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JD.com Grabs China Online Shopping Share From Alibaba

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C hina is known for big numbers, not least of all a population nearing 1.4 billion and some 620 million Internet users, more than twice as many as in the U.S.

Many of them shop online atJD.com ( JD ), one of the biggest e-commerce companies in China after giantAlibaba ( BABA ) and with a business model similar toAmazon ( AMZN ).

The company's e-commerce platform sells a broad range of goods: electronics, auto parts, baby products, cosmetics, food and wine, apparel and all manner of household items, including the kitchen sink.

In 2014, it processed $41.9 billion in gross merchandise volume, or GMV, up 107% from 2013. The number of active customer accounts grew from 47.4 million to 96.6 million. Fulfilled orders more than doubled to 689 million.

Net revenue for the year grew 66% over 2013 to $18.5 billion. In the fourth quarter alone, it jumped 73% to $5.6 billion.

But since, like Amazon, JD.com handles much of the warehouse and delivery logistics and continues to expand capabilities, not to mention marketing, it doesn't make much profit yet.

'Investment Mode'

Net income in Q4 was only 1 cent per ADS vs. a slight loss a year earlier. Management said it expects between a net loss of -0.5% of revenue and break-even in 2015.

"By design we are in investment mode," said Josh Gartner, senior director of communications. "Our priority at least through 2015 is on growing market share and infrastructure."

To that end, the company has just hired a former Yahoo research and development executive in Beijing .

JD.com, based in Beijing, was founded in 2004 and went public in May 2014 at an offering price of 19, raising a whopping $1.78 billion. Shares were last trading around 30, 9% off their high on Aug. 27.

The company's business-to-consumer e-commerce platform sells merchandise that it has procured and holds like any retail store. It books sales as revenue. It also operates a third-party "marketplace" where domestic and international retailers, including well-known American brands such as theGap ( GPS ) andSkechers ( SKX ), have opened stores on its website. It gets fees or commissions on those sales.

Alibaba -- which competes with JD.com in the business-to-consumer marketplace through Tmall -- still derives more of its revenue from itseBay (EBAY)-like consumer-to-consumer channel, known as Taobao Marketplace.

Alibaba's Tmall is growing faster than Taobao and is much larger than JD.com's business-to-consumer business, which is at an earlier point in its development cycle.

What's Lifting Market Share?

William Blair analysts note that JD.com is gaining share in China's e-commerce business-to-consumer market.

In a recent research report, the William Blair analysts estimate that JD.com gained 5 percentage points of GMV market share in Q4 vs. a year earlier, while Alibaba's Tmall lost 2 percentage points.

Even so, Alibaba's share in Q4, they noted, was still higher at 61.4% to JD.com's 18.6%.

"We believe faster third-party growth and broadening of the assortment are increasing the appeal of the JD.com platform," lead analyst Mark Miller and his team at William Blair noted.

JD.com's investments in fulfillments, meanwhile, are improving market reach, they added.

JD.com says it has the largest fulfillment infrastructure of any e-commerce company in China. It operates seven fulfillment centers and has 123 warehouses in 40 cities, plus 3,210 delivery and pickup stations in 1,862 counties and districts across China.

Service Centers Opening

In December, a rural service center was opened in Sichuan province, the first of many planned to expand service in rural areas.

On top of all that, seven mega-warehouses will serve as regional hubs. The first one opened in Shanghai in October.

At year end, same-day deliveries were available in 134 counties and districts and next-day deliveries in another 866 counties and districts.

"What is unique is that we handle the last-mile deliveries ourselves," Gartner said, noting that Amazon mostly uses third-party carriers for the final leg of delivery. "By controlling the logistics network, we are able to provide speed you don't see anywhere else."

JD.com says its intense focus on fast delivery and, as CEO Richard Liu stated in the Q4 financial release, "our growing reputation for product authenticity," has helped to grow active customers and orders.

Counterfeiting has been a big problem in China. Analyst Miller noted that increased government and media scrutiny over product authenticity "could be providing some lift for JD.com versus Alibaba."

JD.com plans to market delivery services to third-party sellers more broadly. It'll allow third-party sellers to store and ship merchandise from its own fulfillment centers, similar to Amazon's "fulfillment by Amazon" program.

Miller noted that Amazon's program, which began in 2006, "drove a meaningful acceleration in third-party GMV growth over the ensuing five years."

"Rising third-party sales penetration on JD.com is already happening faster than management's expectation at the IPO (40% by 2016)," he wrote. "And we believe the incremental fee stream will provide important leverage to technology and fulfillment investments and enhance the pathway to profitability over the longer term."

Analysts polled by Thomson Reuters see operating earnings of 8 cents per ADS in 2015, up from 5 cents last year. They expect it to climb to 38 cents in 2016.

Mobile orders will likely help fuel growth. Some 36% of total orders fulfilled in Q4 were placed through mobile phones, up from 30% in Q3.

Key Hire Made From Yahoo

JD.com announced Thursday that it hired a former Beijing-based Yahoo executive, Chen Zhang, as senior VP to oversee research to enhance mobile apps, cloud computing and big-data infrastructure.

In mobile, JD.com's strategic partnership with Chinese Internet services giant Tencent, which has an equity stake in the company, "has been transformational," Gartner says. That's particularly so in social media through WeChat (also known as Weixin) and Mobile QQ.

"These platforms are ubiquitous in China. Everyone in my office (in Beijing) has WeChat on their phone and that's the case throughout the country. We've been able to reach a lot of new users, particularly in smaller cities around China," he said.

But JD.com's mobile penetration remains "well below" the 44% at Alibaba and 66% atVipshop (VIPS), noted analyst Wendy Huang of Macquarie Capital Securities in a client note.

While Vipshop is a leader in apparel, JD.com is "catching up," she noted.

In orders fulfilled, apparel and shoes was the fastest growing category on the JD.com platform in Q4, CEO Liu said in a conference call.

Fast-growing areas called out in terms of direct-sales revenue were baby products, cosmetics, food and beverage, mobile devices and home appliances.

"We have competitors in specific areas, but not a single competitor overall," Gartner said.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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