Alibaba Series 2: A case study on Tmalland JD.com

billgore January 10, 2016 0

Company Background (JD.com)JD.com Inc. (Chinese: , hereinafter as JD), formerly 360buy, is a Chineseelectronic commerce company. It is one of the largest B2C online retailers in China bytransaction volume. The company was founded by Richard Liu (Chinese: ) in1998. Its B2C platform went online in 2004. JD started as an online magneto-optical

Home

Commentaries

Macroeconomics

Market Reviews

Research Reports

Company reports

About me

Resources & References

Search

Bill Guo’s LinkedinBill GuoThe Curious Analyst from the East

2016 January Alibaba Series 2: A case study on Tmall and JD.com

store, but soon diversiOed by selling electronics, mobile phones and computers. Withits headquarters stationed in Beijing, JD also operates subsidiaries in Shanghai,Guangzhou, Chengdu and Wuhan, located in East, South, West and Mid China.JD is a pure internet retailer, with a self-operated online business. The company rankssecond in value terms in China’s online retailing (Euromonitor, 2014), combined withrunning a third-party platform for other merchants. JD continually seeks to diversify itsproducts to appeal to its target customers. As of 2014, there were over 60,000 third-party sellers on JD’s online marketplaces; but the sales revenue from those third-partymerchants accounts for a small proportion of the total sales (JD.com, Inc., 2015).JD runs a nationwide logistics network, operated by its own staff instead of a third-party logistics Orm, to achieve same-day and next-day delivery services for customersin different areas, with a real-time package tracking service and reliable service stan-dards. The national fulOlment infrastructure consisted of a network of 124 warehous-es, with an aggregated gross \oor area of approximately 2.2 million sq. meters in 40cities and 3,201 delivery stations and pick-up stations in 1,862 districts and countiesacross China as of December 2014 (JD.com, Inc., 2015).Company Background (Tmall.com)Tmall.com (Chinese: , literally translated “sky cat,” hereinafter as Tmall), a sub-sidiary of China’s largest online retailer Alibaba Group, focuses on business-to-con-sumer (B2C) online retail. Tmall was Orst introduced by Alibaba in April 2008 asTaobao Mall, a dedicated B2C platform within Alibaba’s consumer e-commerce web-site. In 2010, Alibaba launched an independent web domain, Tmall.com, to differenti-ate listings by its merchants, who are either brand owners or authorized distributors,from Alibaba’s consumer-to-consumer (C2C) merchants.In 2014, Alibaba launched Tmall Global, a platform for international brands which of-fers products directly to consumers in China. Tmall Global allows Chinese consumersaccess to branded products sourced and fulOlled directly from overseas. In addition,consumers may directly settle payments with the international merchant in Renminbithrough Alipay, Alibaba’s international settlement service, which is the Chinese equiva-lent of PayPal.

Tmall ranked number one among all Chinese B2C retailers in 2014 in terms of transac-tion volume, with a gross merchandise volume of 30 billion yuan – about four timesthe amount facilitated by JD, its closest competitor. Tmall accounts for a 61.4% shareof the B2C online retail market in China, followed by JD’s 18.6% and 3.2% of Suning(iResearch, 2015).International brands that set up online stores on Tmall Global beneOt from the expo-sure to the hundreds of millions of visitors on Tmall and Taobao Marketplace (Aliba-ba’s C2C website), enabling them to establish their brand awareness in China withoutthe need for a physical presence in China. International merchants can register, set upan online store through Tmall Global, and be able to use registered trademarks fromjurisdictions of their home countries. Foreign brands on Tmall Global consist of brandsfrom the whole world, including Costco from the U.S., Countdown from New Zealand,Lottemart and e-Mart from South Korea, RT-Mart from Taiwan, Fresta from Japan, andKing Power from Thailand.

FinancialsJD was listed in 2014 in NASDAQ. From 2010 to 2014, its revenue increased from8,583 million yuan to 108,549 million yuan ($17,495 million) with an annul growth rateof 88.68%. During the same period, even though the net loss widened from 412 millionyuan to 4,996 million yuan ($793 million), the net-loss-revenue ratio remained stable:4.8% in 2010 and 4.6% in 2014. It is common in the e-commerce industry for start-upsto lose money for a couple of years when they Orst attempt expanding their customerbases. For example, Amazon was founded in 1994 and Orst traded publicly in 1997, butit didn’t turn a proOt until 2001. Tie back into your discussion of JD here (one summa-rizing sentence).Established in 1999, Alibaba Group turned a proOt in 2005. During the past Ove years,its revenue increased from the 2011’s 7,665 million yuan to 2015’s 62,937 million yuan($10,153 million) with an annual growth rate of 69%. More remarkably, the net proOtincreased by 15 folds to 2015’s 24,320 million yuan ($2,923 million) during this sameperiod. Since Alibaba never disclosed the revenue earned from Tmall, Tmall’s revenue

