Can JD.Com Inc (ADR)(NASDAQ:JD) Invent Killer Weapon Against Fakes? — A Look At The Company


  1. JD shutting online store to fight fakes.
  2. JD draws 47% of orders from mobile.
  3. JD investing in financial services to expand access to credit for customers.

This year’s Single’s Day shopping gala was a rewarding event for both JD.Com Inc (ADR)(NASDAQ:JD) and Alibaba Group Holding Ltd (NYSE:BABA). But JD didn’t get whatever it got on a silver platter- it fought hard for it. At some point, JD had to sue Alibaba for allegedly compelling merchants to use its marketplaces exclusively for Single’s Day sales.

Alibaba takes credit for creating Single’s Day, China’s twist to Valentine’s Day that has become the biggest annual shopping day in the country. However, given China’s rapidly evolving e-commerce space, it is one thing to post huge sales on a single day and another to keep customers flowing and sales growing throughout the year. The rise of fake items on China’s online marketplaces is threatening the latter. Can JD do something by way of coming up with a more effective weapon against fakes to match Alibaba’s invention of Single’s Day?

JD’s way of fighting fakes

JD.Com Inc (ADR)(NASDAQ:JD) has announced plans to shutter its customer-to-customer (C2C) marketplace known as Paipai.com. The reason for the closure of the online store has nothing to do with poor sales or mounting losses on the marketplace, but fakes. JD is taking extraordinary measures to pull down Paipai.com, a platform that it acquired through Tencent, so that it can effectively fight fake goods on the marketplace.

The company is no longer admitting merchants on Paipai.com and vendors who are already in have their contracts expiring by the end of next month – December 31. At that point, JD will shut down Paipai.com for “general cleaning” that is expected to last for months. There is no doubt that JD will lose revenues and profits for pulling down Paipai.com, but the reputation boost that will come from it is worth the sacrifice.

C2C marketplaces are loosely regulated, which explains why they are thriving with fake trades, which end up tainting the image of the platform operator. While several online marketplace operators have sought to weed out fake goods from their platforms, the measure taken by JD with regards to shutting Paipai.com for clean-up is exceptional.

Can JD spark a trend with the move in Paipai.com? If it does and the trend turns out to be successful, it would be a huge reputation boost to the company and a great competitive advantage for its online retail business. With that, JD would not feel like it owes Alibaba for its Single’s Day sales.

Perhaps Alibaba would be a greater beneficiary of a killer weapon against fakes than JD. Alibaba is already messed up with fake goods circulating on its Taobao.com marketplace with suits coming its way and customers dropping out. According to Alibaba’s chairman, Jack Ma, a single fake item that sells through Alibaba marketplaces costs the company five customers. That explains why JD’s innovation in fighting fakes might see Alibaba feeling like it owes more to JD than JD owes it for Single’s Day.

5 Takeaways from JD:

JD in cross-border e-commerce

JD.Com Inc (ADR)(NASDAQ:JD) is working to expand and diversify its revenue streams by fostering international trade. The company is partnering to create online platforms that allow international traders to sell their goods in China. Such platforms include Japanese Mall, French Mall, U.S. Mall and Australia Mall.

Besides inviting foreign traders to target Chinese customers, JD is also partnering to sell Chinese items abroad. Towards that end, the company has launched platforms to sell into Russia and is targeting more international markets such as the U.S., India, Europe and Australia.

JD’s international business strategy mimics that of Alibaba. Sensing that intense competition in the domestic market could limit its growth, Alibaba has been investing in its global expansion, a strategy that JD is out to match, although with a flavor of its own.

eBay Inc (NASDAQ:EBAY) and Korea’s Lotte.com are among the strategic partners that JD has signed to bolster its overseas business. Because JD currently has limited exposure to cross-border trades, the management doesn’t expect pressure from the recent devaluation of China’s currency.

The management of JD is modelling 3Q revenues in the band of RMB43.2 to 44.7 billion. The forecast already takes into account the economic cold sweeping across China and spilling abroad.

The chart below shows JD’s quarterly revenue trend:

1

Delivery network

JD has continued to expand its delivery networks as a competitive advantage in the cutthroat Chinese e-commerce market. At the end of the last quarter, JD operated 4,412 pickup and delivery stations, which rose from 3,539 stations in the previous quarter. JD boasts the largest fulfillment network of any Chinese e-commerce provider with 7 fulfillment centers and 166 warehouses across 44 cities in China.

The company also continues to invest in faster delivery services with its 211 same-day and next-day delivery program capturing 80% of total deliveries in the last quarter.

Mobile customers

JD is using a combination of logistic build-out and partnership with Tencent to recruit more customers, especially mobile shoppers, in the rural and smaller cities. In 2Q2015, JD said that 20% of its new mobile customer additions came through Tencent’s channels, such as Weixin and Mobile QQ. Mobile accounted for 47% of the total orders that JD processed in the 2Q, reflecting a 23% uptick from a year ago.

The partnership that JD has built with Tencent is also helping boost click through and conversion rates.

Executive compensation remodelled

JD.Com Inc (ADR)(NASDAQ:JD) has remodelled its executive compensation plan in a move that boosts confidence in the management team. Under the new executive compensation plan, JD’s CEO, Richard Liu, will receive a cash salary of only RMB1.00 every year, without an extra cash bonus for a 10-year period. However, the CEO will have the option to purchase 26 million ordinary shares of JD at $33.4. The adoption of the new executive compensation plan reflects a strong vote of confidence in the long-term prospects of the company.

JD in financial services

JD has figured out that its venture into the financial services industry can boost its other operations. For example, the company is looking at opportunities that can expand credit access for its customers, thus enabling them to make more purchases on the platform.

Towards the financial services venture, JD has partnered with ZestFinance in a joint venture arrangement. ZestFinance is a provider of technology that helps companies to make more informed credit decisions. Together with JD, ZestFinance will offer credit evaluation services to companies with the hope of expanding credit opportunities consumers.

Bottom-line

By learning from rivals and innovating in-house, JD.Com Inc (ADR)(NASDAQ:JD) is rapidly becoming a powerful online retailer in China.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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