JD, China’s largest retailer and second largest e-commerce company, had a tough 2018.
Its stock plunged about 50% on concerns about slow economic growth, rising competition, shrinking profits, and a rape allegation against founder and CEO Richard Liu. Adding insult to injury, Pinduoduo, an e-commerce upstart focused on consumers in lower-tier cities, overtook JD to become China’s second-largest e-commerce platform by monthly active users.
A year to forget, by any measure. But it gets worse. There’s a strong case JD lost whatever grip it had on omnichannel retail in 2018, throwing the company’s next stage of growth into question.
New retail race
China’s e-commerce market experienced massive growth over the last decade. About 10 years ago, China was less than 1% of the global e-commerce market. Now, that share is around 40%, with more e-commerce transactions per year than France, Germany, Japan, the United Kingdom, and the United States combined. China’s e-commerce giants, Alibaba, JD, and Pinduoduo, have reached staggering heights and revolutionized the way local consumers shop.
But brick-and-mortar retail accounts for three quarters of China’s total retail sales. It’s no secret that China’s e-commerce giants want a piece of that action. Since 2016, Alibaba, JD, Suning, and NetEase have opened physical stores, partnered with existing retail chains, invested in automated convenience stores, and experimented with private label direct-to-consumer propositions. (For an in-depth look, you can check out a presentation I’ve delivered on the subject).
As China’s leading e-commerce companies, Alibaba and JD made early moves to snap up pieces of the brick-and-mortar pie. Alibaba led with Hema, an “omnichannel” supermarket that services both online and offline orders. JD countered with a string of offline retail partnerships companies including with supermarket group Yonghui and American behemoth Walmart. Since then, Alibaba and JD have been scrambling over and around each other to expand and fortify their omnichannel retail offerings.
Bravado vs. reality
JD’s offline retail play involves a series of bold decisions.
From new retail’s outset in 2016, JD shied away from matching Alibaba’s omnichannel expansion. It currently operates three omnichannel supermarkets, compared to Hema’s 100-odd stores dotted across first and second-tier cities.
In 2017, JD went big on automated convenience—think 7-11 without a cashier. It committed $4.5 billion to retail-related artificial intelligence research and unveiled plans to launch over 100 cashier-less, staff-less convenience stores by the end of 2018.
Also in 2017, JD CEO Richard Liu announced it would open one million mom-and-pop convenience stores between 2017 and 2022 under a franchise model. This is retail ‘blitzkrieg’ on an unprecedented scale. As a reference point, 7-11 has around 65,000 worldwide. Assuming it acquires 200,000 franchisees per year under its plan, JD expects to open three times 7-11’s worldwide footprint each year, for five consecutive years.
Despite the bravado, there are clear signs these decisions haven’t gone to plan.
Alibaba’s Hema supermarket is an unqualified success. Analysis from China Merchant Securities, a securities and trading firm, suggests Hema stores that have been in operation more than 18 months make anywhere between three and five times more revenue per square meter than China’s traditional supermarket chains.
That’s a significant blow for JD, which could have been an omnichannel first mover. Hou Yi, Hema’s CEO, is a former JD Logistics executive. He was originally tasked with spearheading JD’s omnichannel retail efforts. Reporting by 36kr suggested that Hou Yi’s defection to Alibaba last year was precipitated by frustrations with CEO Richard Liu’s tepid commitment to omnichannel. If true, decision-makers and shareholders must be sorely lamenting the misstep.
JD’s unmanned convenience stores haven’t found a foothold. An estimate using China’s two largest mapping services, Baidu Maps and Gaode Maps, shows that JD has probably opened around a dozen out of the hundred unmanned convenience stores it originally planned. This isn’t surprising. Unmanned convenience propositions fell on hard times last year, as about a dozen chains went out of business.
Two years into its plan to build the world’s largest retail franchise, JD has accrued an estimated 50,000 mom-and-pop convenience stores under its franchise model. In April last year, Richard Liu claimed JD gained 1,000 franchisees a week. While impressive, that’s well behind schedule. Further complicating matters is that we don’t know how many mom-and-pop retailers have actually become franchisees, as opposed to those have signed up for JD’s retail-as-a-service solution. Chinese analysts speculate that it conflates the two to puff up announcement numbers.
At this stage, it’s fair to say JD’s new retail missteps are combination of bad luck and inopportune timing.
Omnichannel supermarkets were a breakout hit, rather than the cost-intensive new retail posterchild JD thought they would be. Unmanned convenience stores presently add more costs than they save, but future technical maturation could tip that balance. JD’s also found convincing mom-and-pop convenience stores to cough up franchise fees and forfeit current supplier arrangements is a hard sell, particularly in cities and towns where JD isn’t a household name.
JD’s new retail struggles have important ramifications for its future growth.
To date, JD’s growth has been driven by two engines: a focus on high-margin product categories and expansion from Tier 1 to Tier 2 cities without compromise to its much-vaunted same-day delivery standards.
As I wrote previously, JD is trying to develop new engines to survive the end of easy growth. These include extending from online to offline retail, entry into lower-tier cities, and developing service revenue from its logistics network. Its mom-and-pop convenience store push shows that offline retail efforts are linked to its entry into lower-tier cities. The plan was to quickly accumulate JD-branded stores in lower-tier cities, boost brand awareness, and shape consumers’ e-commerce purchase habits.
All fine, in theory. But, to quote Mark Twain, “How empty is theory in the presence of fact.” Fact is, JD’s new retail big bets haven’t exactly paid off.
With a handful of omnichannel supermarkets and struggling unmanned convenience stores, JD’s extension from offline to online retail hangs in the balance. Two years into its “retail blitzkrieg,” clouds hang over its fledgling franchise network. To be a new retail contender, JD needs a concerted effort to turn things around.