This article is the first part of our two-part series on JD, where we provide an overview of the company's history, business model, and key financial statistics. In Part 2, we discuss JD's long term business strategy and the company's potential success going forward.
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History and Development
Prior to 2003, JD started as a physical store selling electronic devices in Zhongguancun, what was then China's largest electronics retail mall in Beijing. With the outbreak of SARS in late 2002, China entered a near-lockdown state by early 2003. Without customers being able to shop in physical malls, JD was forced to adapt to the epidemic by accepting orders by phone and email, then subsequently mailing the goods to customers to fulfill their orders. Eventually, an online retail platform that was the precedent of what would become the current JD was launched in 2004.
After making the transition to online, JD initially kept its focus on selling electronic devices. However, the company experienced problems with unreliable delivery companies that frequently damaged the devices they sold. Consequently, in 2007, JD made the strategic decision to invest in and build its own nationwide fulfilment infrastructure, which laid the groundwork for what has become the current JD Logistics.
Since JD focuses on sourcing high-quality, authentic products with better service and more reliable delivery, buyers mostly purchase high-premium goods (e.g. phones or cameras) from their platform, although the retailer has expanded to offer general consumer merchandise as well. Additionally, since JD sold directly to buyers at first without any third-party intermediaries on the platform, the company did not develop an escrow payment function in the same way that Alibaba developed Alipay.
JD went public on May 22nd 2014 on NASDAQ.
Business Strategy Overview
JD describes itself as a technology-driven e-commerce company transforming to become a leading supply-chain-based technology and service provider. The company prides itself on being China's largest retailer in terms of revenue in fiscal 2020, with total revenues of RMB756.8 billion compared with RMB509.7 billion for Alibaba and RMB59.5 billion for Pinduoduo.
Note: JD primarily sells merchandise directly to consumers so more or less the entire sales price would be counted as revenue, except in the case of merchandise sold by third-party merchants, in which case marketing fees and commissions would be counted as revenue instead. In contrast, Alibaba's and Pinduoduo's platforms are dominated by third-party merchants, and hence their revenue figures mostly constitute of advertising fees and commissions.
JD believes that its competitive edge comes from two main factors: superior customer experience and operational efficiency. Specifically, JD's strategy is to provide consumers with a wide selection of authentic products at competitive prices, while also investing in the long term technology and logistics infrastructure necessary to facilitate efficient and reliable fulfilment services that can boost customer loyalty and satisfaction. Consequently, the strongest differentiating factors that make JD stand out to many Chinese consumers are the authenticity of products, as well as the quality and speed of the company's delivery network and personnel.
Fast, Efficient, and Customer-Oriented Delivery System
JD takes pride in providing professional training to their delivery personnel and ensuring that delivery schedules are arranged based on customers' needs and preferences. The company also introduced their 211 program in 2010, where goods that JD has in stock at a nearby fulfilment or distribution centre will be delivered in the same day for orders received before 11am, and by 3PM the following day for orders placed by 11PM the night before. Expedited delivery within 2 hours is available at an extra charge for customers in major cities. JD has also launched a premium logistics service with China Railway Corporation in order to utilize high-speed trains for secure, long distance transportation of high-end goods that allows customers to enjoy same-day delivery for high-end products originating from further warehouses.
Commitment to Customer Satisfaction
JD highlights that providing high-quality customer service is the company's "top priority", with dedicated 24/7 customer assistance and over 12,000 support staff. The company also claims to have the largest online product review database among all online retail companies in China, with approximately 7.1 billion product reviews from customers as of the end of December 2020.
JD's e-commerce segment comprises of two components: online retail business and marketplace. The former refers to JD's original business of purchasing products from suppliers and selling directly to consumers. The latter was launched in October 2010 as a platform for third-party merchants to sell their products to consumers. The e-commerce business as a whole generated gross merchandise value (GMV) of RMB1,676.9 billion in 2018, RMB2,085.4 billion in 2019, and RMB2,612.5 billion in 2020.
Online Retail Business
JD's online retail business does not include only electronics but has expanded to cover a wide range of general merchandise. As of the end of 2020, JD sources products from over 31,000 suppliers. JD mentions in their annual report that the company is trying to increase direct purchases from manufacturers and become an authorized reseller (rather than buying through an intermediate supplier) in order to benefit from better procurement terms and gain increased access to harder-to-obtain products.
Merchants with products listed on JD's marketplace pay sales commissions to JD. All merchants are required to adhere to strict standards for product authenticity and service reliability, as JD closely monitors the performance and activities of third-party merchants.
