What Is JD.com Up To, Now That E-Commerce Growth Has Slowed?

Is e-commerce a zero-sum game in the end?

Going by the news alone this year, JD.com looks like it has turned into a courier company.

This week, three phone and computer retailers — Hengdahe, Maikaoli and Leyu — signed annual orders worth 8 billion yuan with JD.com, under which JD.com's logistics network will deliver all of their goods.

In early January, 18 retailers including Lüsen Digital signed similar agreements with JD.com, worth more than 13 billion yuan a year.

In two months, JD.com has booked more revenue from logistics, warehousing and marketing deals than YTO Express earns in a year.

These retailers run thousands of brick-and-mortar stores, and online they keep shops on JD.com, Tmall and other channels. Which means the shops they run on Tmall and Suning — shops that compete with JD.com — will also be using JD.com's warehouses and couriers.

Since last year's Singles' Day shopping festival ended, none of JD.com's big news has had anything to do with e-commerce.

In November, JD.com said it would spin JD Finance off into a separate company. Soon after, it said it would build a 3,000-person department to handle advertising and promotion for brands.

Every one of these new businesses and adjustments traces back to changes in JD.com's core business: e-commerce.

How Is JD.com's E-Commerce Business Doing?

In the first quarter of 2016, growth in JD.com's e-commerce transaction volume fell from 99% a year earlier to 55%. It never climbed back to 2015 levels for the rest of the year.

Look only at total transaction volume and JD.com's growth over the past 12 months has slowed, but it is still running at roughly twice Alibaba's rate.

Look at the finer numbers, though, and the picture gets worse.

JD.com's figures for the third quarter of 2016 showed that 198.7 million people had bought something on JD.com in the previous year, up 56% from a year earlier. Alibaba disclosed something different: the number of people buying on Taobao and Tmall from a phone each month. In the same quarter it was 450 million, up 30%.

And JD.com managed that growth with WeChat putting a JD.com shopping entrance directly below Moments.

Alibaba has nothing on mobile as large as WeChat or QQ to send it traffic.

Growth like this suggests that even Tencent, which reaches nearly every internet user in China, may not be able to change the fact that most Chinese shoppers still go to Taobao and Tmall first.

On JD.com's first-quarter 2016 earnings call, CFO Sidney Huang said the traffic Tencent's entry point sent to JD.com had begun to slow after three quarters of rapid growth. From the last quarter of 2015 on, the growth Tencent contributed slowed by 20% each quarter.

It isn't only user growth that has slowed. Average spending per customer is falling too. In September 2015, everyone who had bought something on JD.com over the previous year spent 3,130 yuan on average; by September 2016 the figure was 2,988 yuan, down 4%.

Alibaba, meanwhile, through one attempt after another to make users more active, raised the money it earns per active user in a single quarter by a third in the space of a year.

Spending per customer fell even though JD.com was putting 85% of its revenue into advertising, traffic and other ways of buying sales.

Richard Liu often says that in business model terms, JD.com is closest to Amazon. But Amazon spends only 55% of its global revenue on buying sales, which is why Amazon turns a profit and can put billions of dollars a quarter into businesses outside e-commerce, while JD.com loses money.

Alibaba's fourth-quarter 2016 results showed an operating margin of 39% on its e-commerce business. It kept growing while making billions of dollars in a single quarter.

JD.com's e-commerce business was much smaller than Alibaba's to begin with. Now it is closing the gap more slowly.

Over the past 12 months, JD.com's market value has swung between $30 billion and $50 billion, and its share price has slid from a high of $37.95 to the edge of its IPO price.

Richard Liu Runs E-Commerce Himself Again

Richard Liu has said more than once in interviews that he handed power down in 2013 and stopped managing day-to-day affairs. That has suddenly changed.

Last September, Richard Liu's Weibo account, untouched since JD.com went public, came back to life. After more than two years of silence, his first new post was about Xiaomi's Super Brand Day campaign.

A month before that, JD.com announced a major personnel change: Shen Haoyu, CEO of JD Mall for more than two years, was moved to run overseas expansion.

JD.com said it would not name a new e-commerce CEO for some time, and that the heads of JD Mall's 3C, home appliance, consumer goods and apparel-and-home divisions would report directly to Richard Liu.

Three years after handing power down, JD.com's founder is once again running the company's core business himself.

JD.com's share price started rising last year when the company announced a strategic partnership with Walmart. JD.com took the main assets of Yihaodian from Walmart, and Walmart took 5% of JD.com. Walmart's stake gave overseas investors confidence; on the news, JD.com's shares rose as much as 8.4%.

In an internal email, JD.com said the two would draw on Walmart's global sourcing and supply chain and JD.com's national warehousing and logistics network to sell consumers both Chinese and imported goods. Walmart's Sam's Club then opened an official flagship store on JD.com, and Walmart supermarkets were plugged into JD Daojia, JD.com's two-hour grocery delivery service.

In the seven months after announcing its strategic investment, Walmart twice sharply increased its stake in JD.com, taking it to 12.8% — worth more than $4 billion at the latest share price. Walmart also put $50 million into New Dada, the company JD.com formed by merging in the local delivery platform Dada.

But as Walmart told reporters after the October increase, this is mostly a financial investment, and it carries no voting rights: "We will continue to be a passive investor in JD.com." Richard Liu holds 18.9% of JD.com's shares and more than 80% of the votes.

Walmart CEO Doug McMillon has said that 25% of global retail growth over the next five years will come from China, so Walmart needs to succeed there. Its financial investment in JD.com is part of Walmart's e-commerce plan for the country.

