Dive Brief:

• Chinese retail giant JD.com's logistics arm has grown its external business 300% in the last two years. Revenue from shippers other than JD contributed 20% of total revenue for that segment in the third quarter, said CFO Sydney Huang on the company's Friday earnings call.
• After five years of investment, executives announced JD logistics had reached its breakeven point in August, stating that costs will continue to decline.
• In 2020, JD Logistics will expand to lower-tier cities in China, which may have a short-term impact on costs, said CEO Richard Liu.

Dive Insight:

On the call, executives emphasized that growth and profitability for JD will keep improving with scale. Economies of scale on the logistics side will improve service and keep sales growing, which will further advantage the profitability of the logistics side with more delivery density.

Roughly 90% of JD.com orders are delivered within 24 hours and the company currently covers 99% of counties and districts in China.

"You have to be No. 1 to enjoy this virtuous cycle and you have to have a lower cost structure than everyone else," said Huang. Margins for the company as a whole grew 2.5% year-over-year in Q3, which the company attributed to reduced losses in the logistics business and increased scale across the business.

But JD Logistics has further growth ahead that may slow profitability.

Top-tier cities where JD Logistics began building up five years ago are cheaper to operate in because of the population density. But lower-tier, less-populous cities have the highest growth rates in terms of potential JD customers — accounting for 70% of new customers in Q3 —so reaching them with JD logistics is important for sustained growth.

Servicing these customers with the same speed of delivery as in denser cities will require investment, but Huang said the company expects gross margin to continue to expand in 2020. He told analysts on the call that though the company had not yet done thorough analysis, he expects the cost structure of delivery to be similar in these more rural areas, though consumption patterns may be different.

The secret weapon will be technology, said Liu.

"Technology will always help us to bring up our users' experience, lower the costs, and improve our operating efficiency," the CEO said.