Nearly 30% U.S. consumers will reduce or stop shopping on platforms like Temu if prices rise due to new tariffs. This reaction is driven by concerns over higher costs and the potential loss of Temu’s price advantage, which has been a key factor in attracting shoppers.
The removal of the “de minimis” exemption for Chinese imports, set to take effect on May 1, 2025, could lead to significant price increases for items from Temu, potentially doubling the final cost for some products. This change, combined with existing issues like long shipping times and inconsistent product quality, may further erode consumer trust in the platform. As a result, Temu faces a challenging landscape, with shrinking margins and a weakened value proposition.
Temu’ Reactions to the Price Hike
Supply Chain Adjustment
- Shift to “Half-Custody” Model: Temu is accelerating a shift from its original model, where it handled all aspects of the business, to a “half-custody” model. In this new framework, factories ship goods directly in bulk to U.S. warehouses, and Temu only manages the online marketplace. This move aims to mitigate some of the tariff-related costs and maintain price competitiveness, though it may still lead to higher prices for consumers.
Price Changes
- Pass-Through Costs: Temu may have to pass some of the increased costs from tariffs onto consumers. This could result in higher prices for products, potentially altering the value proposition that initially attracted shoppers.
- Selective Price Increases: Temu might selectively increase prices on certain high-demand or high-margin items while keeping prices lower on others to maintain some level of affordability and customer appeal.
Marketing and Customer Engagement
- Emphasize Value Proposition: Despite potential price increases, Temu may continue to emphasize its value proposition through aggressive marketing campaigns, highlighting the still-competitive prices compared to traditional retailers.
- Loyalty Programs and Promotions: Temu could enhance its loyalty programs and offer more promotions or discounts to retain customers and encourage repeat purchases, even if prices rise.
Diversified Supply Chain
- Sourcing from Other Countries: With Chinese shipments facing new hurdles, Temu may diversify its supply chain by sourcing goods from other countries or increasing domestic production. This could help mitigate the impact of tariffs on its pricing structure.
Optimization of Logistics and Operations
- Efficient Logistics Networks: Temu might invest in or leverage more efficient logistics networks to reduce delivery costs and times, which could help offset some of the tariff-related expenses.
- Inventory Management: By leveraging data analysis to predict consumer demand and optimize production, Temu can minimize excess inventory and associated costs, helping to keep prices as low as possible.
How does Temu’s ‘Half-Custody’ model work?
Temu’s “half-custody” model is a strategic shift from its original fully managed supply chain approach. Here’s how it works:
Merchant Responsibilities:
- Merchants are now responsible for shipping their goods in bulk to U.S. warehouses instead of relying on Temu to handle logistics directly from China.
- They manage warehouse operations, arrange delivery, and handle reverse logistics such as returns.
Temu’s Role:
- Temu focuses on managing its online marketplace, including pricing, sales, and customer service.
- It provides flexible delivery options and supports merchants with marketing and promotional efforts.
Advantages:
- This model allows Temu to reduce shipping costs and delivery times by leveraging local fulfillment centers.
- It also helps merchants avoid the higher delivery costs associated with cross-border shipping.
Challenges:
- The shift may lead to higher prices for consumers as merchants lose the economies of scale provided by Temu’s centralized logistics.
- Smaller merchants may struggle to adapt due to the increased responsibility of managing logistics.
This model is part of Temu’s broader strategy to adapt to new U.S. tariffs and maintain its competitive edge in the market.
How Temu’s “Half-custody” Model Affects Small Businesses?
Challenges
- Logistics: Small businesses may struggle to manage logistics independently, as they lose the economies of scale and support previously provided by Temu.
- Higher Costs: Merchants may have to absorb higher shipping and handling costs, potentially reducing profit margins.
- Market Competition: Larger competitors with more resources may have an advantage in adapting to the new model, potentially squeezing out smaller players.
Opportunities
- Priority: Temu is prioritizing sellers who adopt the new model, offering them better visibility on the platform.
- Local Fulfillment: By shipping goods to U.S. warehouses, small businesses can reduce delivery times and improve customer satisfaction, potentially attracting more buyers.
- Diversified Product Offerings: The new model allows Temu to expand into new product categories, providing small businesses with additional opportunities to diversify their offerings.
Overall, while the “half-custody” model may pose challenges for small businesses, it also offers opportunities for those who can adapt and leverage the benefits of local fulfillment and priority exposure on Temu’s platform.
