Execs say in-house logistics made JD.com more nimble in coronavirus response

Dive Brief:

JD.com's strong fourth-quarter was overshadowed on a Monday earnings call by the company's ongoing response to the COVID-19 outbreak in China. The Chinese e-commerce giant has been providing material and logistics support to businesses and authorities and owes its ability to respond to the crisis to a substantial logistics infrastructure, executives said on a the call.
JD.com executives laid out how the company's vast logistics operation also contributes to its profitability. Fulfillment costs grew 24% year-over-year in the fourth quarter, but fulfillment costs as a percentage of revenue decreased 6.4% to hit a five-year low in Q4. Gross margin stayed flat for the year in 2019, which executives counted as a win after investing in more logistics to increase capacity in lower-tier cities. Third-party logistics as a service revenue was up in Q4.
The e-tailer opened a 17th "smart warehouse" in the Southern city of Dongguan in the fourth quarter along with two new sorting centers, each with the capacity to sort 1 million orders per day. JD.com's total warehouse count is now more than 700.

Dive Insight:

JD has created an internal task force to manage the crisis response, deployed human and autonomous capacity to facilitate the delivery of crucial supplies and waived fees for some suppliers and sellers on the JD.com site.

"Thanks to our use of investments in our self-operated, proprietary supply chain and logistics network, JD.com was able to resume full operations very quickly after the Chinese New Year," CFO Sydney Huang said on the call. He noted the stark difference between JD's capacity 17 years ago during the SARS outbreak and today.

"When SARS occurred 17 years ago, JD was a very small company and we personally experienced then just how devastating an epidemic situation can be to both businesses and the people's lives. That's why today, JD will do everything we can within our power to serve our customers and as well as society," Huang said.

Improving economics for the e-tailer's costly logistics network won't exempt it from the inevitable balance sheet hit from COVID-19, an illness in the coronavirus family. Donated product and logistics services, particularly in Hubei Province where the outbreak originated, will obscure progress to bring down fulfillment costs in the near term, said Huang.

The company forecasts 10% year-over-year revenue growth for the first quarter of 2020 — a far cry from the 26.6% growth in Q4 — and gave no guidance on margin for the full year.

In the longer term, and COVID-19 notwithstanding, greater profitability will come from scale, Huang said. Quarter to quarter margins may fluctuate as JD.com moves deeper into the lower-tier cities in China, but progress will be evident year-over-year.

JD's strategy of in-sourcing logistics, at a great expense, broke even in 2019 and offered proof positive of the strategy for other retailers looking to follow the same playbook. Amazon is also looking to ship goods for third parties and U.S. home goods e-tailer Wayfair are attempting similar feats.