Is JD.com bleeding too fast in its new retail war with Alibaba?

JD.com bravely fights on as share price fell 4% after the financial release.

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Is JD.com bleeding too fast in its new retail war with Alibaba?

With JD founder and chairman Richard Liu’s vision of boundaryless retail and Jack Ma’s dream of integrating online, offline, logistics and data in a single supply chain, ‘new retail’ will be an ongoing theme as the e-commerce giants battle to revolutionize the retail space.

The unforgiving nature of the business

According to the recent quarter results, JD.com delivered a year-on-year net revenue growth of 33.1% and achieved a 27.6% increase in annual active customer accounts.

Despite these seemingly positive results, year-on-year net revenue growth has actually been on a decline, specifically from 65.8% to 33.1% over the past 5 years.  Operating margin has also thinned rapidly.

Deepening of intense competition in the e-commerce space in China could be a reason for the dismal performance. Eager to stay as a top e-commerce retailer, JD engaged in keeping building logistics infrastructures, expansion into retail stores and ramping up of marketing expenses.

Furthermore, as an asset-heavy business-to-customer retailer, intensive research and development, coupled with costly capital expenditure on logistics will affect the short-term prospects of the firm, as reflected in the market sentiment that brought the company’s share price down by 4% the second day after the financial release.

JD’s heavy-asset business model leads to its low operating margin, which is unforgiving towards profitability especially during huge expansion phases.

A natural cause of this can be seen in JD’s loss doubled that of analyst forecast polled by Reuters. JD has even reduced exposure to cash-burning units, easing the financial load to compete in the coming future.

Nevertheless, according to Sidney Huang –  Chief Financial Officer of JD, these are still early days for a long-term growth trajectory.

Given that slow profitability is expected and the competition with Alibaba is a multi-layered battle, it is natural for investors to be non-bullish, especially with a precedence of Xiaomi on the brink of failure due to over zealous plans. The inherent cost associated with over trading cannot be overlooked.

Traditional e-commerce space in China is saturated and rife with extreme competition mainly between the two giants – JD.com & Alibaba. The drive to go for new markets led to penetration into the untapped fresh food e-commerce market in addition to the new retail experiment.

Bleeding too fast in competition?

While untapped markets usually tend towards huge potentials, fresh perishables demand costly warehousing and cold chains. An efficient system for on-time delivery is also necessary to compete with nearby markets that are usually near housing estates.

One of the strategies employed by JD is to offer subsidies to rural farmers and Wang, President of JD Fresh, its fresh produce ecommerce service, also revealed industry’s average net loss to be 35-40%, as cited by Technode.

Additionally, to pit against Alibaba’s new retail poster child Hema stores in Chinese tier-1 cities, JD.com’s 7Fresh with over 10,000 transactions during the operating trial, has combined cooked and fresh-food offerings to rival in the new retail space.

 Last month, JD.com formed strategic partnerships with two prominent Chinese retail brands to offer omni-channel services leveraging on artificial intelligence and big data to cater to blur the lines between online & brick and mortar store – revolutionizing the shopping experience further.

JD.com also supported Swiss luxury watch maker Audemars Piguet launch its first ever online pop up boutique on the WeChat Mini-Program platform, paving the way for ‘’retail-as-a-service’’ model.

While bold ambitions to leverage latest artificial intelligence and data technology to enhance the traditional supply chain does attract consumers and can reap great future returns, out-of-box process has to be in placed in the midst of a fierce competitor to achieve stellar performance – like how Xiaomi experienced a ‘’rise of the phoenix’’ experience after a harrowing 2016.

In the long term, those explorations into the online fresh produce and offline new retail area might eventually be rewarding, but at the current stage, it’ll keep weighing down JD’s revenue and profit growth. And it’s a game that JD has to play simply because Alibaba will only expedite its pace in the same sectors.

Editor: Ben Jiang