JD.com is rising amid a year of low prices, signaling a significant recovery

After a year of intense price competition, China’s e-commerce giants appear to be gradually regaining user trust and entering a phase of slow recovery.

In the first quarter of 2024, Alibaba achieved double-digit growth in gross merchandise value (GMV) for the first time in two years, and the growth rate of customer management revenues – driven by trade advertising fees and commissions – also reached a new record for three quarters. JD.com (also known as Jingdong) is not far behind, exceeding market expectations in terms of GMV, revenue, profits and user numbers.

More importantly, both companies saw first-quarter 2024 GMV growth rates exceed the 11.6% online retail growth rate, signaling recovery after several quarters of struggles. JD’s share price also rose 40% last month, outpacing the 27% gain of the Hang Seng Tech Index (HSTECH) over the same period. The stock then retreated, ending around 5% higher since the beginning of the month.

This time last year, Xu Lei, who had worked at JD for 12 years, announced his retirement plan, and CFO Sandy Xu (also known as Xu Ran) would succeed him as the new CEO. In his farewell speech, Xu Lei thanked and praised Sandy their activities in the future.

Now, a year later, Sandy Xu has perfectly executed Richard Liu’s low-price strategy. In the first quarter of 2024, JD achieved revenue of RMB 260 billion (USD 35.9 billion), up 7.0% year-on-year, and operating profit reached RMB 7.7 billion (USD 1 billion), which represents a significant increase of 20.3% year-on-year.

In a year dominated by cheap subsidies, JD’s retail operating profit fell much less than the company had indicated, by about 5% instead of the forecast 16%.

Breaking out of the retail morass

The first quarter of 2023, when Xu Lei had not yet retired, was the quarter when JD’s retail sector plunged into difficulties.

At this time, the shadow of the epidemic has not yet disappeared, and revenues from product categories such as 3C electronics and daily use products have declined, and the revenue dynamics have decreased by 2% and 8.7%, respectively. A year later, JD appears to have seen a rebound in both major revenue categories.

In the first quarter, 3C electronics revenue increased from RMB 117 billion (USD 16.1 billion) to RMB 123 billion (USD 16.9 billion), a growth rate of 5.3%, almost on par with social commerce. After launching a RMB10 billion ($1.3 billion) subsidy plan, JD closed the price gap in electronics categories compared to its competitors, regaining market share.

This was reported by a JD informant 36 kr that as of the second quarter, the growth rate of 3C electronics continues to increase and outpace the growth of social commerce. Recently, JD also signed deals with Xiaomi, Lenovo and Oppo.

JD’s daily consumer products revenue increased from RMB 78.5 billion ($10.8 billion) to RMB 85.3 billion ($11.7 billion), an increase of 8.6%, reaching a new high in recent two years and continuing a significant recovery after a 0.2% increase. indicator from the previous fourth quarter.

The rebound in sales of everyday items can largely be attributed to JD’s adjustment to the postage threshold for self-contained items last August, reducing it from RMB 99 ($13.6) to RMB 59 ($8.1) for non-members J.D.Plus. Sandy Xu previously revealed that this action enabled supermarket order growth to recover and purchase frequency to be much higher than the increase in average revenue per user (ARPU), which has been sustained for the past two quarters.

Currently, this postal service is not limited to self-handled goods. By the end of the first quarter, 90% of third-party goods JD has also implemented a new free shipping policy for orders over RMB 59, while all products in 13 categories such as home appliances, kitchenware and health products are subject to shipping. free.

Initially, there were concerns whether this action would weaken the dynamics of revenues generated by logistics services. However, in fact, the increase in shopping frequency not only did not weaken, but indirectly accelerated growth.

In the first quarter, JD’s logistics and other services revenues reached RMB 32.3 billion (US$4.4 billion), with a growth rate of 13.5%, exceeding the product revenue growth rate of 6.6% and the group revenue growth rate of 7%. However, the growth rate of implementation costs was only 9.3%. This difference took JD Logistics from a loss of RMB 1.12 billion ($154.7 million) in the first quarter of 2023 to a profit of RMB 220 million, and the operating profit margin also returned from -3.1 % to 0.5%.

Regarding the progress in the “open platform” (POP) ecology that raises concerns among outsiders, Sandy Xu revealed that at the end of the first quarter of 2024, the number of active sellers on JD POP exceeded one million, and the order volume and the number of users third-party products have increased significantly. However, it also admitted that, compared to its competitors, JD was still at a disadvantage when it came to third-party product supply. But she said it’s only a matter of time before 3P orders and GMV exceed self-handled inventory. The term 3P refers to the business of JD’s Third Party Platforms.

So what’s the secret to staying profitable? One important reason for Sandy Xu’s promotion as JD’s new CEO is her financial situation. After JD implemented a low-price strategy, Liu did not want unlimited subsidies and investments, but to spend every penny wisely.

Over the past year, JD’s earnings have exceeded market expectations in almost every quarter. At least in this regard, Sandy Xu did a good job. As for how JD achieved a rebound in revenue and users without reducing profits, there are some conclusions to be drawn from this quarter’s financial report.

Before the report was published, JD’s guidance for the retail business was that operating profit could fall by 16%, but in reality it only fell by about 5%. With revenues and expenses broadly in line with expectations, the main difference was that gross profit exceeded expectations by approximately RMB 1.8 billion ($248.5 million), leading to a year-over-year increase in gross profit margin of approximately 0.5 %.

This could be attributed to JD controlling the discount rate for self-sold goods and covered categories or optimizing certain product structures in the first quarter – e.g. ensuring greater traffic for high-margin goods. The rebound in the growth rate of everyday products this quarter also seems to indirectly support this thesis.

JD, on the other hand, relied more heavily on user subsidies through POP sellers, at the expense of weak advertising revenues and commission revenues. JD’s ad services revenue performance continued to remain sluggish this quarter, with a growth rate of just 1.2%. This was reported by several brokerage analysts 36 kr that while advertising revenues have improved somewhat, commission revenue growth continues to decline, roughly on par with the decline in the prior fourth quarter, both of which are in double digits.

Previously, POP sellers participating in the JD subsidy program claimed that they were primarily motivated to participate in the program by commission rebates offered by JD. The commission rate for POP sellers selected for the program is automatically reduced to 0.6% compared to 3-8% in the past for various categories, which has effectively weakened JD’s commission revenue.

Attracting third-party sellers, optimizing product structures and better implementing low-price strategies have been key themes for JD over the past year. However, the historically high number of new sellers has not yet significantly increased the company’s revenues.

In announcing the financial report, JD’s management once again emphasized that it will take time to translate the increase in the number of 3P sellers into increased orders, GMV and revenue. In the short term, JD said it will not make monetization its main goal as its 3P platform and other platforms are at different stages, which is not conducive to it.

This was reported by a JD employee 36 kr that based on Sandy Xu’s performance last year, she may be the most suitable candidate for CEO right now. A series of adjustments and a turbulent external environment left JD in need of a stable figurehead who could work with Liu and lead the group forward. This stability applies not only to management, but above all to finances and results.

JD’s journey last year was characterized by resilience and adaptation to changing market conditions. As it continues to navigate the e-commerce landscape, a focus on financial prudence and strategic execution will likely remain key to its success.

KrASIA Connection contains translated and adapted content that was originally published by 36Kr. This article was written by Dong Jie for 36 kr.