JD.com slows its bleeding, but investors want growth

The e-commerce giant has reduced the pain from its entry to food delivery, but weak retail sales and crowded new battlefields show its next growth engine remains elusive

Key Takeaways:

• JD.com beat expectations and improved its profit in the second quarter, but investors focused on its first quarterly revenue decline since its 2014 Nasdaq listing
• Losses from the company’s young food-delivery business are narrowing, but weaker retail sales and fierce competition show it needs a more convincing growth story

By Hu Minghe

E-commerce giant JD.com Inc. (JD.US; 9618.HK) gave investors a profit recovery. They sold the stock anyway.

The selloff came after the company reported its first quarterly revenue decline since its Nasdaq listing in 2014, with revenue down 2.9% year-on-year to 346.4 billion yuan ($51.1 billion) in the three months to June, according to its latest financial report released last Thursday. Its adjusted net profit rose 20.8% to 8.9 billion yuan. Both figures were better than many analysts expected. But the sales decline mattered more to investors, who sent its Hong Kong and Nasdaq-listed shares down about 9%.

The reaction pointed to a bigger question: What does a company like JD become when its China e-commerce growth story that once captivated investors grows old?

Three months earlier, the concern was that JD was paying a heavy price to enter China’s new food-delivery war. In the second quarter, some of that pressure eased. The company’s marketing expenses fell 24.8% to 20.3 billion yuan during the period, mainly because JD pulled back from promotional spending on new businesses. Losses in its new businesses segment, which includes food delivery, narrowed to 9.85 billion yuan.

But the same segment’s revenue plunged by 47.6% to 7.26 billion yuan, partly reflecting a transfer that moved some on-demand delivery revenue into its JD Logistics (2618.HK) unit. That helped to make JD Logistics a bright spot for the quarter. But the picture isn’t as bright for the parent JD, as its newer consumer bets have yet to produce an obvious second growth engine.

JD built its name as China’s reliable online store, especially for electronics, appliances and fast delivery. But China’s e-commerce market no longer has such clean borders. Alibaba (BABA.US; 9988.HK) and PDD Holdings (PDD.US) operate relatively similar traditional e-commerce sites. But there are also less traditional newcomers like ByteDance’s Douyin, which let users turn their short videos into shopping channels, and Meituan (3690.HK), which leads in the food-delivery market.

Stumbling electronics

JD’s first trouble spot is the one it knows best. Revenue from the electronics and home appliance businesses for which it’s famous fell 11.8% to 157.9 billion yuan in the second quarter, dragging down overall product revenue by 5.4%. General merchandise sales and services still grew, but not enough to offset weakness in electronics.

CEO Sandy Xu said on the earnings call that electronics and appliances were hit by last year’s high base created by spiking sales from government trade-in subsidies, as well as higher prices for electronics caused by rising raw material costs.

But investors appear to be looking beyond that temporary hangover to a more basic concern: China’s consumers are still cautious in a sluggish economy, and a growing number of internet platforms are fighting harder for the same wallets. JD’s old promise of genuine goods delivered quickly is no longer enough. PDD’s Pinduoduo platform can undercut prices. Douyin can turn entertainment into impulse shopping. Alibaba can push deeper into local services. And Meituan can bring almost anything nearby to a consumer’s door in less than an hour.

To foreign readers, food delivery may sound like a side business with some potential. But the reality is it has become part of a larger fight over “instant retail” in China, where consumers expect meals, groceries, medicine and daily goods to arrive almost immediately.

On the call, JD executives said order volume for the food delivery business kept growing during the latest quarter, losses narrowed by more than 50% year-on-year, subsidies per order fell, and commissions and advertising were starting to contribute revenue. They also said the business is bringing new users, local merchants and on-demand delivery capabilities into JD’s broader retail system.

Defensive measure

The improvement suggests JD has moved past the most aggressive stage of the subsidy campaign for its food delivery business. But for now, food delivery looks more like a way to defend its overall traffic, rather than a proven new growth engine.

China’s instant-retail war is brutal even for the strongest player. Meituan has also been hurt by subsidy battles, which pushed the company into the red last year. Alibaba retired its Ele.me takeout dining brand in December and rebranded it as Taobao Instant Commerce, pulling food and other local deliveries more directly into the shopping cart of its core Taobao e-commerce business. Beijing has also become more alert to the damage caused by endless discounting, releasing draft rules in June to curb excessive food-delivery subsidies and price wars.

The same hunt for new growth is also pushing JD abroad. JD executives told analysts that Joybuy, its European online retail business, doubled revenue within two quarters and now offers same-day or next-day delivery to more than 40 million customers in major European cities. The strategy plays to JD’s traditional strengths in warehouses, supply-chain control and faster, more reliable delivery.

But Europe is not a blank market waiting for JD to arrive. Amazon.com (AMZN.US) is entrenched, local retailers still matter for offline shopping, and Chinese-linked platforms such as Temu, AliExpress and Shein have already trained many European shoppers to expect ultra-low prices. JD is taking a different path by leaning on its traditional strengths in electronics, appliances and local fulfillment, but that path is expensive.

Its proposed $2.5 billion purchase of Germany’s Ceconomy, owner of the MediaMarkt and Saturn chains, could give it a valuable offline foothold. But that purchase, once considered a done deal, was cast into doubt after the European Commission laid out concerns in May that the transaction may involve unfair foreign subsidies. The case shows Chinese e-commerce companies now face political and regulatory barriers overseas as well as local competition.

Technology is another area where JD is trying to sharpen its edge, though that story is more about efficiency than a fresh source of growth. Its R&D expenses rose 37.7% to 7.3 billion yuan in the second quarter, as it continued to invest in AI and automation. Founder Richard Liu has acknowledged that JD is not the strongest player in large-model research, while pointing to its logistics and warehousing data as advantages.

JD has shown it can take its foot off the subsidy accelerator to bring some relief to its bottom line. That’s useful after its expensive push into food delivery. But spending less is not the same as growing again. The next test is whether China’s most reliable online retailer can find a new reason for shoppers – and shareholders – to come back.

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