JD-SWR: Leveraging Supply Chain Advantage, Focusing on 3P Business Development

Below is the summary of the JD 2Q23 performance conference call. For the analysis report, please refer to " JD: Revenue Up, Profits Down, Gains and Losses of Billions in Subsidies "

I. Management Remarks

1. First of all, I would like to reiterate JD's business philosophy since its establishment, which is to persistently pursue lower costs, higher efficiency, and better customer experience. It consists of two key elements: customer experience and supply chain capabilities.

For JD, this means the coexistence of prosperity in our 1P and third-party marketplace businesses. Our platform ecosystem strategy aims to continuously enhance the customer experience, and both the 1P and 3P models serve as means to achieve this goal.

In the third-party marketplace business, we are pleased to see that the number of 3P merchants has more than doubled YoY and reached a historical record in the second quarter. This is because we have improved our tools and traffic allocation mechanisms to establish a fair and efficient operating environment. With the improvement of the business environment, more 3P merchants have brought a wide range of product choices to our customers, driving continuous acceleration of 3P market GMV for two consecutive quarters. In addition, we have seen double-digit growth in 3P revenue for two consecutive quarters, mainly due to strong growth in advertising revenue as more 3P merchants allocate their advertising budgets to the JD platform.

1. In terms of value, since the beginning of this year, we have enriched the value of our billion-dollar subsidy program by selecting many 3P products. The contribution of this program to 3P GMV gradually increased to over 50% in July. Furthermore, our core categories, including 3C and home appliances, continue to benefit from our strong supply chain capabilities, enabling us to provide stable supply at low prices while delivering high-quality services. Therefore, we have further increased the market share of these core categories in this quarter.

2. In this quarter, we observed strong user stickiness trends, including higher purchase frequency and attractiveness of our app. In particular, the number of repeat customers continued to grow at a double-digit rate, while the average GMV per user increased by a high single-digit percentage. The number of JD Plus members grew by over 20% YoY, reaching 36 million in the second quarter. All of these strongly demonstrate that, in addition to our speed and quality, users' recognition of our improved selection and value is becoming stronger, as our supply chain capabilities continue to be the cornerstone of our resilient business performance.

3. Now let's talk about the progress of our organizational restructuring. We launched this initiative in the second quarter, focusing on flattening our management structure and delegating greater decision-making power to the operational departments closer to the users. Our goal is to improve organizational efficiency and foster an entrepreneurial spirit, even at the front line. Until now, the restructuring is proceeding as planned. We have completed the reallocation of responsibilities and KPI references for each operational unit, and we are now tracking and evaluating the execution, as well as further streamlining our operational nodes and iterating our business support systems. The restructuring requires a lot of effort and time to fully realize its effects.

Under the new structure, our operations department is more motivated and demonstrates a higher level of professionalism and execution capability.

1. This year's 618 event, we have put forward the ambitious "3571" vision. In the next 20 years, our goal is to build three companies with annual revenue exceeding 1 trillion yuan and net profit exceeding 7 billion yuan. We aim to have five JD subsidiaries listed in the Fortune Global 500, seven listed companies with a market value exceeding 100 billion yuan, contribute a total of 110 billion yuan in taxes, and create over one million job opportunities. This vision outlines the path of sustained growth for the next 20 years and reflects our commitment to positive social impact. It also demonstrates our firm confidence and responsibility in the long-term development of the Chinese economy.

2. Analyst Q&A

Q1: Summary and outlook for future performance by category?

A1: Despite continued external challenges in the second quarter, we remained committed to our strategy of low-price mindset and open ecosystem, while continuously optimizing our organizational structure. In an environment where overall consumer spending was under pressure in the second quarter, our consumption patterns showed strong resilience, particularly driving market share gains in our core advantageous categories, especially in the electronics category.

In fact, the real estate industry and durable goods consumption faced relatively weak pressures, and the home appliances industry as a whole faced significant challenges. However, JD's home appliances category performed noticeably better than the industry, thanks to our long-established strong user mindset, nationwide service network and capabilities, as well as our years of advantages in supply chain capabilities.

