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Financial Analysis

In the past few days, some friends have been excitedly saying, "I didn't expect that JD.com released a satellite." The reason for "unexpectedly" is that JD.com, with consumption upgrading as the background, still adheres to the strategy of "low price first" (the overall consumer market is also relatively weak), which generally erodes corporate profits. In the Q2 2024 financial report, another "satellite" was released, with operating profit reaching 10.5 billion yuan, a year-on-year increase of nearly 25%.

Among them, JD.com's retail operating profit increased from 8.1 billion yuan in the same period last year to 10.1 billion yuan. The reality is very different from the preset position at the beginning, causing friends to repeatedly "unexpected".

In fact, in our previous analysis of JD.com, we have already made a very detailed analysis of the improvement in its retail sector profits, and all of them have been verified:

1) Department store products have become the main force behind JD.com's gross profit margin improvement. This is due to both the timing and the geographical advantages of its own business over the years. In short, under the current domestic demand environment, JD.com has increased its bargaining chips with the supply chain to improve its profit environment.

2) JD.com’s open platform strategy has not stopped. On the contrary, as market costs have risen again, JD.com is eager to make up for its shortcoming in user scale by acquiring customers. After all, without users, even if it subsidizes merchants, it will not make much sense;

3) JD.com's operations remain prudent. Whether from the perspective of business strategy or human resource management, JD.com hopes to improve efficiency in the short term to increase the sustainability of its operations.

These can largely explain the improvement in JD.com's income statement, but on the other hand, the almost stagnant growth of its own e-commerce business has cast a shadow over the company. If the total volume does not increase, the improvement in profitability will eventually come to an end. How should we judge JD.com then?

With the above questions, we wrote this article with the following core points:

First, the improvement in the self-operated business’s ability to negotiate with suppliers is an important reason for JD.com’s recent improvement in profitability;

Second, JD.com is still in the "water storage" stage for its open platform business, and needs to give up the monetization rate to please merchants;

Third, JD.com’s bonus period will last about half a year, and time waits for no one.

Improved negotiating position with suppliers

In Q2 2024, JD.com's self-operated business did not grow year-on-year. Affected by factors such as the downward trend in the real estate market, 3C home appliances showed a year-on-year contraction trend, while daily necessities categories grew significantly.

With the decline of offline retail channels represented by Gome and Suning, JD.com has become the largest single channel for 3C home appliances. This gives JD.com a greater say over suppliers, and coupled with the weak domestic demand environment, these will prompt upstream suppliers to take the initiative to make concessions to JD.com.

There are two ways for JD.com to implement "low prices":
1) Ask for low prices from upstream suppliers;

2) The platform subsidizes consumers.

According to our observations and analysis, JD.com should focus on the former. In other words, even if the total revenue has stagnated,But JD.com can still squeeze out profits from upstream procurement, which is the main reason for the improvement in profitability besides cost reduction and efficiency improvement.

The same is true for daily necessities. After social order returned to normal at the end of 2022, the retail industry also underwent great changes. For example, after the "people's livelihood protection" dividend disappeared, offline supermarkets were suddenly deserted and unpopular.

It was originally thought that this would be the beginning of the offline retail boom, but users just wouldn't buy it. At the same time, companies such as Meituan and Douyin pushed instant retail, and offline supermarkets became suppliers and gradually stopped directly facing consumers (Walmart and Carrefour withdrew from China one after another, and Pang Donglai had to save Yonghui).

We can imagine that in the original supermarket retail ecology, some manufacturers only need to negotiate entry with a dozen leading chain supermarket companies and give a price to enter the warehouse. However, when the supermarkets' ability to control goods gradually disappears, manufacturers will need to find new channels.

JD.com's department store sales in a single quarter exceeded 88.8 billion yuan (Q2 2024). Such centralized purchasing advantages will naturally be relied upon by manufacturers. In addition, with the support of JD.com's logistics, customers only need to deliver the goods to JD.com's warehouse, which also saves a lot of circulation chores. At this time, JD.com's pricing power for department store manufacturers has increased. The contribution of department store products to the improvement of self-operated gross profit margins has been strengthened. Even though JD.com continues to emphasize low prices, department stores can still get high gross profit margins.

Generally speaking, if total demand is weak, it should be bad news for retailers.However, JD.com can now use its channel advantage to improve its bargaining power with the supply chain, allowing the company to significantly improve its profitability with almost no revenue growth.

This conclusion is not obtained through "guessing the truth" but can be verified through specific data.

After 2021, JD.com accelerated the construction of open platforms, such as the high-profile launch of the low-price platform Jingxi. Adjustments to the business model will inevitably affect the results of the income statement. For example, after 2021, JD.com's gross profit margin grew with the growth of the open platform (the proportion of self-operated business revenue decreased), but in recent quarters, the two broken lines have diverged again.

