Lance Yeung 134498 February 28, 2017

LS 125 G Mr. Johnny Filart CASE 2: JD.COM

Introduction and Problem Statement

The rise of internet and mobile shopping in China has been capitalized by key players such as
JD.com and Alibaba.com. Jingdongs B2C online retailing operations started in 2004 where it
sold magneto-optical products. Within seven years, JD transformed into a mega-site by
expanding its product line to all kinds of products ranging from computers, consumer
electronic goods, mobile phones, and books. Currently it rivals the e-commerce market
leader, Alibaba, with its vast product line of 40.2 million SKUs and self-owned extensive
network of logistical systems. JDs success in growing its consumer base can be attributed to
its fast delivery, affordable prices, and quality controlled goods.

However, to differentiate itself from Alibaba, JDs business model required an investment of
US$1.3 billion in logistical infrastructure and its massive 50,000 fleet of employees to satisfy
the quick delivery times, quality control, and great customer service. Although this strategy
generated an increase in their customer base, it also resulted in huge losses for JD especially
in Q1 and Q2 of 2015. To add to this, the companys strategy in controlling the quality of its
products meant that it had to own huge amounts of inventory which resulted in substantial
inventory risks.

The company needs to address key issues such as whether to sustain its current business
model of high logistical investments and a large workforce, combatting competitors
advances against it, strategically growing the other facets for instance, fundraising, financing,
operating O2O, and expanding to agriculture and fresh produce. How does JD balance short-
term profitability with long-run development under these circumstances?

External Analysis

A strategic evaluation of key external factors must be understood to identify and evaluate
opportunities and threats which may impact the companys long-term plans.

a. Chinas e-commerce Users expected to reach 1 Billion by 2025

In 2013 to 2015, Chinas internet user base increased from 301 to 600 million and it is
predicted to break the 1 billion user mark by 2025 resulting in a CAGR of 5% per year from
2015. Based on conservative online shopper growth rates and data provided in online
retailing market growth, the number of people who use the internet to purchase goods is
expected to reach 400 million by 2020 where internet penetration would be dominant at
87.4%. In turn, the consumer spending is also expected to increase from US$959.9 billion to
US$1554.6 billion by 2020 because of the increased customer base as well as more
willingness to spend by the lower-tier sectors. Based on these forecasts, Chinas e-commerce
market is a promising environment to grow in, with stable growth in the long-run and a
constantly increasing consumer base as well as consumer spending. Leveraging on the loyalty
and return purchases of these new customers and users of the mobile shopping platform will
be a key strategy in riding the tide of this growth.

Furthermore, a trend in the market shows that B2C e-tail operations is also projected to
overtake the C2C online selling industry in terms of market share. B2C started with a lagging
13.7% market share during 2010 but is projected to quickly catch up with C2C by 2016 and
overtake C2C online selling with its dominant 52.7% market share by 2017.

b. Mobile Shopping: Rapidly gaining popularity

Customers who use mobile online shopping in 2014 were estimated to be 670 million. This
means that mobile shopping has already captured one-third of the total online shopping
industry and is still rapidly gaining traction with the support of the government, increasing
incomes, and advancement of infrastructures. In 2015, the mobile shopper count is expected
to increase by 70 million more and this is a 63.5% growth which is 3.2 times faster than the
online shoppers growth as a whole. The continuous robust growth of the mobile shopping
industry in the recent years is a potentially huge venture to penetrate in. Developing better
infrastructure will enable the company to support the growing customer base in this area.

c. Rural Markets: Major contributor to the Internet Retailing Industry in the Future