and proOt can only be estimated based on the share of its gross merchandise value(GMV) in the whole Alibaba group. Based on Alibaba’s 2014 annual report, Tmall’s rev-enue and net proOt are around 15,143 million yuan ($2,403 million) and 7,852 millionyuan ($1,246 million) respectively.

Products & CustomersJD sells a large variety of products with 15 categories, from the common merchandisemost online retailers provide, such as home appliances and books, to products andservices most American online retailers don’t sell, such as insurance quotes, fund, lot-tery tickets, fresh fruits and travel plans.JD targets young and middle-age customers who are accustomed to shopping throughmobile platforms and computers. Unlike America’s established retail market, China’smodern retail market formed as late as the 1990s; as a result, there are no establishedretail brands like Wal-Mart, Macy’s and Nordstrom in the market. Due to the short his-tory of Chinese retail markets, Chinese customers easily embraced online shoppingwhen e-commerce emerged in the 2000s. If comparing the penetration rate and thetransaction value of online shopping between China and the United States, China’s on-line shopping market is larger and more advanced. Give example (JD).Tmall caters to online and mobile consumers looking for branded products and a pre-mium shopping experience. It is a trusted platform for consumers to buy both home-grown and international branded products unavailable from traditional retail outlets.Brands and retailers operate their own stores on Tmall’s platform with unique identi-ties, enabling sellers to control their own branding and merchandising. As of March2015, there were over 140,000 brands on Tmall (Alibaba, 2015). Because of the largenumber of global brands and the stringent requirements for merchants to operate onTmall, an online store on Tmall has become a validation of quality, allowing merchantsto take advantage of Tmall’s signiOcant trafOc to build brand awareness.Operation & MarketingUnlike Tmall, JD focuses on a self-operated online retailing business although it pro-vides an online platform for third-party merchants. By comparison, the revenue from

its self-operated sector accounts for over 90% of its total revenue; although the rev-enue from the third-party merchants is increasing at an accelerated rate, it only ac-counts for less than 10% of its total revenue (JD.com, Inc., 2015).JD takes the lead in China’s Internet retailing in terms of advanced logistics systembuilt up and operated by its own staff members; this is quite different from Tmall,which mainly relies on third-party logistics companies. To remain competitive, JD hasbeen improving its fulOlment infrastructure and technology platform, enriching itsproduct offering and enhancing customer satisfaction so that it can attract new cus-tomers and new orders from existing customers. The company boasts the largestwarehousing system among all Internet retailers, running seven large-scale logisticscenters and 124 regional warehouses across China, with a total area of 2.2 millionsquare meters as of December 2014 (JD.com, Inc., 2015).In 2009, Tmall pioneered November 11th, known as “Singles Day” in China, as an annu-al promotional shopping day. Singles Day was established as an annual promotionalevent on Tmall to reward consumers through discounts. On November 11, 2014, Tmalland Alibaba’s other retail marketplaces generated a Gross Merchandise Volume (GMV)of 57 billion yuan ($9 billion) via Alipay within 24 hours. 43% of the total GMV settledthrough Alipay that day was attributable to mobile platforms.Sellers on Tmall and Tmall Global pay commissions based on a pre-determined per-centage of GMV for Alipay transactions that vary by product category and typicallyrange from 0.3% to 5%. Tmall sellers also pay an annual upfront service fee—up to100% of which may be refunded, depending on sales volume achieved by the sellerwithin each year. Sellers also pay a security deposit to back-stop potential claims un-der Tmall’s consumer protection programs (Alibaba Group, 2015).