Our 3C category, especially the mobile phone category, also benefited from our supply chain capabilities, strengthened low-price mindset, improved shopping experience through services such as trade-in programs, and our active layout in the O2O field. As a result, JD's mobile phone category achieved double-digit growth in the second quarter, outperforming the overall industry.

Of course, there are categories that we still need to continue improving and enhancing, especially in the supermarket sector. In the second quarter, we faced challenges due to ongoing adjustments in our business structure, the return of offline consumption after the end of the pandemic, and the high base of stockpiling caused by the pandemic last year. As a result, our short-term growth encountered some challenges. However, we believe that through the implementation of our strategies and the gradual manifestation of the effects of organizational structure adjustments, the performance of our merchants will return to a healthier growth trajectory in the second half of the year. In the long term, we firmly believe that the supermarket and daily necessities category remains the most important growth driver for JD.

Q2: Focus of future development strategy?

A2: While promoting the low-price mindset, we pay more attention to user performance. In Q2, we saw positive indicators from our users, with both the ARPU of core users and the proportion of user base continuing to increase. This indicates that our actions to prioritize user experience have gained recognition and wallet share from more core users. Regarding the market's attention to the billion-dollar subsidy, in Q2 we observed that the subsidy had a positive impact on the shopping frequency of users and their cross-category purchases. It also played a significant role in activating new users, especially those with low frequency.

As for the open ecosystem, we are more concerned about the diversity of merchants and products, as well as the efficiency of merchant operations. Since the beginning of the year, we have simplified the process for merchants to join our platform and increased our support for them. This includes reducing operating costs, providing more operational tools, and establishing clearer operating rules. The number of new merchants has also grown rapidly, with a YoY increase of over three digits in Q2. By enriching the supply of merchants and products, we can meet the diverse needs of different users. This is also an important driver for the continuous growth of our revenue and profit.

In terms of improving supply chain capabilities, we have not only focused on promoting the concept of low prices but also provided excellent services to consumers. This is evident from our continuous market share gains in core advantageous categories. Additionally, our supply chain capabilities have contributed to the continuous improvement of our fulfillment gross margin.

This year, our overall and most important KPIs will still revolve around GMV, profit, and cash flow.

Q3: What is the outlook for 3P GMV in the future? What is the latest situation regarding the growth of the number of merchants?

A3: In terms of specific merchants and categories, there are three major aspects to consider.

First, in terms of merchant onboarding, we will increase our efforts to attract merchants and lower the platform's entry threshold. At the same time, we will greatly simplify the onboarding and product launching processes, reducing the fixed costs for merchants.

Second, in terms of operations, we will promote fair competition among all entities on the platform, including between self-operated and pop stores, as well as among pop merchants. The most important thing is to clarify our platform's value proposition and effectively promote it to merchants through traffic channels, thereby creating a clear growth path for merchants on the JD platform.

Third, in terms of tools, we will continue to optimize merchants' operational tools and provide more comprehensive data support to help them improve their operational capabilities, efficiency, and profitability.

In this quarter, the number of effective 3P merchants achieved a YoY increase of three digits, especially in categories such as supermarkets, fashion, and home, where the number of pop merchants saw significant growth. The growth rate of 3P revenue also reached double digits, surpassing 1P revenue growth for multiple consecutive quarters.

Overall, both 1P and 3P serve our consumer-centric value proposition of offering products that are diverse, fast, and affordable, with the goal of capturing more market share. We will balance cost efficiency and user experience, allowing consumers to choose between 1P and 3P products based on factors such as price and service, in order to meet their diverse needs. We expect 3P to eventually account for 60% of GMV.

Q4: What is the latest situation regarding category expansion? A4: Firstly, in the second half of the year or the third quarter, we will still need some time for consumer recovery. Additionally, there have been cases of miscalculated high-temperature forecasts this year, and there is also some uncertainty in the release rhythm of new mobile phones. These macro and industry factors will indeed affect our performance in the fourth quarter and the second half of the year. However, we believe that in such an environment, JD's supply chain capabilities will be further unleashed. Therefore, we still have confidence that the electrical category or advantageous categories will continue to maintain their industry-leading advantages and outperform the industry.

