JD.com: Building a Chinese E-Commerce Leader
How did China’s #1 direct-sales e-commerce company and e-commerce challenger achieve its leading position? By aligning its business model with its operating model, of course!
In 2009, JD.com, Inc. generated less than $0.5 billion of sales. In the last 12 months ended 9/30/2015, it generated over $25 billion. How has the company managed to achieve such eye-popping organic growth? Using ownership and control to deliver a superior customer experience.
Business Model
JD’s customer value proposition is captured in its company logo (above), which contains 4 characters: more, fast, good, save. In short, JD seeks to provide a more enjoyable online shopping experience by providing a broad array of high quality goods at attractive prices that can be easily and speedily found, purchased, and delivered to the user. In order to best deliver this value proposition, JD owns each step of the purchase experience. In addition to owning its website and smartphone app, JD purchases and takes inventory of its products to ensure quality, builds and owns its nationwide distribution and last-mile delivery infrastructure to ensure speedy and accurate logistics, controls its back-end technology, offers its own online and in-person payment system to increase convenience and lower adoption barriers, and manages its own fully-integrated customer service organization staffed by its own employees to ensure customer satisfaction.
All this can be understood in contrast to Alibaba, owner of China’s leading e-commerce platforms, which owns websites and apps that facilitate transactions between third-party buyers and sellers of products never owned by Alibaba and delivers orders using third-party fulfillment and delivery companies. JD’s vertical-integration allows it to ensure a more consistent level of quality more easily, which is particularly important in an economy like China’s in which counterfeit and low-quality products and services can be a concern and in an industry like retail in which customer experience is a key driver of customer loyalty. Successful execution of JD’s strategy should drive scale economies that form significant competitive advantages.
Operating Model
JD’s operating model is aligned with its business model, as owning more steps in the value delivery process allows JD to provide a superior customer experience.
Its website and app are colorful, full of content, and easy to use, serving 132 million annual active customer accounts and fulfilling 330 million orders in the last quarter. From its roots in electronics and appliances, JD has expanded into general merchandise, apparel, food, media, and groceries. To help consumers make good purchase decisions, JD provides the ability to give product reviews (>518M at 12/31/2014) and provides product recommendations based on past purchase and viewing history. To drive customer traffic, it also has a partnership with Tencent, China’s communications and social media leader, which advertises JD through its dominant Weixin and Mobile QQ messaging platforms. In addition, JD also owns B2C and C2C marketplaces akin to Alibaba’s through which third-party sellers can distribute through JD’s logistics infrastructure.
To provide high-quality and accurate logistics, JD owns its proprietary fulfillment and delivery infrastructure. JD operates 196 warehouses in 46 cities and 4,760 delivery and pickup stations across 2,266 counties and districts as of 9/30/2015 and continues to expand this infrastructure at a rapid pace. Its “211 program” allows for same-day and next-day delivery for no extra charge such that over 85% of direct sales orders in the third quarter were delivered on the same day as – or the day after – they were placed. JD will even deliver within 3 hours in certain major cities for an extra charge.
In order to facilitate this complex infrastructure, JD controls its back-end technology which includes systems for suppliers, customer relationship management, supply chain, warehouse management, delivery management, transaction processing, and business intelligence, backed by 156 Chinese computer software copyrights and 30 Chinese patents (with hundreds more pending).
As part of adapting to local consumer habits, JD built out the capability to accept cash or credit card on delivery in addition to payments through the website and app, a service that is used approximately 1/3 of the time.
In the video below, JD’s VP of Retail Shi Tao (formerly of Amazon China) shares more color.
Last but certainly not least, JD’s customer service representatives are also company employees and can be easily reached through instant messaging and and phone for immediate assistance 24/7. Furthermore, products can be returned within 7 days (or defective goods within 15 days) of receipt, and JD will even pick up the package from where they delivered it!
Conclusion
In the battle between Amazon and eBay in the US, Amazon has clearly demonstrated the superiority of the owned business model, with its $320B market cap dwarfing that of its $35B rival. As JD.com continues to scale up and build out its moat in China, can it overtake Alibaba to become China’s e-commerce leader as well?
Sources: Company public filings and videos, JD.com, Google Images.
https://www.techinasia.com/jd-mall-english-guide-how-to-tutorial/
https://vimeo.com/95239516
Really interesting article – thanks!
JD’s business model makes a lot of sense to me from the consumer standpoint – having same-day-delivery, better customer service and easy returns are very attractive in a market where fraud and trust are enormous issues. My primary question is whether JD.com will be able to sufficiently -supply- the marketplace — i.e. satisfy the producers / brands who sell through e-commerce.
Alibaba currently remains 59% of China’s e-commerce marketplace (http://www.wsj.com/articles/alibaba-vs-jd-com-executives-weigh-in-1439793927). It has entered into many exclusive partnerships with brands — a feat that is possible given the dominance of the site. This means that consumers, even if they prefer the service of JD.com, might opt to buy a product on Alibaba, simply because that is where the brand is being sold (and switching costs are practically nonexistent). As someone who has never bought products through China’s e-commerce platforms, I do not know how large of an issue this brand exclusivity is… and I imagine that there will be a certain tipping point as JD.com continues to grow, whereby brands will be incentivized to offer products on both sites. However, until that point, JD.com may need to tailor some of its operating model to be as attractive to suppliers as they are to consumers.