ResourcesTmall’s most important resource is its brand loyalty which is associated with AlibabaGroup, China’s largest online retailer and one of the top ten global Internet enterprises.Backed by Alibaba’s aura, Tmall has rapidly increased brand awareness and won a re-markable market share. Tmall became China’s largest B2C platform in 2012. At the end

of 2015, it took more than 60% market share of the B2C market.Tmall’s large size is another crucial resource. Aided by economics of scale, Tmall canreduce operation costs and improve efOciency due to its big sizes. In addition, Tmall’sscale strengthens its bargaining power to sellers and third-party logistics companies,in effect multiplying the proOt margin.Tmall’s third critical resource is Alibaba’s Alipay versatile payment platform. In additionto low transaction fees, Alipay provides many services, such as cash management,money transfer, utility bills payment, and asset management. Remarkably, Alipay pro-vides an escrow service in which consumers can verify the merchandise before releas-ing money to the seller. As a market leader, Alipay has 300 million users and controlshalf of China’s online payment market as of 2015 (Alibaba Group, 2015). To increaseTmall’s transactions, Alipay charges a lower transaction fee for the buyers who shopon Tmall, offering a critical incentive that boosts Tmall’s sales revenue.Alibaba’s management team is also considered as a key resource. The managementteam consists of the most famous Chinese entrepreneur, Jack Ma, famed former WallStreet lawyer Joseph Tsai, and a couple of experienced professionals. Led by thisteam, Alibaba put eBay out of Chinese market and suppressed Amazon’s growth inChina.Last, but not least, Tmall’s relationship with sellers and logistics companies is a vitalresource in the battle for market share. In order to cut operation costs and mitigaterisks, many international brands prefer establishing Tmall stores rather than openingbrick and mortars in China. Costco is a recent case: Costco had considered for manyyears on how to have a presence in China’s fast growing retail market; after carefulconsideration, Costco decided to open an online store on Tmall rather than establishseveral brick and mortars. Due to cost reduction and risk control advantages, manyinternational brands rely on their relationships built with Tmall; therefore, these brandsare very loyal to Tmall’s services.In sharp contrast to most online retailers, JD operates a nationwide logistics networkwhich includes seven large-scale logistics centers and 124 regional warehousesacross China. The logistics network is JD’s strategic resource, on which JD estab-

lished a more efOcient logistics system. Supported by this system, JD guaranteessame-day and two-day delivery for over 90% orders without extra charge. By compari-son, most Chinese online retailers can only promise same-week delivery. Due to thisgap on delivery timeliness, JD enjoys a huge competitive advantage.JD’s brand and customer loyalty also are critical resources. Since JD carefully selectssuppliers and strictly controls product quality, in addition to its fast delivery speed, ithas become synonymous/associated with high quality and fast delivery in China. As aresult of its reputation, JD’s private-label products are popular across China.As the second largest online retailer in China, JD’s annual revenue exceeded $17 billionin 2014. Its large revenue stream strengthened JD’s bargaining power to suppliers andthus trimmed down procurement costs. In addition, supported by the economics ofscale, JD has cut down the operation cost per order. Supported by these two factors,JD is the cost leader in the market and has an over-industry-average growth rate.As a critical resource, JD’s management team is known for implementation and quickresponse to market change. Its founder Richard Liu is called/known as China’s SteveJobs, because these two entrepreneurs are similarly obsessed with centralized man-agement. Richard Liu believes that centralized management is the best method in thefast-changing e-commerce industry. When most competitors outsourced their logisticsnetwork to third parties in the early 2000s, Mr. Liu instead built a self-operated logis-tics network ahead of other Orms within a short period of time. This case showcasedhis vision and implementation.Finally, JD’s sturdy relationship with suppliers is also a resource. Backed by its hugeprocurement volume, JD has priority right over other buyers. In addition, JD shares itsinventory information with its suppliers, who can then adjust their production schedulein order to meet JD’s demand. Moreover, JD has built alliances with many suppliers inorder to secure timely supply.Overall, JD and Tmall have asymmetric advantages in terms of resources. In compari-son, JD leads in logistics, but Tmall dominates with its payment platform and supportof third-party merchants. This difference roots in the histories of these two compa-nies. JD started business in Beijing as a B2C online retailer. Since delivery speed deter-