For example, in Q1 2024, both the proportion of self-operated revenue and gross profit margin increased.For example, the improvement in gross profit margin in Q2 2024 is obviously greater than the decrease in the proportion of self-operated revenue.

All these point to the fact that JD.com’s self-operated business gross profit margin is improving.

JD.com's "efficiency improvement" is not only reflected in the gross profit margin, but also in the turnover speed of operations. In recent years, JD.com has improved its inventory turnover efficiency by controlling inventory size and other means. On the other hand, its payment terms to suppliers have also been quietly increasing (Q2 2024 is almost the highest in recent years).

Payment terms are often considered to be the result of bargaining between producers and sellers. In other words, when the channel is strong, it will require upstream suppliers to provide more payment terms. If the supplier is strong (product supply exceeds demand), it will inevitably require a high premium and low payment terms.

After verifying the data, we will find that

1) JD.com’s self-operated gross profit margin is indeed improving;

2) Suppliers’ negotiating position is indeed lower.

Comparing the inference with the reality, this is the main reason why JD.com's self-operated business has increased its profitability.

There is still half a year left for the dividend, but JD.com still needs to work hard

In contrast, JD.com's open platform is a different story.

On the one hand, the GMV of this business is still expanding, with advertising and platform revenue increasing by 4.1% year-on-year in the quarter; on the other hand, marketing expenses in the period increased by 7.3% year-on-year.

The success or failure of an open platform mainly depends on the total volume of platform traffic. When the corporate strategy switches to this model, the cost of purchasing traffic will be pushed up (low-price subsidies can also be regarded as "traffic purchasing" in a broad sense).

If JD.com has a high bargaining power over its own merchants and is in a strong position in price negotiations, thenIts negotiations with merchants on the open platform will be relatively weak, and the platform must provide merchants with sufficient preferential policies, including but not limited to increasing the platform's traffic purchases, reducing the monetization rate, etc.

Even the stagnation of self-operated business growth is also the result of platform regulation:Internal resources are more inclined towards open platforms, and the weight of self-operated business is declining accordingly.

Recently, mainstream e-commerce platforms have announced the end of "involution" and changed the low-price model to GMV-driven. Only JD.com still insists on low prices. "Consumption upgrade" as JD.com's main label once gave the platform a huge premium space, but in the new consumption environment, the benefits have become a burden. Therefore, companies hope to force themselves to complete transformation in adversity (the order volume and GMV of third parties will exceed those of self-operated ones) and cultivate open platforms into new profit sources.

This has led to a change in JD.com’s profit structure:

1) The original profit margin of the self-operated business is increasing;

2) The open platform business, which was originally very profitable, will need to recover its earning power in the short term.

So how long can this momentum last?
In macroeconomic analysis, CPI (Consumer Price Index) and PPI (Producer Price Index) are the two most common price measurement indicators, which are often used to deduce supply and demand relationships.

We can also use this to represent the game relationship between upstream suppliers and downstream channels. Simply put, if the upstream is in a strong negotiating position, the PPI performance will be more prominent (the product ex-factory price is more negotiable). Conversely, if the downstream position is more prominent, the CPI changes will be more direct.

The above assumptions can be well verified on JD.com. For example, since the second half of 2022, my country's PPI has been on a downward trend, and the gap with CPI has also widened accordingly. The position of upstream suppliers has become more passive. At this time, JD.com's gross profit margin has been on the rise.

On the other hand, PPI has rebounded significantly recently. Although it is still at a low level, the gap between it and CPI is very small, mainly due to:

1) my country's current round of destocking cycle is almost over, and the inventory changes of industrial manufactured products have shown a rebound trend in the near future;

2) The extremely loose monetary policy and proactive fiscal policy are gradually taking effect, which will also help improve total demand.

If PPI can maintain this momentum from the fourth quarter of 2024 to the first half of 2025, only for the retail market,At that time, the game relationship between upstream and downstream will be reversed: upstream suppliers will regain the pricing power.

For JD.com,The time window for it to continue to "eat" the market dividends explained in this article is relatively narrowIn the next six months or so, JD.com needs to quickly change users’ mindsets, expand its user base, complete the switch from self-operated to high-proportion open platforms, and transform from selling goods to selling traffic.

Otherwise, once the window period has passed and the negotiation positions of upstream and downstream companies have changed, JD.com will face the dual test of gross profit margin and growth. Other platforms are no longer enthusiastic about low prices, but JD.com is still pursuing it tirelessly. The management hopes to complete the transformation of business model and operation within the limited window period, and the sense of urgency can be imagined.

Before the market closed the door to total demand, competitors "left the table" and opened a window for JD.com, resulting in a situation where total revenue almost stagnated and profit margins rebounded rapidly, making JD.com the "unexpected" company it is today.

The next six months or so will be very important for JD.com. Whether it will open up a new ceiling or be trapped in a "snail shell" (also known as reducing costs and increasing efficiency), we will have to wait and see.