JD.com: Shift from Big Promotions to Everyday Low Prices (Summary)

I. Management Speech

In 2022, JD.com's focus is on core businesses with an emphasis on improving business health, resulting in the best profit levels in history.

Post-pandemic, consumers' lifestyles and consumption habits have changed. We have observed that the consumption structure and purchasing power have become polarized:

On the one hand, the middle class and family users who value product quality and functionality are increasing.

On the other hand, consumers are becoming more adept at balancing their budgets, and demand and consumption scenarios are becoming more diverse.

Since Q4 2022, JD.com has made proactive adjustments:

Firstly, JD.com has innovated extensively in both core and new businesses, which has to some extent, exhausted management resources. As a result, we have comprehensively restructured the business and closed down businesses that cannot be brought into synergy with JD.com's core business to achieve economies of scale.

Secondly, we have promoted the landing of the supply chain middleware to reduce costs in JD.com's core business.

Thirdly, we have returned to the essence of retail, where the business logic revolves around user demands and adheres to the philosophy of product, price, and service. We have also optimized the underlying systems, including simplifying promotional methods and traffic delivery mechanisms to create a vast array of high-quality self-brand products and a rich supply of third-party products while strengthening the users' low-frequency and low-price mindset.

Focusing on users: JD.com is more concerned with the efficiency and sustainability of acquiring users and improving user quality. On the basis of maintaining a relatively stable overall user base, daily active users continue to grow by double digits YoY, and the user structure and quality have improved significantly. The scale of repeat users and paying members of the retail business is growing rapidly, with a continuously increasing proportion, further driving the growth of user shopping frequency and ARPU.

The membership scale of JD Plus has reached 34 million. While the scale is growing rapidly, the average annual consumption level of members remains eight times that of regular users, maintaining high levels of activity and consumption.

The No.1 membership store targeting the mid-to-high-end market has a reserve of 1 million paying members. We are constantly improving our user services and operational capabilities to gradually refine our comprehensive user layout in first-tier, second-tier cities, and sinking markets.

The number of third-party merchants on JD's retail platform has continued to grow by over 20% YoY for eight consecutive quarters, with categories such as healthy sports, outdoor, and home products growing faster than the industry.

The JD same-city retail business maintains a rapid growth trend, with YoY growth of 29%, while the hourly purchase business has grown by more than 80%.

JD's own brand, "Made by JD," has achieved high growth of over 60% in 2022. The original purpose of "Made by JD" is to supplement the categories on JD's platform for suppliers and consumers in the manufacturing industry. Now, 1/4 of Plus members have become loyal users of "Made by JD" products, and its penetration rate among JD users is also increasing.

Q&A

Q1: How to measure the effectiveness of the tens of billions of subsidies to "reshape the low-price mindset"? How to cope with the impact of competitors increasing their subsidy efforts on JD's short-term/long-term financial reports?

A1: Price is a very important factor in the overall user experience. The price of e-commerce is concentrated in the big promotions, forming an industry phenomenon of "no promotion, no sales, no promotion, no purchase". However, this is not the most optimal solution in terms of efficiency and overall planning of merchants, users, and supply chains. We hope to guide users to gradually change this habit of "not selling without promotions, not buying without promotions" through adjustments to our marketing strategy, using the business philosophy of "hoarding during big promotions to everyday low prices" to drive the daily sales that previously had a relatively low proportion. This is more in line with JD's advocated low-price mindset, and also more in line with the essence of retail and the smooth operation of the industry's supply chain, which is beneficial to the orderly development of brand merchants.

The tens of billions of subsidies are only one item in the price strategy. The overall investment in the first month is around 1 billion. We and brand merchants, including platforms and merchants, have jointly invested marketing resources, and the impact on profit margins is very low.

There are several ways to build JD's low-price mindset.

First of all, on the supply side, more abundant categories, including brands and white labels, are provided to meet the needs of consumers with different consumption levels.

Secondly, through our own supply chain, we continue to release economies of scale to benefit consumers.

Thirdly, I use various forms to ensure high-cost-effective products for both self-operated and third-party merchants.

