JD.com (NASDAQ: JD), the second largest e-commerce player in China, struggled over the past 12 months with concerns about its slowing sales growth, lack of profits, and rape allegations against CEO Richard Liu. JD's outlook improved in December after the charges against Liu were dropped, and a solid fourth quarter report in February featured a surprise profit and stabilizing sales growth.
However, two executive departures, reports of upcoming layoffs, and an online rant by Liu about "slackers" in his company cast a cloud over the more positive developments. Let's see if investors should be concerned.
Executive departures and layoffs
In late March, JD announced that its chief technology officer Chen Zhang would resign to take a job as a senior advisor in the U.S. on June 30. Shortly afterwards, JD announced that chief public affairs officer Ye Lan would also resign on May 31. The company cited "personal and family reasons" for both departures.
Back in February, JD stated that it would fire 10% of its high-level executives. In early April, it announced that it would cancel basic salaries for its couriers, cut their housing benefits, and pivot toward performance-based compensation instead.
The Information subsequently reported that JD would cut another 8% of its workforce of over 178,000 full-time employees. JD claimed that report was "completely untrue," but a widely circulated post by Liu on WeChat highlighted the CEO's frustration with his workforce.
Liu noted that as JD expanded rapidly over the past four to five years, "the number of slackers has rapidly grown." Liu declared that "slackers" were not his "brothers", and that JD would be "kicked out of the market" if it didn't cull its workforce.
Will the executive departures impact JD?
The departure of Chen Zhang is worrisome because the CTO oversees the expansion of JD's core e-commerce platform and logistics services.
Last quarter, JD's technology and content expenses rose 70% annually to 3.5 billion RMB ($0.5 billion), and its fulfillment expenses increased 11% to 8.9 billion RMB ($1.3 billion). Those figures compared favorably to the third quarter, when its tech and content expenses surged 96% and its fulfillment expenses rose 22%.
Keeping those costs under control prevented JD's operating expenses from outpacing its revenue growth rate last quarter and enabled the company to post a slim non-GAAP profit. If Chen's replacement pursues more aggressive strategies, JD's bottom line could easily dip into the red again.
Meanwhile, Ye Lan's resignation shouldn't matter much to investors, since the chief public affairs officer mainly handles public policy decisions and investor relations.
Will layoffs improve JD's profitability or destabilize its business?
JD differs from its bigger e-commerce rival Alibaba (NYSE: BABA) in two key ways. First, JD uses its own logistics service, JD Logistics, to fulfill orders, while Alibaba mainly relies on third-party couriers.
Second, JD Mall takes possession of the products sold on its platform before fulfilling the orders, while Alibaba's Taobao and Tmall mainly facilitate consumer-to-consumer and business-to-consumer transactions, respectively.
This means that JD's business model is much more capital intensive than Alibaba's. Alibaba co-founder Jack Ma once warned that JD's business strategy would end in "tragedy," but JD emphasizes that its business model weeds out counterfeit products and eliminates its dependence on dodgy sellers.
JD is trying to boost its profitability by offering JD Logistics as a service to other companies and selling more ads on JD Mall. It's also replacing warehouse workers and couriers with automated robots, which could significantly cut its long-term labor costs. A near-term strategy would be to aggressively cull its workforce.
JD's decision to eliminate 10% of its higher-level executives mirrors Tencent's (NASDAQOTH: TCEHY) decision to fire 10% of its middle managers earlier this year. It wouldn't be surprising if JD was following Tencent's example, since Tencent is JD's top investor and partner. Its decision to reduce courier payments at JD Logistics also makes sense, since fulfillment costs are one of its top operating expenses.
However, those layoffs could also destabilize its business. A JD employee told The Information that the layoffs were "pretty much all JD employees can talk about," while KrAsia recently cited a Weibo post which warned that the elimination of basic salaries could impact the stability of JD's couriers and hurt consumer trust over the long run.
Should investors be concerned?
JD, which is backed by Tencent, Walmart, and Alphabet's Google, should remain China's largest direct retailer for the foreseeable future.
However, it still faces intense competition in the e-commerce market from Alibaba, and it needs to make some tough calls as investors question its ability to generate stable profits. As a JD investor, I'm not worried about these latest developments destabilizing the company -- but I'll follow the situation to see if other issues arise.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun owns shares of JD.com and Tencent Holdings. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), JD.com, and Tencent Holdings. The Motley Fool recommends Weibo. The Motley Fool has a disclosure policy.
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