We expect that the growth rate of the supermarket category will improve in the second half of the year, gradually getting better, and performing better than the first half of the year. After focusing on the operational quality of the supermarket business, including optimizing the planning and management of the supermarket category and channel structure, our operational capabilities have also been further enhanced. Therefore, the overall profitability of the supermarket category will continue to improve.

In the second half of the year, the fashion category will continue to focus on enriching brands, merchants, and products, optimizing our category structure and traffic distribution, and further enhancing our user engagement through a series of refined operational actions. The growth performance will also continue to improve.

Q5: How do you evaluate the performance of the promotional activities in the first half of the year, including the 618 promotion? What are your expectations? Any adjustment or improvement plans?

A5: In the first half of this year, we mainly promoted several projects, including Everyday Low Price and platform ecology, and achieved some phased results. In terms of users, we have actively adjusted our pricing strategy and implemented a series of actions to enhance user experience, which has been well received by consumers and achieved better-than-expected results. The effect and growth rate of major promotions exceeded expectations, which indirectly proves that users have a strong awareness of promotions. To promote the daily low-price model, we still need more efforts or a longer time period to gradually change users' mindset.

Furthermore, the prosperity of the platform's merchant ecosystem also takes time to accumulate, and the traffic distribution mechanism and rules need to be gradually adjusted. Although we have made good progress in merchant recruitment and onboarding so far, there is still significant room for improvement in the platform's operational rules and traffic distribution algorithm.

Q6: What are the key focuses for new businesses in the next 12-18 months?

A6: JD's strategic focus or business focus has always been relatively concentrated. We have always focused on improving supply chain capabilities, building an open ecosystem, and developing instant retail, among other long-term capabilities. Instant retail, including the recently upgraded "hourly delivery" service, is currently one of our main strategies for new retail formats. Innovative retail businesses, such as Pinduoduo and front warehouse integration, mainly aim to promote their synergy in the supply chain.

Currently, these businesses are still in the pilot stage, mainly exploring and verifying the models. We are exploring how these business lines can generate greater synergy through supply chain collaboration. Even if the models are validated in certain markets or cities, it still requires the promotion of an entire city. So, there is no need to worry too much. The overall level of investment is still manageable and will not affect our projection of annual profit or profit trend.

Q7: How do you view JD's differentiated competitive strategy compared to other platforms? What is the future outlook for China's e-commerce industry?

A7: From JD's perspective, we have always been focused on our differentiated competitive advantage in the supply chain infrastructure. We continuously build our core capabilities around the supply chain and user experience, ensuring high-quality and low-priced products, as well as stable commodity supply. At the same time, we strive to accurately match these products to the right users, providing them with a better shopping experience and continuously winning their trust.

With a focus on the user mindset of "fast, good, and affordable," JD will continue to strengthen and consolidate our own advantages, continuously enhancing the user's trust by improving the speed and quality aspects of the experience. On the other hand, we will gradually address our own shortcomings by introducing more merchants to enrich our platform ecosystem, enhancing the diversity and richness of the supply to meet different user needs.

In this process, we have done a lot of work to ensure and improve the user experience, including:

First, maintaining strict entry thresholds for platform merchants and product management.

Second, expanding the scale effect of our self-operated business, continuously reducing procurement costs to benefit users, and also improving the service standards of our self-operated business to ensure the best user experience.

Third, emphasizing product prices and service as the core standards in platform operation and traffic distribution.

Q8: Community group-buying strategy? How is it different from before?

A8: Regarding the community group-buying business, as we have mentioned before, our Pinduoduo team is still active. After last year's business adjustment, this core team has been focusing on Beijing and its surrounding areas, continuing to explore the local short-chain supply chain model, especially in the fresh produce category. We constantly optimize the product experience and system processes to enhance the operational user experience. Currently, the Pinduoduo business is still in a small-scale pilot phase, and the overall investment is relatively manageable.

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