Temu's U.S. Sales Slump: Tariff Headwinds and the Cost of Reduced Marketing

The once-sizzling growth of Temu, Pinduoduo's (PDD) aggressive U.S. e-commerce play, has cooled dramatically. Recent data reveals a 25% year-over-year sales decline in the first half of 2024, contrasting sharply with rivals like Shein and Walmart, which leveraged stable pricing and sustained ad spending to regain momentum. At the core of Temu's stumble lies a perfect storm of rising tariffs and a strategic retreat from the aggressive marketing that once fueled its rapid ascent. For investors, the implications are stark: PDD's stock valuation now hinges on whether Temu can stabilize its U.S. operations or successfully pivot to Europe without incurring further losses.

The Tariff Trap: Losing the Price War

Temu's model relied on ultra-low pricing enabled by tariff exemptions for small-value shipments. However, the U.S. Commerce Department's closure of this loophole in late 2023—part of broader trade reforms under the Trump administration—has crippled Temu's cost advantage. Competitors like Shein, which sources more goods domestically and maintains higher ad spend, have weathered the storm. Meanwhile, Temu's U.S. sales dropped 25% between May 2023 and June 2024, while Shein's sales rebounded to single-digit growth.

The math is simple: higher tariffs = higher prices. Without the price edge, Temu's appeal to budget-conscious shoppers fades. As PDD CFO Jun Liu admitted, the firm faces “macroeconomic headwinds” that “pressure margins” and limit its ability to pass savings to consumers.

Ad Spend Cutbacks: A Self-Inflicted Wound

Temu's decision to slash U.S. ad spending—from thousands of daily ads in 2023 to just a handful in June 2024—has accelerated its decline. Analysts at AppGrowing Global note that Temu's growth was “heavily reliant on aggressive marketing,” including its high-profile Super Bowl campaign. By retreating, Temu ceded digital real estate to rivals like Walmart and Amazon, which increased ad budgets to capture post-trade-truce demand.

The impact is visible in PDD's Q1 2025 earnings: net income plummeted 47% YoY, and revenue growth slowed to 10%—far below expectations. While PDD funneled funds into its “100 billion support program” for merchants, this move strained short-term profits. Investors reacted swiftly: shares plunged 18% premarket after the earnings miss.

The Risky Pivot to Europe: A Gamble with Uncertain Payoffs

Temu's shift to Europe—where it's doubling down on ad spending—comes with risks. European consumers have different preferences and regulatory hurdles, such as stricter data privacy laws and higher shipping costs. PDD's spokesperson confirmed the focus on “working with local merchants” to stabilize pricing, but this strategy may not replicate the low-margin, high-volume model that worked in the U.S.

Moreover, Europe is already crowded. Amazon dominates with 40% of e-commerce sales, while Shein and Zalando are gaining traction. Temu's lack of localized supply chains and brand recognition could limit its upside.

Investment Implications: Time to Reassess Tariff-Sensitive Plays

PDD's stock now trades at a 30% discount to its 52-week high, reflecting investor skepticism about Temu's U.S. prospects and European gamble. The firm's $50 billion cash reserves provide a buffer, but sustained margin pressure and slowing revenue growth suggest the stock could face further declines.

Investment Takeaway:
- Avoid PDD unless Temu stabilizes U.S. sales or Europe's strategy yields quick wins.
- Favor tariff-resilient e-commerce players like Amazon (AMZN) or Walmart (WMT), which benefit from diversified supply chains and pricing power.
- Monitor U.S.-China trade policies: A reversal of tariff hikes could revive Temu's price advantage, but don't bet on it.

Final Analysis

Temu's stumble underscores a critical truth: e-commerce dominance demands both pricing power and persistent marketing. With tariffs eroding its cost edge and ad cuts ceding market share, PDD's stock remains vulnerable. While the pivot to Europe is bold, it's a high-stakes bet in a market where Temu lacks a clear path to profitability. For investors, this is a cautionary tale: tariff-sensitive plays like PDD require not just low prices, but sustained execution—and right now, neither is guaranteed.