<Editor's Pick>JD.com Logistics is unexpected rescued from a desperate situation

Feb 19, 2020 Logistics JD.COM CAINIAO

No matter what Richard Liu's character is, his business mind still has to be admired. As early as ten years ago, he decided to do JD.com Logistics on his own when a group of investors were against it. He even asserted that in the future, only JD.com Logistics and SF Express would live in private logistics companies in China.
Now it seems that Richard Liu made a very visionary decision, and the development of JD.com Logistics really made him have such confidence.

With the outbreak of coronavirus, people's lives are greatly affected in various degrees. As many small and medium-sized logistics enterprises have entered the holiday state around the Spring Festival, coupled with the rapid increase in logistics demand generated by the epidemic, there has been a huge gap in logistics capacity in the short term.

On weekdays, most of the e-commerce platforms that rely on the third-party logistics as the main part obviously feel the pressure brought by the excessive demand. No matter from the aspects of business delivery, express delivery, transportation speed, delivery efficiency, etc., they all fall sharply compared with the normal period.

However, JD.com, with its own logistics system as the main part, has shown a reliable combat effectiveness in the whole Spring Festival, whether it is in the To C business related to the mall or the To B business related to "anti-epidemic". 

In order to ensure that medical supplies can reach the front line of anti-epidemic quickly, JD.com and the Hubei provincial government cooperated to comprehensively build their emergency supplies supply chain management platform. It is a response to the urgent needs of Hubei Provincial New Crown Pneumonia Prevention and Control Headquarters. Since JD.com Logistics invested in Hubei anti epidemic in various ways such as transportation capacity, manpower and equipment, its whole supply chain technology has directly participated in the epidemic prevention and control work of government departments.
At first it faced a lot of questions such as too-heavy business, 12-year continuous loss that has dragged down the e-commerce business for a long time, no cash on the account. But now, it achieved quarterly profit for the first time and realized efficient distribution in the special period of the epidemic. JD.com Logistics seems to have explored a business model that suits itself, which has achieved initial results.
From e-commerce logistics to open logistics platform

For a long time, JD.com has been criticized that its self-built logistics is too heavy, which affects the overall profit. Even Jack Ma has expressed it in public that he is not optimistic about the model of JD.com self-built logistics.

In Alibaba's entire business system, it does not advocate doing hard work, but rather to be the market integrator and service provider. As early as September 2017, at Alibaba's 18th anniversary annual meeting, Zhang Yong proposed Alibaba's future core strategy, which is to be an "infrastructure service provider" in the era of digital economy.
When it talked about Alibaba, what appeared in people's mind was Taobao, Tmall, Alipay and other related e-commerce business. For an e-commerce enterprise to propose to be an "infrastructure service provider", it seemed difficult to understand at that time.
Now, its so-called Internet infrastructure is not a traditional hardware facility. It is more about creating a public environment (or platform) in various areas of the Internet, which provides services for practitioners such as technology, data and other resources.
Taobao and Tmall provide services for merchants, Alipay provides services for payment activities, Alibaba Cloud provides cloud services for SMEs, and Dingtalk provides office services for enterprises, while Alimama provides data services for enterprises. And its logistics platform Cainiao provides platform services for logistics enterprises.
At first, Cainiao was born in a relatively loose form of platform. Alibaba serves the logistics enterprises in the platform through continuous technology and data output. Finally, it makes the logistics enterprises in the whole network reduce costs and increase efficiency. In terms of infrastructure, rookies only build infrastructure in the core areas of intelligent storage, intelligent distribution, global super logistics hub and other fields. Other logistics links are completed by the logistics enterprises themselves in the network.
In contrast, JD.com Logistics initially started with the hard work of serving JD.com Mall, and built all its core links in warehouses, distribution, and supply chain systems.

With the continuous increase of JD.com Group’s overall volume and the gradual maturity of its logistics system, JD.com Logistics has also begun to open from internal use. 

On April 25, 2017, JD.com Logistics was officially established as an independent sub-group, which defined its vision and mission: to serve the supply chain infrastructure of the society, reduce social logistics costs, and improve the efficiency of global trade.
Whether it is Cainiao's platform service enabling logistics enterprise, or the logistics and supply chain technology output and service users of JD.com Logistics, its core idea is to improve the logistics efficiency while reducing costs, which are the same.
In the past, the logistics market was dominated by SF Express, JD.com Logistics and Cainiao. SF Express focuses on high-end products, JD.com Logistics' core is  high-speed products, and Cainiao stresses its low prices. 
In response to emergencies, the behavior of each company is significantly different. Cainiao, with YTO Express, STO Express, ZTO Express, BEST Express, and YUNDA Express as the main logistics output, is not smooth at the To C side. In a proposal to the public on January 24, China Post said that if the public has a demand for express mail to Wuhan during the Spring Festival, the postal express services of China Post, SF Express and JD.com Logistics will be preferred.

