing to buy products that are tailored to their wants and needs.
The savings from reducing waste at each stage of the production cycle add up. The result is that NGM can lead to an estimated 50% reduction in costs compared with conventional production and distribution systems. By passing on these savings to consumers through lower prices, the merchants also win through higher sales volumes that enable them to negotiate better terms with their suppliers.
By empowering upstream manufacturers with more visibility to downstream consumers, Temu’s NGM reduces waste due to communication lags or blockages. In the physical retail world, feedback from a department store to a brand or supplier can often come too late or not at all. With NGM, the feedback is aggregated, instantaneous, and continuous.
Even with improvements in technology and logistics pioneered by the likes of Walmart, whose founder Sam Walton once said the retailer got big by “replacing inventory with information,” or by Amazon with its massive Fulfilment Centers, there is still a lot more way to go before information exchange between buyer, seller, and producer becomes seamless.
Conventional retail and manufacturing still rely heavily on guesswork and a “spray-and-pray” approach. With NGM, Temu is championing a smarter way of managing the complex processes that translate a consumer need into an end product, in a more sustainable manner both for the consumer’s wallet and the environment.