- JD.com has continued expanding its top line and GMV faster than Alibaba.
- JD.com is also encroaching into Alibaba's apparel business.
- Can JD.com pull the rug from under Alibaba's feet?.
JD.com (NASDAQ:JD) is China’s second largest e-commerce site and one of Alibaba's (NYSE:BABA) biggest competitors. The company recently released impressive Q4 2015 results that topped expectations and once again proved that worries about a slowing Chinese economy are overdone. JD reported fourth quarter revenue of $8.38B, good for 57.3% Y/Y growth and 420M above the consensus. Gross merchandise volume or GMV clocked in at $22.29B, a huge 69% Y/Y increase. Meanwhile, EPS of $(0.07) was in-line with expectations.
The one thing that jumps at you when you look at JD.com’s results and compare them to Alibaba’s is just how much faster the company is growing. Alibaba reported December quarter revenue of $5.25B, or 31.9% Y/Y growth with EPS of $0.98, good for a robust 78% Y/Y growth. GMV clocked in at $146.57B, which was 23% better than the figure for last year’s comparable quarter.
While Alibaba still remains the king of China’s e-commerce space with 59% of the business-to-consumer marketplace compared to JD’s 23%, there is growing evidence that Alibaba could be in danger of losing market share to its smaller rival. First off JD.com sports much better top line and GMV growth than Alibaba. JD.com is very popular with younger buyers. To underscore the growing popularity of the site, consider that customer accounts grew 71% Y/Y to 155M. The company’s rapid growth can be pinned on its quest to expand into rural areas.
JD has been benefitting from its partnership with Tencent. JD now sells directly on Mobile QQ, a messaging platform owned by Tencent that boasts 490 million MAUs, mostly younger folks.
JD.com is beginning to encroach into Alibaba’s territory. The company has traditionally been a seller of electronics, with more than 85% of its revenue coming from selling consumer electronics. But JD is now selling clothes as well, a market that has been Alibaba’s bread and butter. In fact, JD.com has called apparel the most important growth driver for JD Mall. JD says that 25,000 of the 80,000 merchants on its platform sell apparel.
Despite JD.com’s impressive top line growth, Alibaba still has some distinct advantages over the company. JD relies very heavily on its first-party business that involves selling its own merchandise directly to customers as opposed to being a third-party seller where it sells merchandise from other merchants. More than 70% of JD’s revenue comes from its first-party business. In sharp contrast, Alibaba sites such as Taobao are almost exclusively a third-party platform. Being a predominantly first-party platform carries considerable risk because the company can potentially suffer huge losses due to write-offs of stale merchandise. This model also forces the company to invest heavily in building out an extensive warehousing and delivery infrastructure. In fact, this is the main reason why JD.com is not profitable as it continues to invest heavily in expanding its infrastructure.
JD.com’s business model also means high fulfillment costs as well as marketing spends. During the last quarter, the company’s fulfillment costs grew 75% to $700M while marketing expenses grew 81% to $400M. Amazon (NASDAQ:AMZN) faced the same conundrum of thin or non-existent profits for years due to heavy infrastructure investments. The US online giant has, however, been able to start turning a profit consistently due to its highly profitable cloud business. JD.com might not be as lucky as Amazon.
Meanwhile, Alibaba remains solidly profitable and its profits are growing. This gives the company plenty of room to continue expanding its operations. JD.com still relies heavily on its consumer electronics business, a low-margin business, while its apparel business is still in its infancy. Unless the company can figure a way to turn a profit before long, investor patience might start running low and JD will increasingly face an uphill climb trying to scale its burgeoning clothes business and competing effectively with Alibaba.