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Redefining online retail

Aug 14 2018 17:06
Sarah le Roux


Founded in 1998 as a 4m2 electronics stall in Beijing, JD.com had expanded to 12 stalls by 2003 when the SARS epidemic broke out. To protect his employees, founder and CEO Richard Liu temporarily shifted the business online. The advantages soon became apparent, and in 2004 he had shifted operations entirely online. JD.com is now the largest single retailer in China.

A tale of two business models

China’s $2tr e-commerce market is dominated by JD.com and Alibaba. JD.com is primarily a first-party seller. Products are acquired, stored and delivered by JD.com, similar to Amazon or Takealot. Alibaba is primarily a platform for third parties. Millions of sellers operate independently on its platform, similar to eBay or Bidorbuy. Rather than operate its own logistics, Alibaba established Cainiao Logistics Company, a central delivery system platform incorporating multiple delivery providers.

On gross merchandise value sold, Alibaba remains larger, but JD.com is catching up. In recent years, Chinese preferences have shifted from pure price consideration towards quality and service – detrimental to Alibaba given its restricted control over what is sold and how it is delivered.

China’s largest logistics network

JD.com operates a network of 515 warehouses and almost 7 000 delivery stations covering most of China. More than 100 Chinese cities have a population of over 1m residents, making it feasible to have multiple logistics centres to reduce delivery times, with sufficient demand to operate at capacity.

Physical shops have historically maintained an immediacy advantage over online retail, but smart logistics and automation have enabled JD.com to challenge this without storing excessive inventory. Products start at large-scale sorting centres in key locations. Once ordered, they are shipped to smaller distribution centres. Customer purchasing records are used to analyse buying patterns to predict future orders, enabling certain products to be sent to delivery centres ahead of ordering, reducing delivery time. Delivery within 24 hours is provided in almost every city and averages three hours in major city centres.

Faster delivery enabled fresh food retail from 2012. By 2016, JD.com’s cold chain network was sufficient to launch JD Fresh as an independent food business unit. Live lobsters ordered from Canada can now reach customers’ homes in 48 hours in parts of China.

Where science fiction meets reality

JD.com aims to fully automate its entire logistics system and realise even greater speed and geographic coverage. In 2016, it began a rural drone delivery programme, starting with 30 drones capable of carrying packages of up to 15kg and travelling up to 50km. In 2017, the fleet increased to 40 drones, with newer models capable of double the capacity and distance.

In September 2017, JD.com opened a 30?000m2, automated logistics centre in Shanghai which sorts 20 000 packages per hour with almost zero human input. Products are logged, sorted and shelved, picked, packed and labelled, all by robots. Transportation is via a conveyer belt network with image scanners to track product movements. The smart logistics system directs them, monitoring throughout and rerouting as necessary. Driverless forklifts load packages onto trucks for transfer to delivery centres around Shanghai.

JDcom’s augmented reality technology improves the online shopping experience. When shopping for lipstick, a customer can upload a selfie to the JD.com app to test out shades, while the JD Dream app allows customers to virtually place a couch in their living room to assess style and fit.  The business has invested in an omnichannel strategy ahead of international peers, launching a physical supermarket, 7Fresh, in Beijing this year. Smart mirrors sense when an item is picked up, automatically displaying origin and nutritional information. Autonomous shopping carts follow customers. Self-checkout is available, with an option to pay via facial recognition.

Friends with benefits

In 2014, Tencent acquired 15% of JD.com. Tencent’s own e-commerce business, Yixun, was then the fourth-largest player, controlling 3% of the market versus JD.com’s 22% and Alibaba’s 50%. Yixun merged into JD.com, and Tencent began directing traffic to JD.com via its social media platforms. Tencent subsequently increased its stake to 21.25%.

JD.com also partnered with Tencent on marketing solutions. Their combined user data assists merchants in understanding their customers and how to reach them. Targeting has reduced advertising volumes while increasing relevance – improving shopping experience and customer conversion.

After Tencent and Richard Liu, Walmart is the third-largest investor in JD.com at 12.1%. Walmart and JD.com have a strategic partnership to increase efficiency by integrating their platforms, supply chains and customer resources in China, allowing consumers to buy goods directly from Walmart on the JD.com platform, providing access to US products.

Outlook

Through its strategic partnerships, world-class logistics and continuous innovation, JD.com has rapidly grown into one of the world’s largest retailers. Similar to Amazon, the business is currently loss-making as it continues to invest to build scale. Despite its size, it is still in the early stages of its journey, with a long runway of growth and profitability ahead.

Sarah le Roux is an associate analyst at Kagiso Asset Management.

This article originally appeared in the 16 August edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

investment  |  online shopping  |  alibaba
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