Chinas rural market in 2014 was valued at US$ 28.3 billion and is expected to reach 72.4
billion in the future. The rising incomes of 600 million people who are situated in the rural
areas and increased consumer spending in the provinces has lead to the increasing popularity
of mobile and online shopping in these locations. As of present, although per capita income
of the rural citizen is still three times lower than that of the urban dweller, the volume of
online shoppers in the provinces is able to make up for the lower tiers lack of purchasing
power. This is also evident in the data of 2014 where the growth of online shopping was a
staggering 41% compared to the slow 17% growth in urban areas. In 2018 it is expected that
over half of the total online sales would be contributed by Tier-3 cities and below. This
drastic increase of market penetration in these highly populated and untapped areas are key
factors the company should look into to capitalize its growth in the domestic market.
However, the fact remains that rural areas are harder to reach compared to urban areas which
translates to higher delivery costs, longer delivery times, and even lost customers. Quality
control is also a challenge to implement and oversee in rural areas and this is evidenced by
the fake agricultural products which comprise 80% of the total goods sold.

d. Government supporting and formalizing e-commerce systems

The boom of e-commerce is supported by the Chinese government with open arms. The
administration implemented policies such as Administrative Measures of Online Trading,
Notices on Tax Policies for Cross Border Retail Export in E-Commerce, and many other
measures that supported online retail markets by obstructing foreign competitors from
importing, and allowing domestic companies to export their products. These policies also
covered formalizing mobile retailing and distribution. All of these translates to the
advancement of the industrys layout and infrastructures, and ultimately boosts the industrys
market even more. The integration of government and consumers has also paved way to the
modernization and improvement of internet capabilities especially in larger cities like Beijing
and Shanghai. With these events, the risk of political or economic instability for the e-
commerce industry is very little because the government is in line with nurturing the growing
industry.

e. Foreign players not allowed to import in China

America is second only to China in the e-commerce market with a contribution of US$297
billion and annual growth of 11.7 %. With Chinas B2C e-commerce goods becoming more
and more saturated because of Tmall and Taobaos dominance, exploring foreign goods and
bringing them to the domestic playing field will be the next logical decision to undertake.
This is also supported by the local governments policies which support the export and sale of
e-commerce to international companies and blocking of international servers such as e-bay,
Amazon, Groupon, and Google. These are opportunities for the domestic companies to tap
into. Procurement of foreign and international goods and bringing them to the domestic
market at a cost advantage will differentiate the company from its domestic competitors and
capture consumers who wish to have foreign branded products.
 f. Alibaba, Chinas E-commerce Giant

Capturing more than 50% of the market, Alibaba has made it hard for JD to grow in China.
The e-commerce giant is a third-party platform which utilizes its lean business model which
relies on outsourced logistical solutions and only a few servers to connect buyers and sellers
where it profits on commission on sales. The competitor currently has B2B, B2C, and C2C
platforms and is exploring other businesses such as microfinance, payment, and
crowdfunding. Compared to JD.coms army of 50,000 employees who process 2 million
parcels daily, Alibaba only has a fleet of 25,000 who can work more efficiently, packing 27
million orders per day. However, one key weakness of Alibaba is that the products and
manufacturers listed in its sites such as Taobao.com, Tmall.com, and Aliexpress,com are
often not regulated. This lacking quality control results in a lackluster customer experience
and the presence of many counterfeit, and low quality goods.

Internal Analysis

a. Expansive Logistical System & Partnerships with Physical Stores

JD differentiates itself from the company by providing joyful, carefree, and trusted delivery
to customers. It promises to deliver items ordered online within the day and only a few et
delayed to the next day. Currently, it is able to deliver 70% of items during the day and the
rest the day after. However, to achieve such an efficient delivery system, it had to invest
billions from investors to build 86 warehouses in 36 cities, 166 regional warehouses, 1620
smaller delivery stations and 214 pickup stations. Furthermore, controlling deliveries and
purchases entailed a fleet of 24412 delivery personnel, 11145 warehouse staff, and other
operations employees which total to over 50,000 workers.

To make it easier to reach the rural areas, JD worked with a network of offline brick-and-
mortar convenience stores to cater to the provincial markets. As a result of partnering with 15
companies, it was able to establish a physical presence of 10,000 convenience stores, chain
stores, and enterprise resource planners. This proved as a great strategy since this distribution
channel contributed as the fastest-growing in sales volume.