mines the survival of e-commerce businesses in such a fast-paced metropolis, JD builtits own logistics network in order to become the leader in shipment speed. Unlike JD,Alibaba Group rose from the C2C market, in which third-party logistics services aremore efOcient. Alibaba replicated this business model to Tmall, its B2C sector. Al-though it was reported that Alibaba Group started building its self-operated logisticsnetwork in 2015, but some industry observers have assumed that the self-operated lo-gistics network was only a complement to its third-party logistics network.Selling FormatJD and Tmall have adopted two completely different selling formats. JD procures mer-chandises from suppliers, delivers orders through its self-operated logistics network,and earns the proOt margin of goods sold. In sharp contrast, Tmall attracts merchantsto sell products through its platform and charges transaction fees; during this process,the logistics services are outsourced to third-party companies. Tmall’s selling formatis named as a New Selling Format for study purpose in this paper. The study’s goal isto examine whether the New Selling Format could be adapted to JD’s environment andpotentially be more efOcient than JD’s current selling format.The New Selling Format seems more efOcient than JD’s current one because it couldtrim down the operation costs by outsourcing the logistics service to some third-partyOrms; however, the New Selling Format is inapplicable in JD’s circumstance due tothree reasons.First, the New Selling Format will damage JD’s reputation as a fast and reliable B2Cretailer. Boosted by China’s rapid economic growth, the amount of deliveries experi-enced a speedy growth during the past decade; as a result, the delay of delivery is verycommon. If JD imitates Tmall by outsourcing logistics services to some third-partycompanies, both the delivery speed and reliability will be negatively affected. Conse-quently, JD will lose its core competence in fast delivery and thus lose customer loyal-ty.Secondly, from a resource perspective, since Tmall has built resource position barrier(Wernerfelt, 1984) by signing long-term agreement with China’s largest logistics Orms,JD will Ond it is difOcult to build alliances with those logistics companies. Without such

strategic alliances, JD cannot obtain the priority right of delivery, which will furtherworsen the speed and reliability of JD’s delivery service.Finally, given that JD has built a nationwide logistics network, the plan to outsource thelogistics service is unrealistic. On top of the supporting employees, JD employed13,000 delivery men as of 2013 (CECRC, 2013). If JD outsources these positions, thelarge scale of employee layoffs, given China’s new Employment Law, would be costly.In conclusion, due to these three factors, the New Selling Format will not work in JD’scircumstance. Alternatively, from Wernerfelt’s resource perspective, JD should “Ondthose resources which can sustain a resource position barrier, but in which no one cur-rently has one, and where they have a good chance of being among the few who suc-ceed in building one” (Wernerfelt, 1984). For example, JD could consider opening someshowrooms in order to showcase its private-label merchandises. Since China’s large e-commerce retailers have not built a resource position barrier in this Oeld, it could be anew promising area to be explored.

ReferenceAlibaba Group. (2015). SEC Filing. Retrieved from SEC.gov: http://www.sec.-gov/Archives/edgar/data/1577552/000104746915005768/a2225010z20-f.htm#ei13804_item_16b._code_of_ethicsCECRC. (2013). Logisticis Data. Retrieved from Statistics: JD.com employs more than18000 couriers as of Sep. 2013: http://b2b.toocle.com/detail–6170187.htmlEuromonitor. (2014). Euromonitor. Retrieved from Alibaba Group Holding Ltd in Retail-ing: http://www.portal.euromonitor.com.libproxy.chapman.edu/portal/analysis/tab#iResearch. (2015). China’s e-commerce market grew fast in 2014. Retrieved from ire-search.com: http://news.iresearch.cn/zt/246308.shtmlJD.com, Inc. (2015). SEC Filing. Retrieved from SEC.gov: http://www.sec.-gov/Archives/edgar/data/1549802/000110465915028403/a15-5694_120f.htmWernerfelt, B. (1984). A Resouce-based View of the Firm. Strategic Management Jour-nal.

Exhibit 1: An example webpage on JD.com

Exhibit 2: The automobile channel on JD.com

Exhibit 3: JD.com’s income statement

Exhibit 4: The income statement of Alibaba Group

Exhibit 5: China Internet Retailing Market Share (source: Euromonitor)

Exhibit 6: China’s B2C market share (source: iResearch)s

Posted in Company reports, Uncategorized

LEAVE A REPLY

Your email address will not be published. Required Oelds are marked *

Comment

Name *

Email *

Website

Post Comment

Previous Post: Alibaba Series 1: Alibaba’s dual-class structure and potential con\ict of interestNext Post: Why is China’s stock market so volatile?

RECENT POSTS

Why is China’s stock market so volatile?Alibaba Series 2: A case study on Tmall and JD.comAlibaba Series 1: Alibaba’s dual-class structure and potential con\ict of interestCompany Analysis Sample: AAA Road MaterialWhy credit rating agencies did not prevent the subprime mortgage crisis? – A quantitative model

BY TYPE

Commentaries (3)Company reports (3)

Macroeconomics (2)Market Reviews (5)Research Reports (1)Uncategorized (1)

Copyright © 2016 Bill Guo. Powered by WordPress and Stargazer.