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How JD is making its mark in Southeast Asia

JD is known to invest a lot in logistics. Shoppers seem to appreciate the enhanced customer experience.

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How JD is making its mark in Southeast Asia

Jingdong, better known as JD, is one of the big beneficiaries of China’s first internet wave. Founded by Richard Liu, it began as a traditional brick-and-mortar store selling electronics in 1998. Now, it’s a publicly traded company with a market cap well over US$40 billion. The firm, in 2014, had beaten its big rival Alibaba to a US IPO.

Now that China’s e-commerce market is showing signs of saturation — data from McKinsey shows growth rates in tier 1 to tier 3 Chinese cities are already slowing down — companies like JD and Alibaba are intensifying efforts to explore other markets such as Southeast Asia, where e-commerce is just starting to take off.

 

A retailer forced to go online

A story often told is that JD became serious about selling online in 2003 during the severe acute respiratory syndrome (SARS) outbreak in China. People couldn’t lead their usual lifestyles for fear of catching the SARS virus, and this forced them to shop online. Offline businesses were badly affected. To avoid going under, JD moved its stores online. That year, JD saw a 26% annualized growth in its online business. By 2005, it had fully pivoted its business to the online world.

Then JD started building its own logistic systems in major Chinese cities like Beijing, Shanghai, and Guangzhou and expanding into more product lines.

From the start, JD invested in a solid supply chain ecosystem based on maximising efficiency. It not only invested in logistics and IT, but also the overall customer experience and quality of service.

JD’s approach is asset-heavy but has ultimately led to its ability to offer shoppers speedy and reliable services backed by its nationwide fulfillment infrastructure and last-mile delivery network. By 2018, it owned 500 warehouses, 6,906 delivery stations and pickup stations across 2,655 counties and districts in China.

The firm has in some ways gone full circle in that it has now moved beyond online retail and is bringing technology to a new generation of offline stores, a concept it calls “boundaryless retail”. 7Fresh Grocery Chain, for instance, is a flagship product that integrates technology elements with the traditional brick-and-mortar shops.

Overall, JD owns up to 25% of the e-commerce market share in China, according to iResearch data.

 

Taking competition across borders

Increasing competition at home and the already saturating Chinese e-commerce market led JD to venture out internationally.

Southeast Asia was particularly attractive because of its many similarities with China, Sam Han, JD’s head of communications told KrAsia.

He pointed out the region’s currently still low online retail penetration of 1-2% and the underdeveloped logistics infrastructure are opportunities for JD.

Southeast Asia is home to a total of 158 million middle-class consumers, according to the Business Times and as such also promises huge benefits from the demographic point of view.

Alibaba began with an all-out expansion strategy in the region. For US$1 billion, in 2016, it acquired a controlling stake in Lazada, a major e-commerce player that has a wide reach across 6 Southeast Asian countries. Alibaba later further raised its ownership stake and installed its own leadership team at Lazada.

JD went a different route, usually opting to strike up partnerships and acquiring minority stakes in foreign markets. It brings its logistics expertise into the region in trade for market access.

That’s because JD believes that each country has its unique characteristics that require separate operations working closely with local partners, Han explains. Operating multiple countries through a unified platform would not make sense for JD.

“JD’s online retailer model with the emphasis on in-house logistics and highly dedicated customer service operations is the technology trade-off that the firm can offer the local partners,” he adds.

 

JD’s plan for Southeast Asia

JD began its global expansion in 2015, through a tie-up with a Russian online retailer. Later that year it launched in Indonesia, where it deviated from the minority partnership principle.

Here, it launched its own operation under JD.id, without a local retail partner. It first focused entirely on electronics and gadgets but has since branched out into a variety of shopping categories.

JD has heavily invested in the country and built a series of warehouses. Earlier this year, it said it is adding another “three to four” warehouses in addition to the five it has already built, in an effort to streamline delivery across the archipelago.

“JD.id relies on local insights to develop its own logistics to improve local infrastructure and customer service,” Han says.

In addition to a classic B2C retail model, Han explains, JD.id also accommodates a curated third-party seller marketplace, which makes it possible to offer a wide variety of products while maintaining high quality.

The firm’s investments in a tight-knit supply chain seem to be paying off to some degree. In a recent survey that compared several big e-commerce sites in Indonesia with each other, market research firm commerceIQ found that JD.id scored highest in some customer satisfaction categories. For example, JD.id customers were more likely to recommend JD.id to their friends than those who usually shop on other sites.

It has also allowed JD.id to get a foothold in a category that’s still quite new in the country’s online shopping landscape: fresh groceries.

In ecommerceIQ’s survey, 19% of respondents said they purchase groceries on JD.id, as opposed to 11% for Shopee and 10% for Lazada.

JD.id’s logistics infrastructure that enables reliable delivery and the direct retail model that ensures the authenticity of products seems to have helped it enhance the user experience, says Sheji Ho, chief marketing officer at ecommerceIQ.

Indonesia was also the first place outside of China in which JD chose to open one of its “unmanned retail stores,” a fully automated shop where people pay with smartphones and that showcases new technologies like facial recognition. With this experience center, JD wants to introduce its new retail concept in Indonesia says Han.

After Indonesia, JD expanded into Thailand, the second most populous country in Southeast Asia.

Here, it has partnerships with local companies. JD set up joint ventures with Central Group, Thailand’s largest retailer, and says both parties together are investing US$500 million into building a  logistics network including warehouse and last-mile delivery team. The joint venture is known as JD Central in Thailand.

There are additional programs JD is involved in that aim to connect Thailand with China. Some of the key initiatives include the Eastern Economic Corridor (EEC), a development plan by the Thai government on cross-border e-commerce, to which  JD lends its logistics technology such as warehouse automation and AI-driven inventory management.

Separately, JD has also invested into Thailand’s online fashion brand Pomelo that has a presence across Thailand, Indonesia, and Singapore.

In Vietnam, JD has invested in local e-commerce site Tiki.vn, which is part of VNG, a Vietnamese entertainment, and social media firm.

While JD is gaining a stronger foothold in Southeast Asia, the firm is also taking steps in other regions. It has launched partnerships with Google and Walmart in a push for global expansion into the US and Europe.

However, JD’s asset-heavy business model means higher operating costs and thinner profit margins, which makes for challenging financials during times of expansion.

In its latest Q2 financial results, for instance, despite seeing its net service revenue grow, the firm missed its mark on the earnings per share target. Whether that can be managed is yet to be seen. The company’s share prices were spiking during JD’s expansion years since 2015, but in a currently more bearish climate, there seems to be growing skepticism among shareholders.

Still, there are a number of investors who think differently.

They see JD’s present falling share price as an opportunity to buy into  JD’s business model, believing that JD’s strategy will be sustainable in the long-term, and the current issues are ‘short-term’ in nature.

Editor: Nadine Freischlad