Walmart's exit raises questions about JD.com's future, Marketing & Advertising News, ET BrandEquity

Walmart logo

E-commerce retailer JD.com must convince investors of its relevance in the face of a stagnating Chinese e-commerce market, aggressive price wars and now the exit of its largest shareholder, Walmart.

Walmart this week announced its full exit from the Beijing-based e-commerce platform and sold its $3.74 billion stake, triggering a 10 percent slump in its share price and raising questions about whether JD.com can survive in the changed environment.

A decade ago, founder Richard Liu convinced investors that the company could compete with its larger rival Alibaba using its own business model, raising $1.8 billion in what was then the largest IPO of a Chinese company in the United States.

In 2014, Alibaba was a dominant force in the fledgling Chinese e-commerce market, with a market share of nearly 80 percent.

JD.com is in the shadow of Alibaba, which survives largely on advertising revenue and merchant fees it earns by facilitating sales. The company took a different but attractive approach.

Its business model, which includes direct-to-consumer sales and heavy investments in supply chains and logistics, has enabled the company to nearly double its market share from 14% a decade ago to 27% in 2023.

JD’s initial strategy of selling directly to consumers and delivering products through its own extensive logistics network helped it gain the trust of consumers who were then inexperienced in online shopping, encouraged them to spend significant amounts on branded electronics and home appliances, and guaranteed fast delivery, which people valued.

“Loyal users still prefer to shop at JD.com. The first reason is the fast delivery and the second reason is the higher quality guaranteed on this platform,” said Liu Xingliang, an internet business analyst at DCCI Data Center.

However, JD.com’s bloated cost structure and logistics, which once served the company well, are now a burden compared to its competitors.

“Given its upscale positioning, JD is less likely to deliver strong growth compared to peers like PDD given the current consumer weakness in China and lack of diversification outside of China,” said Morningstar analyst Chelsey Tam.

In contrast, Alibaba Group employs around 200,000 people, and PDD Holdings – whose market capitalization has risen to five times JD.com’s $40 billion – has a comparatively small team of just 17,400 employees.

Overhead costs have also put pressure on profitability. By the end of 2023, the workforce will have 517,000 employees, including 355,000 delivery workers.

The operating margin was 4 percent in the second quarter, well below Alibaba’s 15 percent and PDD’s 26 percent.

JD.com did not respond to a request for comment.

STRATEGY ADJUSTMENTS

To counter the slowing growth of Chinese e-commerce, JD.com has recruited third-party sellers to expand its offerings of competitively priced products and private label products, Tam said.

In addition, the company responded to competition from Alibaba’s Taobao and PDD’s Pinduoduo by further optimizing its supply chain and logistics and taking advantage of economies of scale to attract buyers with low prices without compromising on quality.

During a conference call last week where JD.com reported quarterly profits that beat forecasts, CEO Sandy Xu reiterated that the low-price strategy was key to the company’s growth.

However, there are doubts about the extent to which supply chain optimization can lead to further sales growth.

“JD.com’s stated strategy is to work with manufacturers on low-cost versions of high-quality goods. That sounds great, but I’m skeptical that this will be the biggest growth driver in the short term,” said technology analyst Rui Ma.

Strategic weaknesses highlighted include JD.com’s limited presence in markets outside China – the company generates about two percent of its revenue from its international business, compared to about ten percent for Alibaba – and the company’s inability to tap international markets for growth as effectively as its competitors.

Earlier this year, JD.com abandoned a bid for struggling British electronics retailer Currys, which analysts said at the time could be a shortcut to the international expansion that Alibaba and PDD have spent years and billions of dollars building.

Davy Huang, business development director at e-commerce consultancy Azoya, said expanding overseas was a good idea but warned it would need to avoid the price wars currently gripping cross-border e-commerce from China.

“The current environment for cross-border exports is quite toxic. The focus is on low-price competition, heavy advertising, subsidies for orders and price gouging by sellers,” he said.

“I do not doubt their capabilities, but … the priority now should be on China to defend its position.”

Despite e-commerce boom, Indian customers continue to buy from retail chains

Indian shoppers still prefer retail chains over e-commerce for premium products and during festive seasons. Big shopping days significantly increase sales in FMCG and electronics. NielsenIQ observed an increasing preference for premium products and private labels. Grocery and food retail chains like DMart are not significantly affected by the rise of quick commerce.