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Bill Guo Bill Guo’s Linkedin The Curious Analyst from the East    2016 January  Alibaba Series 2: A case study on and JD.com Alibaba Series 2: A case study on Tmall and JD.com

 billgore  January 10, 2016  0

Company Background (JD.com) JD.com Inc. (Chinese: Ղӳࠟउ, hereinafter as JD), formerly 360buy, is a Chinese electronic commerce company. It is one of the largest B2C online retailers in by ୩ӳ) inڝ :transaction volume. The company was founded by Richard Liu (Chinese 1998. Its B2C platform went online in 2004. JD started as an online magneto-optical store, but soon diversied by selling electronics, mobile phones and computers. With its headquarters stationed in Beijing, JD also operates subsidiaries in , Guangzhou, Chengdu and Wuhan, located in East, South, West and Mid China. JD is a pure retailer, with a self-operated online business. The company ranks second in value terms in China’s online retailing (Euromonitor, 2014), combined with running a third-party platform for other merchants. JD continually seeks to diversify its products 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-party merchants 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 rm, to achieve same-day and next-day delivery services for customers in different areas, with a real-time package tracking service and reliable service stan- dards. The national fullment infrastructure consisted of a network of 124 warehous- es, with an aggregated gross oor area of approximately 2.2 million sq. meters in 40 cities and 3,201 delivery stations and pick-up stations in 1,862 districts and counties across China as of December 2014 (JD.com, Inc., 2015). Company Background (Tmall.com) Tmall.com (Chinese: ॠሞ, literally translated “sky cat,” hereinafter as Tmall), a sub- sidiary of China’s largest online retailer , focuses on business-to-con- sumer (B2C) online . Tmall was rst introduced by Alibaba in April 2008 as 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 consumers access to branded products sourced and fullled directly from overseas. In addition, consumers may directly settle payments with the international merchant in through , 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 times the amount facilitated by JD, its closest competitor. Tmall accounts for a 61.4% share of 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 benet 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 without the need for a physical presence in China. International merchants can register, set up an online store through Tmall Global, and be able to use registered trademarks from jurisdictions of their home countries. Foreign brands on Tmall Global consist of brands from the whole world, including from the U.S., Countdown from New Zealand, Lottemart and e-Mart from South Korea, RT-Mart from , Fresta from Japan, and King Power from Thailand.

Financials JD was listed in 2014 in NASDAQ. From 2010 to 2014, its revenue increased from 8,583 million yuan to 108,549 million yuan ($17,495 million) with an annul growth rate of 88.68%. During the same period, even though the net loss widened from 412 million yuan 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-ups to lose money for a couple of years when they rst attempt expanding their customer bases. For example, was founded in 1994 and rst traded publicly in 1997, but it didn’t turn a prot until 2001. Tie back into your discussion of JD here (one summa- rizing sentence). Established in 1999, Alibaba Group turned a prot in 2005. During the past ve 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 prot increased by 15 folds to 2015’s 24,320 million yuan ($2,923 million) during this same period. Since Alibaba never disclosed the revenue earned from Tmall, Tmall’s revenue and prot 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 prot are around 15,143 million yuan ($2,403 million) and 7,852 million yuan ($1,246 million) respectively.

Products & Customers JD sells a large variety of products with 15 categories, from the common merchandise most online retailers provide, such as home appliances and books, to products and services 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 through mobile platforms and computers. Unlike America’s established retail market, China’s modern retail market formed as late as the 1990s; as a result, there are no established retail 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 when e-commerce emerged in the 2000s. If comparing the penetration rate and the transaction 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 March 2015, there were over 140,000 brands on Tmall (Alibaba, 2015). Because of the large number of global brands and the stringent requirements for merchants to operate on Tmall, an online store on Tmall has become a validation of quality, allowing merchants to take advantage of Tmall’s signicant trafc to build brand awareness. Operation & Marketing Unlike 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 system built 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 has been improving its fullment infrastructure and platform, enriching its product offering and enhancing customer satisfaction so that it can attract new cus- tomers and new orders from existing customers. The company boasts the largest warehousing system among all Internet retailers, running seven large-scale logistics centers and 124 regional warehouses across China, with a total area of 2.2 million square 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 promotional event on Tmall to reward consumers through discounts. On November 11, 2014, Tmall and 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 settled through 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 typically range from 0.3% to 5%. Tmall sellers also pay an annual upfront service fee—up to 100% of which may be refunded, depending on sales volume achieved by the seller within each year. Sellers also pay a security deposit to back-stop potential claims un- der Tmall’s consumer protection programs (Alibaba Group, 2015).