However, in 2014 it tried to utilize Alibabas strategy in partnering with 29,000 suppliers

b. Great Customer Experience

JD runs using its self-operated business model where everything is controlled by the
company from purchasing, storage, sale, delivery, and after-sales services. This creates better
quality control on each of its SKUs and this is why JD is given a high rating in customer
feedback. Compared to Alibaba, JD is doing a great job in sifting its product lines for any
lemons and fakes, as well as keeping tight regulations on its suppliers. While Alibaba is
plagued with counterfeit items and untrustworthy suppliers, JD maintains its reputation by
providing top of the line quality to ensure better customer experience. The drawback to
controlling everything on its own is that operations are becoming more and more complex as
their product lines and customers increase.

To ensure better customer feedback, it employed 5832 customer service personnel to respond
to concerns in its online customer service center. Furthermore, it established 100 country
level service centers which covers 10,000 villages to sustain its good relationship with its
customers especially in rural areas,

c. Autonomy of Procurement Managers

Managers are given responsibility to source out newest market trends and have the authority
to purchase these without head office approval. This results in fast reaction time to market
needs and demand. Aside from response, this also serves as a motivation for the managers to
try out unconventional marketing and merchandising tactics they judge to be effective. If the
strategy proves worthy of implementation, then the manager does not have to wait for the
head offices approval before launching a full scale innovative marketing campaign.

Key Issues & Recommendations

a. How will JD continue to sustain its logistical investments and expenditures?

i. M&A or Partnership with Foreign Entities

To address the investors concerns about JDs massive spending in expanding its logistical
network in China, the company is advised to partner or enter a M&A with foreign entities
such as Amazon or Wallmart to bring their products into the market and adapting more
efficient systems. JD has been generating poor gross margins which is a contributor to its
negative profit margins over the years. As a comparison, Alibabas gross margins are on
average 7 times more than JDs usual 8 to 10 percent gross margin. Implementing a foreign
partnership strategy will enable JD to penetrate the market with foreign products. This means
that JD will be able to generate a higher markup on foreign branded products which are
scarce in the domestic scene and in turn increase its gross margin performance.
Second, partnering or undertaking a M&A with a large foreign online e-tailer will enable JD
to modify its current capital intensive logistical system. This strategy can possibly cut down
the unnecessary expenses that are not value-adding and focus only on the core needs of its
delivery system.

Finally, JD should continue to partner with physical retail stores especially in rural areas as
these provide a helping hand in expanding the companys reach in provincial markets. By
utilizing this strategy, JD doesnt have to deliver the products door-to-door and can provide
cheaper delivery rates for pick up in the nearest convenience outlet.

b. Which industry should JD focus on? B2B, B2C, C2C?

i. B2B quickly overtaking C2C

B2B is expected to grow from a 36.2% market share compared to the 63.8% market share of
C2C in 2013 to a 52.7% market share by 2017. While the C2C is rapidly shrinking, Taobao
and other competitors C2C performance will lag behind in the future as well because of the
deflation of sales volume. JD can now capitalize and continue to strengthen its B2C platforms
to better serve its customers and in turn generate more sales volume and bigger margins by
2017. Specifically, JD is already leading in mobile phone sales in Q3 2014 with over 53%
market share compared to Tmalls 25.7%. Hence, it should continue to market and sell
various electronic products because the company is trusted by the customers with regards to
quality and satisfaction. JD should continue to improve its customer service facilities and
look into call center systems to optimize its service department personnel. Furthermore,
controlling quality will be an integral part of business to generate the maximum customer
experience and benefit.

Aside from mobile phones, JD can continue to explore the fresh product e-commerce industry
as well as the factory to country and farm to table business. This is in-line with Chinas
deteriorating standards in food where scandals have exposed various toxic chemicals mixed
in food for human consumption. With JDs good reputation and quality assurance, customers
will not hesitate to purchase from the company. To add to this, the farm to table industry is
also steadily growing and this B2C strategy can generate a higher margin because of the
perceived premium value on natural healthy food.

