JD.com turns to warehouses for growth

August 22, 2018 13:11
JD.com hopes to secure a steady flow of rental revenue from its logistics facilities across the nation. Photo: Reuters

JD.com is the country's second-largest e-commerce platform after Alibaba Group. It has collaborated with internet giants such as Tencent Holdings and Google as well as with US retail major Walmart as part of its efforts to narrow its gap with the market leader. And the company is now turning to bricks and mortar business for greater revenue to fund its technology development.

During an earnings conference call with investors last week, JD.com said it is shifting the management of its warehousing assets to a separate unit to help revive profits. The company reported a second-quarter net loss of US$334.4 million, far worse than analysts' forecasts.

JD said it has built a professional management team over the past two months to manage the company’s logistics assets in a bid to enhance their value. As of the end of July, JD has already owned over 2.5 million square meters of completed warehouse space which could unlock billions of yuan in value appreciation and a steady flow of management income. This portfolio is only part of the assets in the pipeline that the company has signed for or are under construction.

“We expect the monetization of our logistic properties, when realized, will compensate part or all of the additional investments,” Reuters quoted JD’s chief financial officer Sidney Huang as saying.

Huang said some of the revenue from the new unit will become visible in the company’s financials within six to 12 months.

Some of JD's logistics assets were acquired in recent years on beneficial terms with local governments, which are looking to boost job creation. These assets are expected to start yielding returns soon, the news agency said.

Market observers believe that JD’s logistics facilities will play a key role in the company’s business. A retailer will be able to use JD's assets and services to launch its own online retail business by just paying a service fee to the company, instead of hiring a team and investing in fixed assets for business growth.

JD hopes to secure a steady flow of rental revenue from its logistics facilities across the nation, considering that online retailers must stick with the company for fast delivery options. As such, it makes sense for JD to invest in its own logistics facilities, which will serve not only the JD platform but other JD users as well.

In its second-quarter results, JD said revenue from its logistics business surged 151 percent year-on-year to 5.11 billion yuan (746.7 million). However, the business was still making a loss as it was still in the initial stage of investment.

While JD is well-known for its online shopping mall and its revenue is still mainly from its online retail business, the company has been transforming itself from a pure online retail platform to an online retail solutions provider for retailers that want to do business online.

JD’s retail service initiative is supporting nearly a million business customers through multiple offerings such as supply chain management, marketing solutions, logistics services, and technology support. The company is also gaining traction with clients under the WeChat Store program toolkits. It launched more than 80 WeChat Stores each day for its partners during the second quarter.

Indeed, JD is enhancing its delivery service as part of its competitive advantage against rival Alibaba Group. The company has been driving innovation for its logistics services in order to provide one-hour delivery in selected cities. More than 90 percent of its first-party orders are delivered either within the same day or the next day across the country. The company’s own delivery and warehouse network covers well over 2,800 counties and districts, or essentially 99.9 percent of the country.

Riding on its logistics facilities across the nation, JD said it will introduce more differentiated products in cities of various tiers and provide dedicated solutions to its customers.

Of course, the company must have plans to further monetize its logistics assets other than offering its facilities to third parties for revenue.

The market has been speculating for a long time that JD's logistics arm would be spun off for a separate listing in the future. In February, the logistics arm raised US$2.5 billion at a valuation of US$13.5 billion. The company may launch an initial public offering in Hong Kong and mainland China.

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EJ Insight writer