As mentioned above, JD places a huge emphasis on efficient logistics and takes responsibility for the entire supply chain process, starting from procurement of the items to transporting the products and distributing them to end customers. JD takes pride in delivering most of the orders placed on their platform themselves. Since the decision to invest in and build a nationwide fulfilment infrastructure in 2007, JD has continously remained committed to expanding the company's logistics network.
As of the end of December 2020, JD's warehouse network covered almost all counties and districts in China.
Some key statistics include:
Over 900 warehouses operated by JD Logistics
Over 1,400 "cloud warehouses" operated by third-party warehouse owner-operators under the JD Logistics Open Warehouse Platform
Gross floor area of 21 million sq. metres (including the gross floor area of cloud warehouses)
242,452 warehouse and delivery personnel
Note: as a comparison, Amazon's fulfilment and data centres have a total area of 37.4 million sq. metres globally as of the end of 2020. Amazon does not provide a number solely for the area of its fulfilment centres in the company's annual report.
More Than Just E-Commerce
Even though JD is commonly viewed as just an e-commerce company and its core business is e-commerce, it would be more accurate to understand JD as an ecosystem of related businesses in the same manner that the businesses within Alibaba and Ant Group form an ecosystem.
We highlight some important components of JD's ecosystem below:
Undoubtedly the most important component of JD's ecosystem second only to the core e-commerce business itself, JD Logistics plays a crucial role in driving JD's business success and is a key area of focus for the company's future growth.
JD Logistics was officially established in April 2017 with the goal of providing integrated supply chain and logistic services to businesses across a wide range of industries, not necessarily just those in e-commerce. Some of these solutions include warehouse management, transportation, delivery, after-sales service, and cloud-based service and data analytics. Starting in October 2018, JD Logistics opened up its logistics network to consumers by offering parcel delivery services to users in specific regions.
JD claims that JD Logistics is the largest player in China's integrated supply chain logistics services market in terms of total revenue in 2020. During that year, JD Logistics served more than 190,000 corporate customers with approximately 90% of the total online retail orders processed through its network being delivered on the same day or on the day after the order was placed.
JD Logistics prides itself on its dedication to improving the supply chain management process through the use of advanced technology. As of the end of 2020, the business group has a team of over 3,700 R&D professionals, as well as more than 4,400 patents and computer software copyrights, of which over 2,500 are related to automation and unmanned technologies.
JD Logistics went public on the Hong Kong Stock Exchange on May 28th, 2021.
JD-Y is JD's supply chain research and development unit that focuses specifically on supply chain innovation.
JD Property was established in 2018 as a subsidiary that owns, develops, and manages JD's logistics facilities and other real estate properties to support JD Logistics. In the course of its short history thus far, the business group has established two logistics investment funds with Government of Singapore Investment Corporation (GIC - Singapore's sovereign wealth fund) in February 2019 and January 2020, as well as a third fund with GIC and Mubadala Investment Company (MIC - an Emirati sovereign wealth fund) in September 2020. In March 2021, JD Property engaged in preference share financing agreements with Warburg Pincus and Hillhouse Capital to leverage the funds' industry expertise and further expand its infrastructure development and operations.
JD Technology - JD Digits, JD Cloud & AI
JD Digits, originally known as JD Finance, was established in 2017 as JD's fintech arm (similarly to Alibaba's Ant Group). JD Cloud & AI was established as JD's research and development unit for artificial intelligence, big data analytics, and cloud computing, three areas of technological innovation which the company believes are crucial to achieving sustainable future growth.
In light of the tightening regulatory stance (see here and here) on fintech in China, JD Digits was rebranded as JD Technology in January 2021 to signify the company's intent to focus less on fintech and more on technological development as a whole. JD Cloud & AI were subsequently spun off from JD and absorbed into JD Technology.
JD Health is described as a comprehensive "internet + healthcare" ecosystem that provides pharmaceutical and healthcare products as well as internet healthcare services to customers. In 2020, the business group earned total revenues of RMB19.4 billion from 89.8 million annual active users with more than 100,000 daily health consultations. JD Health commenced trading on the Hong Kong Stock Exchange in December 2020.
Note: digital healthcare is becoming a more and more prominent trend in China along with the rise in income levels and an aging population. Other internet healthcare platforms include Alibaba Health by Alibaba Group and Ping An Good Doctor by Ping An Group.
