Earnings Preview: Logistics strategy to deliver strong Q2 for JD.com
- JD.com's Q2 earnings are released on Friday, prior to the opening of US markets
- Investors will be keen to learn how it's expanding its logistics infrastructure
- Its O2O app, Daojia is set to be a long-term revenue driver
Continued growth in non-electronic retail
Despite originally being an electronics retailer, JD.com has since expanded its product range to become a general retailer that can actively compete with Alibaba's Taobao and Tmall platforms. During the first quarter, management announced that non-electronic goods accounted for more than 49% of GMV (transactions), and this proportion should continue to grow throughout the rest of the year.
The firm announced that it had come to an agreement with Uniqlo to close its flagship store on JD.com, despite only announcing its opening three months ago. The related press release stated that there was an "e-commerce strategic restructuring", and management won’t comment further in the conference call. However, it is likely that Uniqlo has felt pressure from JD.com’s biggest rival Alibaba, whose Tmall and Taobao platforms have hosted Uniqlo’s store since 2009.
Nevertheless, JD.com launched flagship stores for Unilever and Sephora, as well as an exclusive deal with singer Taylor Swift to sell her merchandise. As I have discussed over the past few months, the firm has been quickly expanding its cross-border e-commerce platforms, and now has six country specific stores: France, South Korea, Japan, Canada, Australia and the US. This will allow Chinese shoppers to order products imported from their respective country.
the backing of tech giant Tencent. Photo: iStock
As I discussed in July, JD.com has entered the O2O industry with its new app JD Daojia (京东到家 lit. JD At Home), which allows users to purchase food from restaurants, convenience stores and other services that can be sent directly to their home or office within the hour. This is a major structural trend in the industry that has now seen Baidu commit to spending RMB 20 billion on building out its own service.
O2O is set to be a long-term revenue driver and the next stage of tech industry evolution. It is essential that JD.com builds a presence in the industry, and although the recent release of JD Daojia can be seen as late, given that large platforms have already taken a commanding market share, I expect that JD.com and Tencent will work together in the industry to stave off competition from Baidu and Alibaba.
Investment in logistics
Logistics is a key investment strategy for online retailers, and will inevitably dictate market share. This is because firms have become so broad in terms of product range that there is often very little to differentiate between the platforms, as the products are the same, and so are the prices.
Alibaba has been investing heavily in its logistics subsidiary Cainiao to correct this, and investors should expect to see a continued response from JD.com. I have previously discussed how online retailers are targeting the central and western provinces of China in order to gain access to hundreds of millions of new potential customers, but the wealthy eastern coast also has a large opportunity that firms want to exploit.
I believe that this ties in nicely with JD.com’s O2O app, because it is more focused on convenience store purchases than its major rivals. It makes the idea of online grocery shopping more appealing and more common by encouraging people to purchase small items such as soft drink or milk through the app and wait an hour for it to be delivered, instead of actually going to the store.
Internet financing after stricter government regulations
Earlier this year, Chinese equities were rallying heavily and consumer credit was easy to obtain. However, with the subsequent market correction, the Chinese government has been quick to crack down on investment margin and credit, in order to reduce the margin levels in financial markets.
The issue for management is that new regulations will likely stunt the growth of JD.com’s credit business, but in the long run, it is necessary, because consumers need regulatory protection. Management should comment on the ongoing regulatory action in the industry, and how investors can expect this to affect the consumer credit business.
Since its IPO last year, JD.com has released four earnings reports, and they have almost always beaten consensus. The only anomaly was Q115’s earnings, which missed by $0.02, however the firm has repeatedly stated that it currently isn’t targeting profitability, as building market is much more important.
Source: JD.com investor relations