Resources Tmall’s most important resource is its brand loyalty which is associated with Alibaba Group, 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 can reduce operation costs and improve efciency due to its big sizes. In addition, Tmall’s scale strengthens its bargaining power to sellers and third-party logistics companies, in effect multiplying the prot margin. Tmall’s third critical resource is Alibaba’s Alipay versatile payment platform. In addition to 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 controls half of China’s online payment market as of 2015 (Alibaba Group, 2015). To increase Tmall’s transactions, Alipay charges a lower transaction fee for the buyers who shop on Tmall, offering a critical incentive that boosts Tmall’s sales revenue. Alibaba’s management team is also considered as a key resource. The management team consists of the most famous Chinese entrepreneur, Jack , famed former Wall Street lawyer , and a couple of experienced professionals. Led by this team, Alibaba put eBay out of Chinese market and suppressed Amazon’s growth in China. Last, but not least, Tmall’s relationship with sellers and logistics companies is a vital resource in the battle for market share. In order to cut operation costs and mitigate risks, many international brands prefer establishing Tmall stores rather than opening brick and mortars in China. Costco is a recent case: Costco had considered for many years on how to have a presence in China’s fast growing retail market; after careful consideration, Costco decided to open an online store on Tmall rather than establish several brick and mortars. Due to cost reduction and risk control advantages, many international brands rely on their relationships built with Tmall; therefore, these brands are very loyal to Tmall’s services. In sharp contrast to most online retailers, JD operates a nationwide logistics network which includes seven large-scale logistics centers and 124 regional warehouses across China. The logistics network is JD’s strategic resource, on which JD estab- lished a more efcient logistics system. Supported by this system, JD guarantees same-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 this gap on delivery timeliness, JD enjoys a huge competitive advantage. JD’s brand and customer loyalty also are critical resources. Since JD carefully selects suppliers and strictly controls product quality, in addition to its fast delivery speed, it has become synonymous/associated with high quality and fast delivery in China. As a result 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 billion in 2014. Its large revenue stream strengthened JD’s bargaining power to suppliers and thus trimmed down procurement costs. In addition, supported by the economics of scale, 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 quick response to market change. Its founder Richard Liu is called/known as China’s Steve Jobs, because these two entrepreneurs are similarly obsessed with centralized man- agement. Richard Liu believes that centralized management is the best method in the fast-changing e-commerce industry. When most competitors outsourced their logistics network to third parties in the early 2000s, Mr. Liu instead built a self-operated logis- tics network ahead of other rms within a short period of time. This case showcased his vision and implementation. Finally, JD’s sturdy relationship with suppliers is also a resource. Backed by its huge procurement volume, JD has priority right over other buyers. In addition, JD shares its inventory information with its suppliers, who can then adjust their production schedule in order to meet JD’s demand. Moreover, JD has built alliances with many suppliers in order 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 support of 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 built its 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 are more efcient. Alibaba replicated this business model to Tmall, its B2C sector. Al- though it was reported that Alibaba Group started building its self-operated logistics network 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 Format JD 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 prot margin of goods sold. In sharp contrast, Tmall attracts merchants to sell products through its platform and charges transaction fees; during this process, the logistics services are outsourced to third-party companies. Tmall’s selling format is named as a New Selling Format for study purpose in this paper. The study’s goal is to examine whether the New Selling Format could be adapted to JD’s environment and potentially be more efcient than JD’s current selling format. The New Selling Format seems more efcient than JD’s current one because it could trim down the operation costs by outsourcing the logistics service to some third-party rms; however, the New Selling Format is inapplicable in JD’s circumstance due to three reasons. First, the New Selling Format will damage JD’s reputation as a fast and reliable B2C retailer. 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 very common. If JD imitates Tmall by outsourcing logistics services to some third-party companies, 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 rms, JD will nd it is difcult to build alliances with those logistics companies. Without such strategic alliances, JD cannot obtain the priority right of delivery, which will further worsen the speed and reliability of JD’s delivery service. Finally, given that JD has built a nationwide logistics network, the plan to outsource the logistics service is unrealistic. On top of the supporting employees, JD employed 13,000 delivery men as of 2013 (CECRC, 2013). If JD outsources these positions, the large 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’s circumstance. Alternatively, from Wernerfelt’s resource perspective, JD should “nd those 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 some showrooms in order to showcase its private-label merchandises. Since China’s large e- commerce retailers have not built a resource position barrier in this eld, it could be a new promising area to be explored.

Reference Alibaba 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_ethics CECRC. (2013). Logisticis Data. Retrieved from Statistics: JD.com employs more than 18000 couriers as of Sep. 2013: http://b2b.toocle.com/detail–6170187.html Euromonitor. (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.shtml JD.com, Inc. (2015). SEC Filing. Retrieved from SEC.gov: http://www.sec.- gov/Archives/edgar/data/1549802/000110465915028403/a15-5694_120f.htm Wernerfelt, 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

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