JD.com Inc. (JD, Financial) is one of the largest e-commerce platforms in China, with a strong focus on authentic products and best-in-class logistics. It is often called China’s Amazon (AMZN, Financial) because it is similar to the company in several ways.
Most importantly, it operates as both a first-party retailer as well as a marketplace for third-party sellers. JD is also the only Chinese e-commerce player which invested heavily to build its own logistic network. From the very beginning, the company has prided itself in only selling authentic products. Product quality and super-fast delivery was JD’s moat, which helped it maintain a loyal customer base and kept it from losing market share to PDD Holdings Inc. (PDD, Financial) and short-form video platforms such as Douyin and Kuaishou.
However, during the past two years, JD’s reputation has been damaged, and the recent decision by Richard Liu to start a pricing war with PDD and Alibaba (BABA, Financial) may very well be one of JD’s most costly mistakes in its history.
Recent growth and improving profitability
The e-commerce industry in China has been growing rapidly in recent years, driven by the increasing use of mobile devices and internet access. Before the rise of PDD and Bytedance, JD.com has been able to capitalize on this trend and grow its market share, becoming one of the top e-commerce players in China.
JD’s revenue has grown at a compound annual growth rate of 20.8% over the past five years, primarily driven by the strong growth of e-commerce sales in China. The company’s gross margin has remained stable at around 8% and its net profit margin has also improved from negative in previous years to 2%, reflecting its improving profitability and cost-control measures.
The company faces strong competition from Alibaba, PDD and Bytedance. Before Shanghai’s lockdown in the second quarter of 2022, JD was able to differentiate itself from competitors by focusing on product quality and authenticity, as well as fast and reliable logistics services, which have helped it improve customer satisfaction and maintain a competitive edge. However, after the Shanghai lockdown, JD has made a series of mistakes, which may have long-lasting business consequences.
Reputational damage during the 2022 Shanghai lockdown
During the period of Shanghai lockdown, JD’s reputation was severely damaged. Right after the lockdown started, the company announced publicly that it would provide 16 million packages of rice, flour, oil and other essential supplies to Shanghai residents and deliver them by JD’s own logistic service . However, in the end, they were unable to deliver the goods as promised and repeatedly postponed the shipment. However, due to warehouse closures, JD’s inability to obtain truck driver permits and other issues, the company was not able to deliver on its promises to Shanghai residents, who vented their frustration online.
Things got worse when its rival PDD, without its own logistic services, secured a large amount of essential food supplies and delivered them to the communities. PDD did not make any public announcement, but the Shanghai residents were very grateful for the gesture.
Pricing war is irrational
At the beginning of 2023, JD announced a strategic pricing war with PDD and Alibaba. Internally, it is a very controversial move, one I think could be a very costly strategic mistake for several reasons.
First of all, PDD is much more efficient than JD and has a cost advantage. Theoretically, PDD can outprice JD in most product categories due to its cost advantage. This is exactly what PDD is doing. Therefore, unless JD is willing to irrationally subsidize its customers, its pricing war will not work at all.
Second, JD’s moat was based on brand value and premium products. And the anchor of brand value is pricing power. The company’s large-scale subsidy will make consumers question the value of products, and thus affect its brand image.
Last but not least, even if JD is successful in its pricing war, once the subsidies are reduced or cancelled, it may lead to consumer loss. This will not only affect JD's sales, but also its user base and market share.
Therefore, although JD's billion-yuan subsidy may bring some benefits in the short term, in the long run, this strategy is very likely to have a negative impact on JD's business.
Conclusion
JD was once a very strong e-commerce leader with a wide moat. But during the past two years, mismanagement and strategic errors have considerably hurt the business. Going forward, the company’s revenue growth and profitability may face significant challenges.
The company's valuation does look very cheap at this point. The stock trades at only 0.31 times forward sales, whereas Amazon trades at 2.3 times forward sales and Alibaba trades at 1.67 times forward sales. This indicates the market may already have priced in JD’s possible deteriorating fundamentals. But given the possibility of prolonged fundamental decline, I am not convinced that JD is very undervalued either.