The online launch of the tens of billions of subsidies has been relatively short, and we have achieved good results in these days. It has not only driven the consumption of old users but also brought new users and more traffic. We still need more systematic adjustments, including the support of ecological partners, and the slow adaptation and acceptance of consumers.

Our core indicators still revolve around users, including the return of old users, the addition of new users, and ARPU value. All indicators related to users are the measure of the success or failure of our ordinary activities.

Q2: How do you see the recovery of China's consumer market this year? How to balance the growth of self-operated and POP? How to match the two inconsistent profit margins?

A2: With the cancellation of epidemic prevention measures, the macro economy is rebounding, and short-term releases of industries such as catering and tourism will be faster. However, the recovery of consumer confidence is essentially the recovery of consumers' income, which depends on the investment of enterprises in production and reproduction, especially the huge number of SMEs, so the cycle is actually relatively long.

The government is now introducing various policies, and the production and operation of enterprises are also stabilizing and recovering. However, it still takes time for income and consumer confidence and consumption power to be transmitted to the household end. The problem of uneven recovery of consumption rhythm in the short term will still exist. Our view on the macro situation is cautiously optimistic, and the second half of the year should be better than the previous year.

The relationship between self-operated and POP: On an open platform, the two are in a fully competitive relationship. Self-operated has strong competitiveness in some categories, but with the increasing number of JD's users and the diversity of their purchasing needs, the supply side needs to be enriched. The rapid growth of the number of sellers for several consecutive quarters, as well as the "Chunxiao Plan" launched in January this year, is actually to increase the supply side. The hope is that through JD.com's supply-side reform, we can meet the diverse shopping needs of users.

There is also traffic distribution, as well as One Box on the search, which is still under testing and has not yet been fully listed, showing multiple store price offerings for the same product on the same page.

Q3: Users have a strong impression of JD.com's quality, but now the focus is on cost-effectiveness and traffic distribution. How does the company make decisions in these areas?

A3: First of all, we have multiple traffic sources, such as JD.com's main site, JD Happy APP, channels on WeChat, and offline stores. Different business scenes have different user structures within different categories.

The main site has multiple channels, some of which are price-led while others are category-led. However, JD.com has consumers who prefer certainty and direct purchase in first-tier and second-tier cities. This can be achieved through algorithm matching, but it also presents a challenge and requirement for technology. But we have been accumulating the necessary technology reserves over the past few years.

Q4: What is the proportion of same-city retail sales to the entire group's GMV? Will the continued increase in same-city retail sales dilute the 1P revenue in JD.com's financial reports? Will the income from market service fees grow faster and will 1P be affected?

A4: Currently, instant retail is still a very small percentage of JD.com's GMV. Based on the long-term perspective, I don't think this business will dilute our 1P business, because it provides a different shopping experience. Although instant retail may not be as efficient as traditional B2C models.

If many users on the platform have instant retail demand, and we cannot satisfy them well, it will result in a lack of user experience. In addition, brand owners actually have a demand for same-city retail sales. We are expanding this business model more from the perspective of the supply chain.

Same-city retail is a new type of supply chain, so we will judge whether we should build it from the perspective of the supply chain. We will also evaluate our cost-effectiveness and user experience when the three conditions are met.

Q5: If competitors increase their promotional efforts in the future, what strategy will JD.com adopt? Will it prioritize revenue growth or adopt aggressive marketing strategies?

A5: The difference in our business model is mainly in the scalability of the supply chain and the certainty of the shopping experience, for which JD.com has more advantages. JD.com has always focused on building core competitiveness around the supply chain and user experience. We also provide a more certain and high-quality shopping experience.

In addition, the proportion of impulse purchases among JD.com consumers is relatively low, and consumer behavior is more planned. Purpose consumption by families is the largest.

JD.com is not a traffic-driven e-commerce platform. In the past, JD.com was more about product types, but now we hope to shift to a user-based model. This is because we have always believed that a retail company, whether online or offline, should focus on managing user lifecycle and value. This is the biggest difference between JD.com and other types of retail companies. This model of JD.com determines that the way of operation will be relatively weighty, and investment in logistics and user experience will be relatively large. We may take a longer-term perspective to look at it.

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