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Today’s high-profile debut of JD Logistics on the Hong Kong stock market highlights the essential role of logistics in e-commerce and the future of fashion, from mass market to luxury.
Both in China, where JD Logistics was founded as part of e-commerce giant JD.com, and in the West, customers expect retailers to provide fast, same or next-day delivery with no, or minimal, additional costs.
Competition between e-commerce platforms is heating up in China, in part boosted also by a state-led crackdown on monopolistic behaviour. The provision of top-notch delivery and customer services is becoming a prime differentiator, particularly for luxury brands that place high priority on efficient delivery across their choice of third-party platforms and channels.
With the creation of JD Logistics, an integrated supply chain provider founded in 2007, JD.com foresaw this kind of expectation from brands and took action ahead of competitors, says Chris Lo, associate professor of fashion retail and marketing at the Hong Kong Polytechnic University. “JD and JD Logistics have emphasised their omnichannel solution for luxury,” he says. As an integrated supply chain provider, JD Logistics oversees a full value chain, from the digital storefront to warehouses and last-mile delivery. This enables a clear view of consumer demand and tight control over where products are stored and how they are delivered.
“For luxury brands especially, the competition is not about price, it’s about logistic services,” says Lo. “Logistic service quality will be the next battleground for all marketplaces in China going forward.”
Investors appear to agree. On the day of its IPO, this Friday, JD Logistics shares jumped as much as 18.3 per cent after it raised $3.2 billion. Shares were 3.5 per cent higher near closing. The company placed the price at 40.36 HKD per share, at the lowest end of its proposed range. The IPO is the second largest in the Hong Kong market this year, following short-video platform Kuaishou’s $5.3 billion IPO in February.
JD Logistics, which has been in the red since it was created, said in its prospectus that it expects fluctuations in profitability in the near to medium term as it focuses on business growth and market share expansion. The company plans to use the cash injection from the IPO to invest in areas such as sales forecasting, inventory planning and broadening the logistics network across China — capabilities that have given it an advantage over competitors, including Alibaba, which founded its own logistics platform, Cainiao, in 2013. “From the early stage, JD always had that edge over Alibaba both from a consumer perspective and from the logistics end, because they had full control [of logistics],” says Chengyi Lin, affiliate professor of strategy at Insead.
A key difference between the JD.com and Alibaba approach is that while JD Logistics is vertically integrated and has full control of the supply chain, Alibaba’s Cainiao is not directly involved with order fulfilment and deliveries, but outsources them to various logistics parties across the country. This makes the Alibaba model less expensive, but also more reliant on external stakeholders.
Dennis Hong, founder and CEO of ShawSpring Partners, a Boston-based investment firm that has invested in JD since 2015, says JD’s ability to exhibit ecosystem control through vertical integration was a key factor in his decision to invest. “JD’s approach takes a lot of time, a lot of money and a lot of human intensive capital, but if you figure that out, you have an incredible set of assets,” he says.
The value of logistics in a competitive luxury market
The JD Logistics approach has not been an obvious attraction for luxury brands. Hong says JD Logistics’s vertical integrated model favours standardised goods and has been more relevant to high-volume standardised products such as consumer electronics, home appliances and fast-moving consumer goods. “You have to think of JD.com as a kind of digital Costco,” he says. “They are very efficient but there is a certain brand image [associated with it].”
By contrast, marketplaces such as Alibaba’s Tmall and Taobao have become China’s largest purveyors of long-tail products, such as apparel and beauty — very diversified goods with lots of SKUs that sell in lower volumes. “Alibaba is a pure marketplace, so essentially what they provide is a demand-generating function,” says Hong.
This has encouraged luxury brands to join Alibaba’s Tmall rather than other platforms, according to Iris Chan, head of international client development at Digital Luxury Group. Although signing more than 200 luxury brands, including Prada, Salvatore Ferragamo and Giorgio Armani, JD has struggled by comparison with Tmall. In December last year, Farfetch stopped operating on JD, preferring to open a flagship on Tmall’s Luxury Pavilion in 2021 (following the Alibaba Richemont mega-deal). Platform options have also multiplied for luxury brands, which can now sell through WeChat mini-programs and short-video app Douyin. “With these changes in the landscape, we could expect to see some shifts and the gaps closing between platforms,” says Chan.
But JD.com is set to achieve new momentum. Its recent partnership with Louis Vuitton is one sign of change afoot. “Brands want to be aligned with someone where they have control on their brand image and be assured that they can have a uniformed standard approach to the customer,” Hong says. “There is a case for JD to make that leap into really doing high fashion luxury offerings, because they can deliver on that white-glove experience.”
Significantly, JD Logistics is looking for some of its post-IPO growth to come from offering its services to third-party clients. That means providing its services to brands that may not be selling through JD.com but through .cn sites and content platforms such as Douyin (now stepping into the e-commerce arena). In 2020, JD Logistics had 190,000 corporate customers across industries, including apparel. JD.com is still the largest customer of the logistic company, but the share of its revenue from external customers rose from 38.4 per cent in 2019 to 43.4 per cent in the nine months ended September 2020.
Speaking at a press conference in Beijing on Friday, CEO Yu Rui highlighted the company’s partnership with US sneaker brand Skechers to illustrate the advantages for brands of using JD’s services. JD Logistics provided Skechers with the digital tools to understand how to better distribute inventory across the network and the physical tools to efficiently distribute products. As a result, Skechers’s costs decreased 11 per cent and delivery times were shortened by up to five hours. “Spanning the digital and physical world is the core value of JD Logistics,” he said. “So we will continue for a long time to invest in fundamentals, but the accumulation of technology will also establish JD Logistic core competitiveness.”
Insead’s Chengyi Lin says that visibility at both ends of the supply chain has allowed JD.com to create a better experience for users and a more efficient one for brands. The e-commerce storefront has enabled the development of a very accurate prediction of consumer trends and purchase behaviour, which in turn has allowed efficient organisation of supplies across its owned warehouses. “If you have the data to have full visibility of where goods are within your entire supply chain and you have the predictability of consumers, then you will do a much better job in matching it,” he says.
The capability of JD Logistics network, which includes 900 warehouses across the country and an operation team of more than 240,000 employees, is another differentiator at a time when brands operating in China are focusing much more on lower-tier city strategies. Third-tier and lower cities are perceived as a significant source of growth for the luxury market, but few international brands are present with physical stores beyond China’s first and second-tier cities.
That makes them more reliant on e-commerce penetration. “When thinking about which [platform] to choose, for luxury brands it is really going to be important to think about their lower-tier strategy and growth,” says Lin. “When brands can worry less about getting the goods into consumers’ hands they can work more on the brand experience.”
Xiaomo Hou contributed reporting from Shanghai.
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