The End of "De Minimis" and Its Impact
A major factor contributing to Temu's struggles is the White House's decision on May 2 to end the "de minimis" practice. This provision had previously allowed Chinese companies like Temu and fast-fashion giant Shein to ship low-value packages directly to U.S. consumers tariff-free. For years, both platforms leveraged this to "drop-ship" items from Chinese suppliers, enabling them to offer incredibly low prices.
With the termination of "de minimis," Temu was compelled to slash its U.S. ad spending and overhaul its order fulfillment strategy. The imposition of tariffs has forced both Temu and Shein to raise prices, impacting their competitive edge. While Shein has managed to increase the amount spent per customer year-over-year, Temu has reportedly struggled in this regard.
Morgan Stanley equity analyst Simeon Gutman noted a significant drop in Temu's engagement following the exemption's end, stating that if the "status quo remains for an extended period, we believe Temu's competitive threat will continue to weaken."
Shifting Fulfillment and Global Strategy
In response to these headwinds, Temu has announced a shift to a local fulfillment model. Previously, merchants were responsible for ordering and supplying products, while Temu handled logistics, pricing, and marketing from China. Now, as detailed by HSBC analysts, Temu's merchants "can ship individual orders from China to Temu-partnered U.S. warehouses but they would need to address tariffs and customs charges and paperwork." Temu will continue to manage order fulfillment closer to shoppers, pricing, and online operations.
During PDD's first-quarter earnings call, executives acknowledged the significant pressure tariffs have placed on their merchants. They reiterated Temu's commitment to maintaining stable prices and collaborating with merchants across various regions, referencing the move towards local fulfillment.
Growth Beyond the U.S.
Despite its challenges in the U.S. market, Temu is experiencing growth in other regions. HSBC's recent note indicated that Temu's growth in non-U.S. markets has accelerated, with non-U.S. users now accounting for 90% of its 405 million global monthly active users in the second quarter. Analysts observed that "new user uptick grew swiftest in less affluent markets," suggesting a strategic pivot towards different geographical segments.
The coming months will be critical for Temu as it navigates the evolving trade landscape and seeks to regain momentum in key markets while capitalizing on its growth in others.