In terms of efficiency, with the continuous improvement in the scale and proportion of JD.com Logistics' external orders, its third-party logistics business is continuously improving in both capacity and efficiency. Due to the long-term accumulation of JD.com Logistics in warehouse, distribution, supply chain technology and other aspects, as external orders' scale continues to increase, its cost control capability will also be better than that of SF Express. It means that JD.com Logistics can operate its platform at a lower price under the same service level.
Compared with YTO Express, STO Express, ZTO Express, BEST Express, and YUNDA Express, JD.com Logistics does not have a cost advantage. However, with the gradual increase in the penetration rate of To B and To C in external orders and the cost reduction under the scale effect, JD.com Logistics will also have an impact on the business of them.

From 12-year continuous loss to make profit
As a heavy asset business, JD self-built logistics has seriously dragged down its e-commerce business for a long time in the past. However, when JD.com e-commerce emphasize high-speed and efficient services, the high cost of self-built logistics will further squeeze its overall profit. (The faster the logistics, the higher the logistics cost, and the lower the overall profit).
Long-term high investment in logistics is also reflected in its financial figures. The logistics business itself has sustained losses for 12 consecutive years. Due to the drag of logistics business, the performance of JD.com Group (including the logistics part of the listed business of JD.com Group) is still sometimes profitable and sometimes loss. What's worse, its stock price has also been questioned by investors. The fact that catching up with Alibaba in five years has become past.
And just four months after Richard Liu said that JD.com Logistics had only two-year cash on account, in the second quarter of 2019 financial report, JD.com Group announced that JD.com Logistics had achieved breakeven.
For JD.com Logistics, the main reason why it is difficult to make profit for a long time is that its initial development is to serve JD.com e-commerce business; and the proportion of external orders is relatively low for a long time; at the same time, in order to realize the rapid and timely characteristics of its e-commerce business, its overall warehouse allocation cost is relatively high.
Nevertheless, JD.com Logistics hopes to fundamentally reduce costs and increase efficiency by a series of internal measures. In terms of technology, synchronous and continuous technology investment can realize more automation in order processing, sorting, distribution and supply chain. The launch of Big Boss project is to divide each business unit (including cost and profit center) into small business units, so as to realize more refined management.
The cost of JD.com Logistics in service mall business is decreasing year by year. According to JD.com's financial report data in the past few years, although the absolute amount of internal performance cost increases year by year with the increase of business volume, the performance cost rate shows a continuous downward trend. It also means that the overall cost rate of logistics is significantly reduced when the quality of distribution service remains unchanged.

For the external orders, since JD.com Logistics announced its independent operation in April 2017, its logistics business has also been officially opened to the public. JD.com Logistics CEO Wang Zhenhui once mentioned: "We hope that our external orders revenue, that is, non-JD.com Mall logistics revenue can account for 50%, and we hope to reach a revenue level of 100 billion in the overall scale."
According to JD.com Group's Q3 financial report in 2019, the total amount of JD.com Logistics and other revenue has reached 6 billion yuan, and the proportion of the group's total service revenue continues to rise rapidly. At present, the proportion of external orders of JD.com Logistics has reached 40%. According to this proportion, its total logistics revenue has reached 15 billion yuan (6 billion / 40%) in a single quarter. According to the current growth rate, Wang Zhenhui mentioned that in five years, the proportion of external orders will exceed 50%, and the revenue will exceed 100 billion yuan soon.

In addition to the rapid growth of external orders' proportion, the price of JD.com Logistics' external orders is also increasing with the increasing number of users.
At the beginning of the opening up of JD.com Logistics, in order to compete with SF Express for the high-end market, JD.com Logistics did not hesitate to adopt the high-quality and low-price strategy to open the market. It is true that price war is not the optimal strategy for logistics enterprises with relatively low profits, but it does help JD.com Logistics to gain a lot of customers at the beginning.

With brand advantages and high-quality services, JD.com Logistics will soon gain a place in the third-party logistics market. With the increasing number of users base and the continuous improvement of good reputation, JD.com Logistics' investment in the "education market" is also decreasing.
According to insiders close to JD.com Logistics, in 2019, the company's single average price for external customers has increased significantly compared to the previous two years. The average price of its external orders has been much higher than the internal single average price of JD.com Mall. 
It is precisely the increase in the proportion of external orders and the unit price of external orders, and the continuous decline in the average cost of the unit that finally ushered a breakeven of JD.com Logistics.
In addition to achieving profit, what the market has been concerned about for a long time is when JD.com Logistics will conduct IPO independently.
In fact, JD.com Logistics has completed its first-round financing in early 2018 after its independent operation. According to JD.com Group's announcement at that time, JD.com Logistics received a total of $2.5 billion in financing from a number of institutions including Hillhouse capital, Sequoia China, China Merchants Group, Tencent, etc., with a post-investment valuation of more than $13 billion.

Recently, foreign media reported that JD.com Logistics intends to seek IPO in the United States or Hong Kong, and plans to raise $8 billion to $10 billion at a valuation of $ 30 billion.
In fact, according to Deep Insights (ID: deep_insights), as early as the end of 2018, PwC, the former auditor of JD.com Group, has started to enter the JD.com Logistics IPO audit work. It is believed that as the company achieves breakeven and its logistics business continues to grow, its independent IPO is only a matter of time.

This is an article from WeChat official accounts Deep Insights (ID: deep_insights), written by Kong E, translated by Chris Yuan.