JD.com, China’s second largest e-commerce provider reported fourth quarter and annual 2015 earnings this week and the results appear quite promising. Net revenue for fourth quarter increased 57% to RMB54.6 billion (US$8.4 billion) and for the full year 2015, it increased 58% to RMB181.3 billion (US$28.0 billion).
Even though net revenue gains were strong, it came at a cost. Fulfillment expenses also increased as competition for the Chinese retailer and customer continued to heat up. Including procurement, warehousing, delivery and customer service, fulfillment expenses for fourth quarter increased 75% to RMB4.5 billion (US$700.0 million). According to the company, the increase was mostly due to the increase in fulfillment employees associated with its network expansion into lower tier cities and rural areas along with the growth in logistics services provided to merchants. Meanwhile, for the full year, fulfillment expenses increased 73% to RMB13.9 billion (US$2.1 billion).
According to its earnings press release, as of December 31, 2015, JD.com operated 213 warehouses covering approximately 4 million square meters in 50 cities including 6 self-built Asia No.1 warehouses and a total of 5,367 delivery stations and pickup stations across China. During 2015, over 85% of direct sales orders were delivered on the same day as, or the day after they were placed.
As noted on its earnings call, innovation is vital for JD.com and it indicated it would continue to invest in innovative ideas. For example, the company noted it had received permission from two county governments to use drones to deliver packages in China. Furthermore, as it invests in innovation in order to grow its business, logistics cost per order is anticipated to decline as a percentage of revenue. An interesting example the company gave was the average price per parcel for couriers STO and YTO are about RMB13 (US$2.00) per parcel, however, its delivery costs were lower than that thanks to its scale and innovation investments. As such, it continues to look at alternatives to encourage customers, for example, to increase their basket size so that economies of scale will further improve for JD.com.
Another innovation/focus of the company is fresh food delivery. In 2015, JD Daojia, JD.com’s O2O platform (Online-to-Offline), established a partnership with Yonghui, a supermarket chain in China. As of February 29, 2016, JD Daojia has partnered with 56 Yonghui stores in 5 cities to provide 2-hour delivery service for customers’ grocery orders. In total, JD Daojia provides O2O services in 12 major cities across China. However, despite expansion progress, the company concedes the lack of standardization of fresh food packaging is an issue and as such it is working with its supermarket partners to improve this in order to fulfill fresh food items more effectively.
What’s ahead for this e-commerce and logistics provider? As it continues to nip at Alibaba’s toes, the company expects to continue investments in its O2O platform as well as focus on particular goods for online selling such as home appliances in which it has seen great growth, improve profitability of its cross-border service and further expansion into rural China.