What you need to know about JD.com before you invest
January 31, 2022
In this article, we will be looking at JD.com’s (NASDAQ: JD) (HKG: 9618) business model and its financials. We will also explore key reasons why you might want to invest in the company.
JD.com is the 2nd largest e-commerce firm in China, after Alibaba, and the company describes itself as “a leading technology-driven e-commerce company transforming to become a leading supply chain-based technology and service provider”.
JD.com’s business model can be categorised into 5 parts, (i) JD Retail, (ii) JD Logistics, (iii) JD Property, (iv) Technology Initiatives and (v) JD Health.
1. JD Retail
In its online retail business, JD.com acquires products from suppliers and sells them directly to customers.
Interestingly, JD.com is leveraging machine-learning technology and massive data sets amassed from online purchase behaviours. The proprietary technology platform will curate personalised product recommendations and targeted promotions for each customer.
JD.com also utilises AI technology to refine its merchandise sourcing strategy. This allows the company to efficiently manage its inventory and costs. Then, with consumer insights generated from its big data analytics, the company can provide tailor-made products, leading to more sales and better customer satisfaction.
JD Worldwide is a cross-border platform that enables brands from around the world to sell directly to Chinese consumers. This means that JD.com customers can get high-quality products from around the globe delivered to their doorsteps at the push of a button.
For its online marketplace business, third-party merchants offer products to customers on its online marketplace. JD.com will then earn a sales commission for each purchase.
JD.com also offers marketing, logistics and other value-added services to these merchants.
The company launched its online marketplace in October 2010 and has been adding new merchants and services, including attracting premium international brands to list on its platform.
JD.com aims to offer its customers with consistently high-quality online shopping experience regardless of whether they purchase from the company itself or third-party merchants. Therefore, JD.com requires third-party merchants to meet its strict standards for product authenticity and service reliability.
For third-party merchants which have shown high quality of service during the entire purchase process, JD.com will tag them as “JD Haodian (京东好店),”. Such certification can help the top third-party merchants improve their sales volumes on the platform. Furthermore, it sets a benchmark to encourage other third-party merchants to improve their quality of service.
JD.com is also exploring new omnichannel initiatives to meet customers’ ever-growing demand.
JD.com has entered into a strategic partnership with Dada Group, a leading platform for local on-demand retail and delivery in China. Dada Group has partnered with a large number of well-known chain retailers and brands by leveraging Dada Group’s crowd-sourcing delivery network.
Dada Group has been cooperating with JD Logistics to provide fast on-demand delivery services of a wide selection of grocery and other fresh products through JD-Daojia.
On March 22, 2021, JD.com acquired approximately 51% of Dada Group’s outstanding shares.
The increased investment in Dada Group is expected to help the company further diversify its retail services and support its omnichannel strategy.
JD.com collaborates with Walmart on e-commerce by launching Walmart and Sam’s Club Flagship Stores on its platform and providing fulfillment solutions to them.
In addition, JD.com provides a one-hour delivery service from Walmart Stores and Sam’s Clubs in selected cities through the JD Daojia app.
JD.com is also exploring the offline retail market through 7FRESH, its offline fresh food retailer.
In December 2017, the company opened its first 7FRESH store in Beijing.
JD.com integrated its supply chain management know-how and storage technologies into 7FRESH stores to deliver a unique shopping experience.
Similar to Alibaba, JD.com also allows third-party merchants and brands to buy advertisement space on its e-commerce platform.
The JD Marketing 360 Platform launched in 2019 employs sophisticated AI and big data technologies. This helps exploit user behaviour insights to provide brand marketers and third-party merchants with branding and sales solutions.
In 2019, the company has also invested in automated marketing technologies. The technology helps to automate processes like bidding, targeting, creation of ads and even budgeting. These products not only reduce marketers’ labour but also improve their return on investment (ROI).
Membership Programme – JD Plus
Following the success story of Amazon Prime, JD.com also started its membership program, JD Plus. The membership serves as a strategy to cultivate customer loyalty and encourage customers to make repeat purchases.
JD Plus offers benefits like extra rebates, coupons, exclusive prices on selected product offerings, free shipping and return services. It also has other VIP customer services, PLUS DAY promotion events, an online medical consultation and JD E-book unlimited access designed specifically for JD Plus members.
JD Plus has also partnered with content and lifestyle service providers such as Tencent Video and iQiyi, providing JD Plus members with greater benefits.
2. JD Logistics
JD Logistics leverages the firm’s advanced technology and logistics expertise to provide supply chain solutions and high-quality logistics services.
Apart from fulfilling its own orders, JD Logistics has also opened its technologies to external customers, helping retailers like Skechers optimise their logistics operations. As a result, 43.4% of JD Logistics revenue came from external customers in the nine months ended September 2020.
JD.com is heavily focused on using technological innovation to develop the smartest, most efficient logistics systems. For instance, JD built the world’s first fully-automated warehouse in Shanghai, and is currently developing its own drones delivery and automatic delivery robots.
In 2020, approximately 90% of the total online retail orders processed through JD Logistics’s network were delivered on the same day or the day after the order was placed.
