Temu explained: How it really works

Written by Times Media

What Temu is doing to small retailers worldwide

Temu has blitzed its way into shopping feeds from Boston to Berlin and Brisbane with a simple promise: everything, for (nearly) nothing. Behind the orange tiles sits a highly engineered, cross-border retail machine owned by PDD Holdings (also parent of China’s Pinduoduo), combining factory-to-consumer sourcing, algorithmic merchandising, aggressive ad spend, and logistics tuned for low prices over speed.

Below is a clear-eyed look at how Temu conducts business—and the consequences for smaller retailers everywhere.

1) What Temu is (and isn’t)

Temu is a global marketplace launched in 2022 by PDD Holdings. It connects shoppers directly to manufacturers—primarily in China—using a mix of “fully managed” and “semi-managed” fulfillment models that keep prices ultra-low. In many markets, Temu still consolidates small parcels and ships directly from China; in others it is experimenting with merchant-stocked local inventory to cut delivery times and hedge against tariff or customs changes.

Key points in 2024–2025:

The European Commission opened—and then escalated—formal DSA proceedings into Temu over illegal/unsafe goods and “addictive” design; preliminary findings in mid-2025 say Temu is in breach (Temu disputes this, and has the chance to respond). Potential penalties run up to 6% of global turnover.
In the U.S., the 2025 rollback of the de minimis duty exemption (packages under US$800) and broader tariff actions materially raised Temu’s costs and forced model adjustments, from price rises to temporary sourcing and shipping pivots.
Australia has scrutinized product safety after high-profile incidents and recalls; ABC reporting and ACCC resources highlight the risk environment and enforcement posture.

2) How Temu makes the prices so low

a) Factory-to-consumer sourcing and platform control.
Temu negotiates directly with factories and, in its “fully managed” model, sets the price, controls promotion, and handles customer service and logistics. A shift toward “semi-managed” models recruits merchants with stock already in local warehouses, pushing more cost and inventory risk onto sellers while keeping front-end traffic in Temu’s hands.

b) Logistics optimized for cost (not speed).
Standard shipping windows often span ~6–20 days, with faster options in select markets. Temu consolidates low-value parcels and uses line-haul air/sea plus local carriers. Return flows are centralized and policy-driven to keep CAC (customer acquisition cost) down and repeat rates up.

c) Regulatory arbitrage—now shrinking.
For two years, Temu benefited enormously from the U.S. de minimis rule that let sub-$800 parcels enter duty-free; that advantage is being dismantled, lifting average landed costs and narrowing Temu’s price gap—though the company has sought workarounds (e.g., selective local warehousing, model switches, and price adjustments).

d) Massive paid marketing.
Temu’s growth has leaned on heavy ad spend—Super Bowl placements, social blitzes, and large referral incentives—to flood the top of the funnel and train new shopping habits.

e) Revenue model.
Temu earns via commissions/fees on transactions and paid placements/services for sellers. PDD’s filings show strong overall revenue growth (despite tariff-related profit pressure in 2025), consistent with a marketplace whose take-rate plus advertising offsets aggressive discounting. (Temu doesn’t publish fee tables publicly; third-party seller guides and analyst summaries help sketch the picture.)

3) The Temu playbook on the app

Temu’s interface blends algorithmic recommendations, gamified promotions (spin-to-win, time-bomb coupons), hyper-dense SKU presentation, and free-shipping thresholds to create “scroll and scoop” behavior: lots of impulse buys, average order values kept modest, and repeat “treasure hunt” usage. Those very tactics are part of the EU’s DSA probe.

4) The safety and compliance overhang

Multiple consumer tests and regulatory notes across the EU and Australia have flagged unsafe or non-compliant products (e.g., button-battery toys, flammability issues), triggering removals and recalls. This is the crux of the EU’s preliminary breach finding and a growing focus for Australian and UK authorities. Expect continued enforcement and higher compliance costs—costs that either squeeze sellers or lift prices.

