JD.com Inc. has been a distant second to Alibaba Group Holding Ltd. in online shopping in China. But now backed by Wal-Mart Stores Inc., the world’s largest retailer by sales, JD may be in a position to close the gap.
The Beijing-based company whose shares are traded on the Nasdaq exchange, reported today net revenue increased 41.2% in the first quarter to 76.2 billion yuan ($11.1 billion), while the total value of goods sold on its e-commerce site increased 42% to 184.1 billion yuan ($26.7 billion.) The e-retailer also reported net income of 239 million ($35 million), its first profit since going public in 2014.
JD.com said today it had begun selling on its e-commerce site goods from British grocery chain Asda, a Wal-Mart subsidiary. It also said it was working with 80 Wal-Mart stores in China and 165 stores operated by Chinese supermarket chain Yonghui Superstores Co. Ltd. to offer one-hour delivery of groceries to online shoppers in China.
Groceries are “a key category for JD to attract female customers, improve purchase frequency and margin profile,” analysts at Credit Suisse Group AG led by Evan Zhou wrote in a note to clients before JD.com released its earnings report. “It still takes time to educate the market and to grow user stickiness, so subsidy is still needed to maintain JD’s price attractiveness for fast-moving consumer good offerings.”
The online retailer also made another announcement today sure to raise eyebrows at Alibaba headquarters: JD.com said it has become the first Chinese company to become “a certified member” of the American Apparel & Footwear Association. The U.S. trade group of apparel manufacturers has harshly criticized Alibaba for allegedly failing to police sales of counterfeit and unauthorized merchandise on its big Chinese online marketplaces, notably Taobao and Tmall. Those accusations helped land Alibaba back on a U.S. government blacklist of websites where counterfeit goods are routinely sold, a decision announced by the U.S. Trade Representative in December.
JD.com today stressed its commitment to protect intellectual property, including the designs of fashion houses. “As part of its AAFA membership, JD.com will cooperate with international fashion brands on issues surrounding [intellectual property] protection as the company continues its push to bring more top global fashion brands to Chinese consumers through the JD.com platform,” JD.com said today in a statement.
Wal-Mart maintains a substantial lobbying organization in Washington and could have played a role in the AAFA admittance of JD.com. Wal-Mart, AAFA and Alibaba did not immediately respond to requests for comment.
China’s leading e-commerce companies all have been recruiting foreign brands to sell on their sites, including Alibaba, JD.com and the Amazon China unit of Amazon.com Inc. In the first quarter, JD also announced that European cosmetic brand Avène and three Giorgio Armani brands had opened stores on JD.com. The e-retailer also announced partnerships with three Italian furniture brands, Savio Firmino, Bordignon and Contractin, along with such internationally known brands as Bayer, Inferno and Cetaphil.
China’s growing middle class snaps up foreign goods, and increasing its selection of brand-name goods from overseas can help JD.com close the considerable gap between it and Alibaba. Alibaba last June reported total sales of $463 billion for the prior fiscal year on its online marketplaces, mostly consumer-facing sites in China, and it’s believed to account for well over half of the $752 billion in online retail sales in China reported by the country’s National Bureau of Statistics.
JD.com’s total sales of $26.7 billion suggests annual gross merchandise value of just over $100 billion, or roughly one-quarter of what Alibaba sells on its consumer-facing online marketplaces in China. (However, JD.com says in a footnote to this earnings report that if it calculated gross merchandise value in the same way “the company’s major industry peer” does, a reference to Alibaba, JD.com’s first quarter GMV would have been 253.2 billion yuan, 37.5% higher than what it reported.) While JD.com allows other retailers and brands to sell on JD.com, its own sales accounted for most of its first quarter revenue. JD.com reported online direct sales of $69.75 yuan in the first quarter ($10.13 billion), an increase of 39.6% from the same quarter a year earlier.
JD.com is No. 1 in the Internet Retailer China 500, which ranks retailers by online sales of merchandise they own. Despite Alibaba’s dominant position in online retailing in China, it is not ranked because, like eBay Inc., it hosts other sellers and does not sell merchandise on its own behalf. Amazon China is No. 4 in the China 500.
For the first quarter of 2017, JD.com reported:
- Total net revenue of 76.226 billion yuan ($11.074 billion), an increase of 41.2% from 53.970 billion yuan in the prior-year quarter.
- Active customer accounts for the prior 12 months of 236.5 million, an increase of 40% from 169.1 million.
- Fulfilled orders totaled 477.1 million, an increase of 39.5% from 342.1 million orders in the same quarter a year earlier. Mobile devices accounted for 81% of orders, a 56% increase from the prior-year quarter.
- Net income of 239 million yuan ($34.7 million), versus a loss of 910 million yuan a year earlier.
JD said a plan to spin off its online payments and finance division in a multibillion-dollar deal may close this quarter. That raises cash to bankroll the warehouses and drone delivery networks it’s building to become one of Asia’s dominant e-commerce players. Yet that race to build logistics networks and attract customers could still weigh on margins in 2017.
“This doesn’t mean we should expect them to have positive operating profit all year,” Kirk Boodry, an analyst with New Street Research, said regarding the surprise profit. But “with the first quarter beat we feel more comfortable with them getting there” by 2018 or 2019, on an operating basis.
JD.Com chief financial officer Sidney Huang called the quarter a “milestone” for the company that reinforced management’s long-term vision. But he cautioned that looming investments in new businesses and the expansion of its logistics network could hurt profits in the coming year. The construction of warehouses, for example, would “significantly increase” capital expenditure resulting in falling free cash flow.
“Our quarterly earnings will likely be lower in one or more of the next few quarters,” he warned. “The Chinese e-commerce market remains highly competitive and we remain committed to returning a meaningful portion of our incremental gains from scaled economies onto our customers.”
JD said it expects revenue to grow 35-39% to between 88 billion yuan and 90.5 billion yuan this quarter, compared with the 89 billion yuan analysts estimated.
The company founded by billionaire Richard Liu is investing heavily on delivery logistics and new markets from groceries to women’s fashion, aiming to dredge up new sources of revenue. Its strategy is to focus on better service to improve the loyalty of customers and their willingness to spend. But rivals such as Alibaba have fought back.
Its running battle with Alibaba may now start to spread to Indonesia and other Southeast Asian countries. JD’s said to be in talks to invest hundreds of millions of dollars into Indonesian e-commerce platform Tokopedia, which could form the basis of a bigger push into the region. But it faces competition from Alibaba’s Lazada Group SA, which has a head start in key countries such as Singapore.