Morningstar | Founder and CEO Richard Liu's Strong Leadership at JD Is a Double-Edged Sword
JD.com has emerged as a leading disruptive force in China's retail industry by offering authentic products online at competitive prices with speedy and high-quality delivery service. JD’s mobile shopping market share has increased from 12.7% in first-quarter 2016 to 15.7% in second-quarter 2017, according to iResearch. JD adopted an asset-heavy model with self-owned inventory and self-built logistics, while Alibaba has an asset-light model.JD is a long-term margin expansion story driven by increasing scale from JD direct sales and marketplace, partially offset by the push into JD logistics in the medium term. According to Deloitte, JD is the largest retailer in China. Among listed Chinese peers, JD’s net revenue in 2016 was USD 37 billion, 76% higher than for Suning, the second-largest listed retailer. JD does not disclose gross margin for the first-party business, but according to the earnings call for first-quarter 2017, JD’s gross margin in the first-party business still lagged the top-of-line retailers by over 10% on average. JD’s increasing scale in each category will allow it to garner bargaining power toward the suppliers and volume-based rebates. Since 2016, JD no longer fully reinvests its gains from improving scale. Instead, it offers the same promotion scale for customers while improving margins. Gross margin improved yearly from 5.5% in 2011 to 15.2% in 2016, and following the consolidation of JD Finance in second-quarter 2017, gross margin improved year over year from 13.7% in 2016 to 14.0% in 2017. In the medium term, we expect to see the investment into JD logistics will hold back some of the margin gains. Starting April 2017, the logistics business became an independent business unit that will open its services to third parties. Management is squarely focused on gaining market share instead of profitability at this point, and to do so, it has invested heavily in supply-chain management, integrated warehouse, and delivery services. As the logistics business gains scale and reaches higher capacity utilization, which we expect to happen after five years, we will see gross profit margin improvement.
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