In this section we present important financial highlights from JD's 2020 annual report and Q1 2021 earnings report.
We note that JD uses the term "net revenues" to refer to the top line item of the income statement, which is more commonly referred to as total revenues. The company states that this is to reflect the fact that revenues are recorded "net of discounts, return allowances, and value-added taxes". Moreover, JD explains that revenues generated from third-party merchants are recorded on a net basis in the sense that JD does not have control over the goods sold by external merchants and cannot establish prices for them, but rather just recognizes the commissions and (where relevant) marketing fees earned.
#1: JD's Revenues Have Been Growing Year on Year with a CAGR of 33%
JD's revenues have been showing steady annual growth with a compound annual growth rate (CAGR) of 33% during the 2015-2010 period. According to the company's recent earnings report, JD's revenue for the first quarter of 2021 is RMB203.2 billion, a year-on-year growth of 39% from the same quarter the previous year.
#2: 90% of JD's Revenues Come From Its Own Online Retail Business, But This is Gradually Changing
We break down the sources of JD's revenues into: (1) net product revenues, and (2) net services revenues. Product revenues refer to revenues generated by JD's own online retail business where the company purchases goods from suppliers and sells them directly to consumers. Services revenues consist of fees earned from providing marketing and logistics services to business partners, as well as commissions earned from third-party merchants for sales made through JD's online market place.
Approximately 90% of JD's net revenues are product revenues, although this percentage has been gradually declining as the company has been trying to diversify its business.
#3: Electronics Still Dominate JD's Sales
In the exhibit below, we further break down JD's net revenues. Specifically, product revenues are categorized as either (1) electronics and home appliances revenues or (2) general merchandise revenues, while services revenues are categorized as (1) marketplace and marketing revenues or (2) logistics and other services revenues.
JD's revenues are dominated by sales of electronics and home appliances which reflects the company's history of selling electronic goods. The percentage of electrical appliances as a proportion of total net revenues has been declining over the past five years as JD has been trying to diversify its product offerings. Nevertheless, electronic sales still constitute slightly over half of JD's revenues in 2020 and Q1 of 2021. In line with JD's product diversification strategy, the share of general merchandise revenues has been rising over the same period, from 22% of net revenues in 2016 to 34% in 2020.
Logistics services, a business segment which JD has been placing increasing importance on as a key investment to the company's future success, contributes the least to net revenues. The revenue contribution of logistics and other services has risen from 1% in 2016 and 2017 to 5% in 2020 and 7% in Q1 of 2021. Of course, it can also be argued that this only measures the revenue directly attributable to JD's provision of logistics services to business partners, whereas part of the benefits from investing in logistics and infrastructure can also be reflected in higher product sales including both direct purchases from JD and through JD's online marketplace.
Commissions and fees earned from JD's marketplace have a stable 7% share of net revenues.
#3: JD's Operating Income Turned Positive In 2019
Since 2019, JD recorded positive operating income. The company's operating income was RMB9 billion in 2019, RMB12.34 billion in 2020, and RMB3.59 billion in Q1 of 2021.
#4: JD's Losses Were Driven by New Businesses
We provide a breakdown of JD's operating income/loss by business segment. Up to and including the year 2020, JD identified two operating business segments: JD Retail and New Businesses. JD Retail consists of the company's online retail business, online marketplace, as well as marketing services in China. New Businesses include logistics services provided to third parties, overseas businesses, technology initiatives, asset management services to logistics property investors, and sales of development properties by JD Property. Starting in 2021, JD now classifies JD Logistics as a unique business segment separate from New Businesses.
JD Retail is shown to be more and more profitable across the years, whereas JD's more risky initiatives in New Businesses and its logistics segment are still operating at a loss.
#5: Overall Positive and Growing But Not Yet Stable Cash Flows
JD has, on the whole, generated positive cash flows over the past five years with the exception of 2018. The company mentions that the dip in FCF in 2018 is due to higher than usual capital expenditure for the year as well as a one-off decrease due to a complex settlement process change required by the regulators.
Our Thoughts: the (somewhat) lack of predictability in cash flow pattern is normal for a company that is still in the growing stage like JD, especially given that JD is still in the process of modifying and refining its business model. We think that, as it currently stands, JD's cash flows seem reasonable given its business situation. However, it will be interesting to see how the company can manage its cash flows going forward when new initiatives, and the logistics expansion in particular, can require substantial capital expenditure.
Part 2: The Future of JD
Please refer here for the second part of our JD series.
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