5) What this means for small retailers (global view)

5.1 The pressures

Price compression & margin erosion.
Temu resets consumer reference prices across dozens of categories (fashion basics, small electronics, home gadgets). Shoppers compare your $20 item to a $5 Temu alternative, even if the quality and warranty aren’t comparable. That depresses conversion and pushes discounting—especially online. ABC
Expectation drift.
Free shipping, constant coupons, and endless novelty make “full-price + paid shipping” feel outdated. To keep up, small retailers either eat the cost, shrink assortments, or re-platform to marketplaces where those expectations are already baked in.
Customer leakage through discovery.
Temu’s ad blitz and viral mechanics siphon attention from traditional channels (Google/Amazon search or local marketplaces). Each hour spent “doom-shopping” in Temu is an hour not browsing indie stores’ sites.
Counterfeit/IP risk & category contamination.
When counterfeit or unsafe lookalikes proliferate, brand equity and fair pricing for legitimate small labels suffer. Even if you never sell on Temu, the category’s price ceiling falls. EU and U.S. scrutiny is rising, but enforcement timelines are slow relative to retail cycles.
Regulatory whiplash.
Tariff and customs shifts can temporarily rebalance the field (raising Temu prices or slowing deliveries), but Temu adapts quickly (e.g., semi-managed inventory). Small retailers shouldn’t bank strategy solely on policy winds.

5.2 The openings

It’s not all headwinds. Temu’s model also creates gaps that nimble small businesses can exploit:

Speed, fit, and service. Temu is built for cheap, not fast or expert. If you can do same-day/next-day delivery, offer fittings/repairs/alterations, or provide pre- and post-purchase advice (e.g., electronics, outdoors, specialty foods), you can win on value beyond price.
Trust & compliance as a brand. In categories plagued by non-compliance (toys, kids’ wear, electronics), make safety and standards your marketing edge (e.g., visible test reports, extended warranties, clear returns). Regulators are already spotlighting the gap.
Local experiences Temu can’t ship. Workshops, community events, pop-ups, and services (repairs, customization) pull shoppers offline and build loyalty Temu can’t replicate. (Australian and German retail bodies have urged policy and experiential responses.)
Marketplace arbitrage—use, don’t be used. Some SMEs do list on Temu (or competing platforms) to clear inventory or test demand, while keeping core ranges and premium SKUs in owned channels. Proceed carefully: Temu’s evolving “semi-managed” model shifts risk to sellers; read the fine print.

6) A practical playbook for small retailers

1) Re-segment your assortment.
Protect high-service, high-fit, or regulated categories in your owned channels; move pure commodity SKUs to clearance/marketplace channels where price war risk is highest. (If you experiment on Temu, use short, insulated test ranges and track returns/chargebacks tightly.)

2) Make safety and guarantee visible.
Publish compliance marks, standards, and test summaries on PDPs; bundle extended warranties; highlight recall processes and local support. This directly counters Temu’s perceived risk.

3) Raise your “speed moat.”
Offer local delivery windows (same/next day) and BOPIS; promote repair/alteration/fit services where relevant. Your differentiation is time saved and problems solved.

4) Price intelligently, not universally lower.
Use KVI (known value item) pricing for the few products customers price-check most; keep margins on long-tail and service-heavy items. Add “value stacks” (bundles, freebies, classes) instead of blanket discounts.

5) Out-advertise locally, not globally.
Lean into geographic targeting and community content (UGC, events, local creators). You’ll never outspend Temu nationally, but you can own a postcode or niche.

6) Build a “reason to return.”
Loyalty with experiential rewards (priority repairs, alterations, early access, local events) beats pure cashback. Your moat is relationship, not rebates.

7) Prepare for policy tailwinds—but don’t rely on them.
Track tariff/customs shifts and EU/US safety enforcement; treat any Temu price bumps as windows to win customers with service and speed.

7) What to watch next

EU DSA enforcement outcomes. A confirmed breach could mean design and compliance changes that raise Temu’s cost to operate.
Tariff & customs politics. The U.S. changes already dented PDD’s profits and forced model tweaks; more volatility is possible in other markets too.
Supplier relations and model shifts. Tension with Chinese suppliers over semi-managed programs suggests Temu will keep pushing risk downstream—creating both opportunity and exposure for merchants.
National safety regimes. Expect more random-buy tests (EU consumer groups, UK Trading Standards, ACCC-linked actions) and higher enforcement visibility in social media—shaping consumer trust.

Bottom line

Temu’s secret isn’t magic; it’s a stack: factory-level sourcing power, a gamified app that manufactures demand, logistics optimized for pennies per parcel, and (until recently) regulatory advantages that muted landed costs. That stack is now rubbing hard against regulators and tariff walls, but the consumer habit it created—“good enough, dirt cheap”—isn’t going away.

For small retailers, beating Temu on price is a race to the bottom. Beating it on speed, service, trust, and community is how you win—and keep winning—while policy winds and Temu’s own model continue to shift.