Whilst implementing this focus on B2C, JD is also advised to specifically target rural areas
which has 41% growth in the volume of online consumers. They should implement an
aggressive strategy in partnering with physical retailers in order to secure
 c. How does JD recover its massive logistical expenditures and aim to cut down
its fleet of employees to be a leaner company in the future?
i. Outsource Employees in Packing, Delivery

From the start, JD focused on quality assurance and customer satisfaction guarantee but this
has lead to the company employing over 50,000 employees just to control its operations from
top to bottom. Instead, the company should gradually outsource reliable domestic companies
which specialize on processing and packing, as well as delivery to cut down its huge labor
expenditures and facilities holding these employees. This will result in a leaner system which
can generate greater gross margins and keep up with Alibaba. Using this strategy, JD can still
continue to monitor its top of the line quality by having its own quality inspection department
which will have to inspect all products before they get delivered to the customers.

ii. Look into call center systems for service department

Aside from maintaining quality before sale and delivery, the JD should continue to improve
on its customer service response and after sales services. It can partner with reputable call
centers to answer customer concerns or adapt the strategies that call centers are using and
establish its own branch of service department that specializes on this process. This will also
result in more efficient processes and possibly cut down unnecessary spending on non-value
adding customer service agents by reducing their downtime and idle hours.

Industry Competition Problem Internal Systems

2015 600M users Alibaba Tmall HQ open in Self-operated model:
Third-party platform Beijing purchasing, storage,
2025 1B users
connecting buyers sale, delivery, after-
and sellers Business Model: too sales service. Too
2014 China largest
Relied on many employees in complex when big
B2C, C2C e-
outsourced logistical logistics Better quality
commerce market
solutions control
$458B sales
Build 1000 country 2015Q1 = Better customer
19.4% GDP growth
level operation -US$112M feedback
33.5% total retail
centers and 100,000 2015Q2 = -US$
growth
village level service 80M 2004- Started as
 stations spending Magneto-optical
2014 American 1.6B in 5 years products
second largest Microfinance Rivals attacking Electronic, Mobile
$297B Payment Phones, Computers,
11.7% growth Crowdfunding Integrating an 3C (Computer,
Took commissions information platform Communication,
2015 China Sino micro-blogging with such diverse Consumer
Industry $265.126B site weibo 66.6 convenience stores. Electronic)
39.1% growth million daily users Can also be source 2010 Books
Increasing users & 143.8M active users of fake products 2012 English site
penetration Only 25,000 2013 -Taiyuan Tang
employees compared Cost of building Jiu convenience
Changes purchasing to JDs 50,000 delivery systems in store delivery
habits Packed 27M parcels rural areas, 2014 NASDAQ
Internet Users VS JDs 2M parcels underdeveloped increasingly
2014 361M users a day internet was another diversified products
+59.53M from 2013 bottleneck largest IPO
+19.7% from 2013 Yihaodian
Amazon integrated B2C Model
Online Shoppers value chain Inventory Risk Fundraising
55.7% of 361M Suning and Ctrip Profit Margins lower 2007-2013
From 48.9% 2013 O2O than alibaba US10M, 21M, 1.5B,
VIPShop discount 700M
Mobile Internet retail model 2.23B total
Users
2014 = 670M; 1/3 Logistics System +
are Mobile Shoppers Tencent social Low Price
2015 = 740M commerce Joyful, carefree,
trusted delivery
Mobile Shoppers JD Reduced cost by
2014 2nd largest e-tailer owning it
236M +63.5% Huge gap from Cost: 1.3BUSD
growth Alibaba 30% growth rate
3.2x faster than over past 5 years
online shoppers Competitors are because of this
growth forced to raise the Beijing, Shanghai,
42.4% of online bar in delivery Chengdu, Wuhan,
shoppers standards Shenyang,
+13.5% from 2013 Guangzhou
3 hours delivery
Government 3pm 7-10pm
Promote & 2014 86
Encourage warehouses
Administrative (1.5sqm) 36 cities
Measures of Online 166 regional
Trading warehouse
Notices on Tax 1620 delivery
Policies for Cross stations
Border Retail Export 214 pickup stations
in E-Commerce 495 cities
Notices on the Pilot 24412 delivery
Project for the Join personnel
Development of E- 11145 warehouse
commerce and staff
Logistics Express 5832 customer
Provisions on the service personnel
Procedures for 70% on the day
Formulating delivery, or the day
Transaction Rules of after
Third-Party Online Same day delivery
Retail Platforms 43 cities Jingdong
Results: Advance 211 programme
layout and Next day delivery
infrastructures, 256 cities
increase market sale Express license from
government to
Integration render logistical
Government &
Consumers services to other
Internet Access companies
Beijing, Shanghai Wants to partly
GuangZhou connect with third
2018 Half of total party logistics
online sales = tier 3
cities and below Mobile Retail
Penetration
Rural Market 2014 - 40M mobile
2014 - US28.3B orders 40% sales
Predicted 72.4B
Rising rural incomes
(600M citizens)
2013 per capita Online customer
income 1401 service center
Urban 4653
2014 77M online Diversify Product
shoppers Categories
+41% compared to 2012 1.5M SKU
17% in urban 2014 40.2M SKU

