JD.com: Continuing to focus on efficiency, same-city retail will be a growth priority (phone conference minutes)

The following is a summary of the conference call for JD's 2Q22 results. For a review of this quarter's financial report, please see "Is JD trying to turn into a value stock since it has lost its growth momentum?"

1. Management's Report

1. User data: In terms of the number of users, the active users of JD's core retail business have maintained healthy growth, with a net increase of over 10 million compared to the previous month (so the stagnation of the overall number of users should be due to the decrease of users of JD's own shopping platform, JD-X), achieving double-digit percentage growth year-on-year. The DAU growth rate of the company in Q2 has reached 25%. In terms of user quality, the number of PLUS members has exceeded 30 million (with an increase of 5 million in the first 7 months of this year), and the annual consumption level of PLUS members is 8 times that of ordinary users.

2. JD Logistics: External revenue accounts for nearly 60% of JD Logistics' total revenue. As of the end of the second quarter, JD Logistics has operated over 1,400 warehouses and managed logistics infrastructure with a total area of approximately 26 million square meters.

2. Q&A

Q: What are your expectations for consumption growth in July and August of the second half of the year? Are there any strategies for categories, delivery models, shopping models, or live streaming?

A: From a category perspective, the categories with good growth are related to people's livelihoods, such as home appliances, health, and omnichannel, and we have been laying out both online and offline to get rid of the constraints of purely online sales. The weak performers are long-tail non-essential products, such as clothing, liquor, and mobile phones. Short-term macro headwinds are expected, but we have long-term confidence in the overall trends of the Chinese economy and consumption.

Regarding new strategies, our strategy will not change for several years, so there are a few elements that we will never change, such as continuously focusing on user experience, building supply chain capabilities, reducing costs and increasing efficiency, continuing to invest in technology, and having disciplined innovation.

At the tactical level, we will 1) expand the user base in lower-tier cities and refine the details, 2) lay out local retail, 3) continue to build supply chain capabilities, and 4) continuously build an open platform ecosystem.

Q: JD's operating efficiency has improved in the second quarter, and now all internet companies are reducing costs and increasing efficiency. Despite the already high level of operating efficiency, how do you think about optimizing operating profit margins?

A: Given the increases in macro uncertainty and complexity, we're more focused on the effectiveness of capital allocation between different business segments and improving operating efficiency.

1. For JD Retail, we expect the majority of core category gross margins to continue to improve year-on-year and quarter-on-quarter in the third quarter, especially for supermarket categories. The improvement in profitability actually comes from better operating efficiency and expanding economies of scale.
2. For JD Logistics, although we still expect some additional costs due to the epidemic, its impact will not be as significant as in the second quarter. We will strive to maintain the bottom line goal of JD Logistics for the year.
3. For new businesses, we have been adjusting our investment pace since the end of the first quarter. Our management team is more focused on cash flow and profitability. We expect our year-on-year and quarter-on-quarter losses to decrease in our new business. Therefore, we expect the Group's short-term profit-making ability to increase significantly compared to last year.

Q: What do you think of the prospects of the household appliance category in the second half of the year?

A: The household appliance industry in 22Q2 is facing weak consumer demand, supply chain shocks, and the large impact of limited doorstep performance. Brand owners take a cautious approach to business growth and focus more on certain sales, so JD's strategy is more in line with their needs.

In 22Q3, the growth rate of the household appliance category will continue to increase on the basis of June, but the overall growth rate will be slower than in previous years. The pandemic and macro uncertainties will also exist, and we will continue to focus on cost reduction and efficiency improvement. In addition, household appliances should be relatively faster in terms of progress in full-channel aspects, including various forms of offline stores, far exceeding the industry growth rate.

Q: What is the revenue contribution of the full-channel business?

A: In terms of revenue contribution, there has been no significant change this quarter. The full-channel business still accounts for about 10%. To be honest, compared with online business, offline business has been more severely affected this quarter. Except for our immediate delivery business is still in its early stages of growth, the performance of other offline businesses has not been as good as our online B2C business.

Q: Can you share insights about the follow-up of the membership strategy?

A: Regarding user growth, this is an extremely challenging quarter. External factors are the pandemic and weak consumption, and internally, we have also proactively adjusted our user growth strategy. Due to the adjustment of our Jingxi business, there may be user loss in the short term. However, the core users of the retail business still maintain high-quality growth. For users, their shopping frequency and ARPU are increasing. Especially, the ARPU of new users has reached a new high in three years.

Consumers in the sinking market are an important shopping group. At the same time, we will attach great importance to the elderly population according to the changes in China's population and purchasing power.

Regarding JD Plus, it cannot be directly compared from any angle and is created based on the characteristics of our platform. Its development in recent years has achieved our original intention, and we will do more business innovations in the future.

Q: This quarter, JD's cooperation with Dada has continued to deepen. Have you seen the long-term growth potential in this business?

A: Two or three years ago, the representative of local retail that people knew more about was the O2O model, but in fact, the two were not the same. O2O is just one form of local retail. The first departure point was to discover that the performance fee of some categories was high, so we wanted to use a more innovative way to serve users.

1. At the same time, users' consumption demand in local retail is growing rapidly, forming a new way of consumption.
2. Previously, online only provided the supply of goods, but lacked the supply of services, such as pet services, such as automobiles.
3. Another dimension is that as the proportion of e-commerce increases, brand owners encounter new difficulties in the management of the entire sales channel. We consider same-city retail as a very important part of our new business and we will have many different product systems to meet the needs of same-city retail, with many categories. However, we are still in the process of designing and integrating.

Although the entire industry is very interested in this field and everyone is rushing in, our own order volume and user volume are growing rapidly, but we still need to make rational judgments.

1. Consumer mentality is very important, and there is still a lot of work to be done in this area.
2. Secondly, the construction of a new supply chain is a big challenge for all companies.
3. The third is the stability and reliability of the service.

Therefore, we pay more attention to the penetration frequency of users in this business, the quality of service delivery, and ultimately we can achieve rapid growth in this business.

So in the short term, GMV is not a pursuit goal. Finally, in this business model, competing with brand merchants and offline enterprises for profit is not sustainable, and we should design a model that benefits all parties. This is the most important reason whether this model can continue to develop in the long term.

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