For JD.com, the real value may lie in groceries, a business people buy from far more often — in the end, it is about using a high-frequency business to pull traffic into e-commerce. To get users to open the app more often and stay longer, e-commerce platforms have spent the past year doing livestreams and content, going after fresh food and alcohol, and pouring money into their own supermarket operations.

Tmall has tried much the same thing.

Around the time Walmart announced its stake in JD.com, Alibaba said it had hired former Walmart executive Jiang Pan to run Tmall Supermarket, which then announced loudly that it would spend 4 billion yuan over three years on subsidies, supply chain, product mix and service.

The core management team of Yihaodian, by then part of JD.com, publicly promised to spend 1 billion yuan fighting a price war with Tmall Supermarket. At a JD Supermarket strategy event two months after Walmart's investment, Feng Yi, president of JD Mall's consumer goods division, said JD Supermarket and Yihaodian's imported-goods teams had already merged. JD.com's plan is for JD Supermarket to be number one online and offline within three years.

Fresh food is the category that gets people into the habit of coming back. At the end of 2015, JD.com moved Wang Xiaosong, head of the 3C division, over to run fresh food — a measure of how much weight it put on the business.

Fresh food has real room to grow, but it also costs a great deal. In the past three months JD.com has changed its shipping-fee rules three times; the most recent change bills delivery for fresh food separately from everything else.

At the same time, JD.com, a company that rarely talked about technology, has started dressing itself up as a technology company.

Last November, Richard Liu discussed JD.com's next 12-year plan in public for the first time, saying the company would go all in on technology. As he described it, JD.com would use cloud computing, artificial intelligence and smart robotics to change the business models of e-commerce, finance and insurance.

Last May, JD.com set up the X Division to develop delivery drones, driverless delivery vehicles, robots and smart warehouses; six months in, it already had more than 7,000 people. The Y Division, set up in November, uses artificial intelligence for sales forecasting, smart pricing and smart promotions — all of it, in the end, to raise efficiency and lower the cost of the e-commerce business.

In an interview early this year, Richard Liu described shoppers who would no longer need to leave an address: artificial intelligence would work out the best moment and the best spot for a driverless vehicle to drop off what they bought. Over the next three to five years, he said, he would prove himself again by making technological innovation a great success.

"A lot of people used to think communism was out of reach, but after our technology push over the past two or three years, I suddenly realized communism really can be achieved in our generation," Richard Liu said in that interview.

Before communism, though, JD.com still has to fix its losses.

Outside E-Commerce, JD.com Is Pulling Back

O2O was the first business to be adjusted.

Last April, Dada Crowdsourcing and JD Daojia, then only a year old, announced they had agreed to merge.

When JD Daojia launched in 2015, Richard Liu called O2O JD.com's main direction for the year. A year later, JD Daojia was running in 13 cities and serving 3 million users — a small fraction of the 155 million annual active users of the core business in 2015.

After the merger the two companies used the Dada brand. JD.com Group held 47% of the new company, its single largest shareholder. The CEO was Kuai Jiaqi, formerly Dada's CEO.

At first the deal looked like JD Daojia simply acquiring Dada's delivery team. But as the integration finished, JD Daojia ended up inside a company called New Dada, while the couriers who had belonged to JD Daojia went back into JD.com's own delivery network.

JD Daojia recently shut the entrances to some of its at-home services. A JD.com executive said the company had found that people were more used to buying groceries, fresh produce, fruit, snacks, baked goods, flowers and medicine through JD Daojia than to booking at-home services like housekeeping and cleaning. So, to concentrate on delivering groceries and fresh food, it closed those entrances for the time being.

Groceries and fresh food are bought often and wanted badly. The at-home services JD Daojia rolled out one by one when it launched have all been cut.

Next comes finance, which burns far more money.

JD.com's latest quarterly results showed a net loss for the quarter of more than 800 million yuan under U.S. accounting standards, most of it spending on JD Logistics and JD Finance.

In the same report, JD.com announced a restructuring plan for JD Finance. The plan, the announcement said, would make it easier to run financial businesses that foreign capital is barred from, and to "better make use of funding from China's capital markets."

In plain terms: Richard Liu will bring in other investors to buy the JD Finance business back from JD.com, so that JD Finance can list in China. Once that is done, JD.com Group will receive 40% of JD Finance's pre-tax profit, or a 40% stake if regulators allow it.

In early 2016, after a $1 billion Series A round led by Sequoia Capital China, Harvest Investment and China Taiping, JD Finance was valued at 46.65 billion yuan.

The most immediate effect is that once JD Finance is separated out, the money it burns will no longer show up in JD.com's results. Over the past eight quarters, losses from JD Finance, O2O and other new businesses have reached 2 billion yuan.

JD.com has not set a date for the spin-off. Right after announcing it, the company also turned its logistics spending into revenue. At a logistics brand event in November, JD.com said it was opening all three of its logistics networks — small parcels, large items and fresh-food cold chain — to outside merchants.

JD.com has been building its own logistics since 2007, nearly ten years. On the past two Singles' Days, its favorite thing to talk about was that logistics advantage. Over Lunar New Year, when Taobao and the couriers shut down, JD.com has run its "open through the holiday" campaign for years. By JD.com's count, the number of people buying New Year goods this holiday, the number of orders and the amount spent were all double last year's.

The "fast" in JD.com's "more, faster, better, cheaper" was the one strength it could take into a fight with Alibaba. Now it is giving up that advantage in order to make money from it.

Cover image from JD.