Alibaba/JD 80% of Electronics & Home

Industry Appl.
440B 2011 80.1%
2012 65.3%
Rural potential 2013 63.6%
80% of agricultural Gross
products sold as fake Merchandising
Volume

Rest of the world Buying managers

potential market can purchase
China B2C e- without head office
commerce was approval
saturated. Tmall & Fast reaction to
JD 75% market market needs,
share different marketing
Sell Foreign & merchandising
products in domestic tactics
markets
Sell domestic Users:
products in foreign 2011 12.5M
markets 2013 47.4M
Sell foreign products
in foreign markets Value-added Tech
Ebay, groupon, Services
google, amazon
blocked Service Centers
Advantage for 100 country level
Chinese companies Covers 10,000
because they can villages
operate in foreign
countries O2O Strategy
Intergration of
Chinese megadata, network,
manufacturers network of offline
scandals brick-and-mortar
Contaminated milk, stores and delivery
healthy and food systems
scandals 3C products in rural
Cross-border e- markets
tailing Integrate terminal
Chinese living stores in tier 305
abroad target markets
Regional regulations
did not allow some Fresh product e-
brand goods to be commerce
sold outside Factory to country,
Mainland finance to country,
and farm to table
B2B 70% of market Industrial products
Alibaba 52.8% Financial products to
B2C might surpass rural customers
C2C by 2017 Farmers can sell
Alibaba e-commerce fresh products
78.8% directly to fining
JD 11.9% tables in cities
C2C Taobao 80%
Convenience stores
2014 partnered
with 15 companies
result in 10,000
physical
convenience stores,
chain stores,
enterprise resource
planners.
Fastest-growing
sales volume
Retail stores act as
distribution
networks, partner
gets to set up online
store on JD

Cross-border E-
commerce Platform
Chinese consumers
can purchase
authentic imported
products
International
producers able to
sell directly to
Chinese consumers
2015 450 online
shops, 150,000 SKU
of high demand
products
1200 brands
US Mall
2013 Singapore
partnership iKnow

Internet Finance
Business
Enterprise and
Consumer
fundraising,
financing, and
payment services
JD Crowdfunding
and JD Baitiao
Competed with
Dreamore, Knewbie,
Angelcrunch,
iChuangye
Issued credit that can
be used to purchase
JD products 30 days,
24 divided payments
Consumers monthly
orders increased by
33%, monthly
spending increased
by 58% average
spend per customer
was 50% higher

2014 joint alliance

with Tencent
Use Tencents B2C,
C2C logistical
assets, mobile assets
(QQ, WeChat) and
personnel for social
media

2014 tried to open to

29,000 third party
sellers
Fake products,
leaked consumer
data
Slower delivery,
disputes, customer
experience was
damaged