JD.com also has a 211 program that offers speedy delivery services. For goods that are in stock at the corresponding regional fulfillment, any orders received by 11.00 am will be delivered on the same day, and any orders received by 11.00 pm will be delivered by 3.00 pm on the following day. Customers can also request that an order placed by 3.00 pm be delivered in the evening on the same day in selected cities.
There is tremendous growth potential for e-commerce companies in the lower-tier cities of China. This is because e-commerce penetration rates are still relatively lower in these less economically developed provinces than the higher-tier cities of China. To expand its consumer base, JD.com continues to expand its same day and next day delivery services, especially in the less developed areas.
Timely and reliable fulfilment is critical to an e-commerce firm’s success. Through JD’s unrivalled nationwide logistics network, JD.com delivers a majority of the orders to customers by themselves. This gives them greater control over the entire fulfillment process, helping to shorten delivery timings and improve the entire consumer experience.
JD Logistics is also opening warehouses in countries such as UK, Germany and has plans to further expand its cross-border operations. This is to provide more support to Chinese sellers who want to sell overseas products to Chinese consumers.
3. JD Property
JD Property, an infrastructure asset management platform, owns, develops and manages JD.com’s logistics facilities and other real estate properties, to support JD Logistics and third parties.
With the expansion of its asset portfolios, it has adopted a capital recycling strategy. This strategy is believed to help further expand JD.com’s asset portfolios, minimise its related future capital expenditures and enhance its returns.
4. Technology Initiatives
JD Retail Cloud
In November 2020, JD.com launched JD Retail Cloud, a technological ecosystem for the retail industry.
One solution provided by JD Retail Cloud is Shangling SaaS Mall, a comprehensive SaaS-based operational solution for manufacturers and offline retailers. Driven by its technology and services, Shangling SaaS Mall aims to help manufacturers and retailers to improve efficiency in omnichannel operation and marketing, as well as digitalisation of offline store operation.
JD Y focuses on creating smart supply chain solutions.
JD-Y has launched an industry-leading end-to-end replenishment model (E2E model). The model applies deep learning technology to achieve automatic merchandise replenishment based on historical sales performance without the need for a sales forecast.
Testing is a frequent pain point for many online consumers given that it is difficult to judge whether or not the products will actually work merely just by browsing online listings. With JD’s AR technology, customers can try products like apparel and cosmetics before making a purchase online.
5. JD Health
As a leading online healthcare platform, JD Health’s mission is to become the go-to health management platform for everyone in China.
It aims to provide easily accessible, convenient, high-quality yet affordable healthcare products and services for everyone in China.
Its pharmaceutical retail business has 72.5 million annual active users, and the platform controls nearly 30% of China’s online pharmacy market
JD.com Stock – Other Strategic Cooperations
Strategic Cooperation with Tencent
Under the strategic partnership, Tencent offers JD.com prominent access points in its mobile apps Weixin and Mobile QQ. This has helped JD.com generate mobile user traffic from Tencent’s large mobile user base of over 1 billion users and enhance its customers’ mobile shopping experience.
JD.com is the largest retailer in China, in terms of revenue. In addition, JD.com is the third-largest e-commerce player in China in terms of the number of users, behind Pinduoduo and Alibaba.
JD.com’s loyal customer base has expanded rapidly, with 305.3 million, 362.0 million and 471.9 million annual active customer accounts in 2018, 2019 and 2020, respectively. This shows that JD.com’s strategy of focusing on delivering the best customer experience has been paying off.
JD.com also managed to consistently grow its Gross Merchandise Volume (GMV), with GMV of RMB1,676.9 billion, RMB2,085.4 billion and RMB2,612.5 billion (US$400.4 billion) in 2018, 2019 and 2020, respectively.
JD.com is well-known for its extremely well-established logistics system. JD owns more than 1000 warehouses, its fulfilment centres and manages its logistic network. Because of the relatively shorter delivery times, customers may choose to buy from JD over its competitors.
Additionally, JD has higher quality and more authentic products than competitors, due to it being very much a first-party retailer. Customers who are particular about the quality of products will choose to patronise JD.
JD.com has two operating segments, namely JD Retail and New Businesses.
JD Retail mainly consists of online retail, online marketplace and marketing services in China.
New Businesses include logistics services provided to third parties, overseas business, technology initiatives and JD Property.
Operating income for JD.com is entirely contributed by JD Retail segment, as the New Businesses segment is still loss-making.
Operating income for JD Retail was RMB 19,484 for 2020 while operating losses for New Businesses was RMB 2,498.
With the stock price beaten down with all the regulatory crackdown going on, JD.com appears to be trading at an attractive valuation for now.
JD.com has also been successful in recent years competing with Alibaba for market share in the e-commerce space. This shows the extent and scale of fulfilment and online retail capabilities JD.com has built up over the years, threatening even the most dominant tech behemoth in China.
However, the rising star is still not spared from regulatory headwinds and also has to continue expanding into new growth initiatives to further expand its total addressable market.
Finance Chicken is passionate about investing and finance. He likes to share his findings on various companies through articles posted on ValueInvestAsia, as well as through his own personal blog https://financechicken.com.