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Breakingviews - JD offers peek into China's e-commerce machine

Delivery workers move parcels from an automated sorting belt to carts at a JD.com's smart logistics center on Singles Day shopping festival, in Beijing, China November 11, 2020.

HONG KONG (Reuters Breakingviews) - JD.com is offering a peek into the engine that powers Chinese e-commerce. The $160 billion web retailer is spinning off its logistics operations in a Hong Kong listing. Investors will be keen.

Online shoppers in the People’s Republic have cheap labour to thank for ultra-fast shipping. Demand has exploded, but price wars in the crowded delivery sector, plus policies that suppress wages for migrant workers, mean couriers charge as little as 1 yuan ($0.16) per parcel. The industry is now struggling to keep up with shifting consumer habits, however. Online grocers, for example, have flourished amid the pandemic but are grappling with logistical bottlenecks, in particular an imperfect refrigerated supply chain. Scooter drivers can’t fix that.

JD reckons it can. To fulfill an online purchase, retailers typically turn to transport specialists like S.F. Holding to move goods from factories or farms to a distribution centre, and then onward to their final destination. JD Logistics has fine-tuned this model to include sales forecasts and better inventory management. The idea is to have goods sitting at a JD warehouse ready for dispatch to nearby customers before an order is even placed.

By reducing potential transit bottlenecks, the company has gained a powerful edge over e-commerce rivals. Last year, 90% of the orders JD Logistics processed for its parent were delivered within a day, thanks to a vast network of 800 warehouses across the country and 190,000 delivery employees. The subsidiary is betting it can replicate the success for other online merchants.

The strategy is already paying off. Revenue at JD Logistics surged 43% year on year, to 49.5 billion yuan ($7.7 billion) in the nine months to September. Much of that growth was driven by external customers including Nestlé, which now account for 43% of revenue. The company is still losing money, but because most of its costs like labour and warehouse leases are fixed, gross margins have more than tripled to 10.9% from 2018.

Sales will hit 120 billion yuan in 2022, Bernstein analysts reckon. On the same 2 times forecast revenue multiple that S.F. Holding’s enterprise trades at, JD Logistics could be worth nearly $40 billion. High-tech upgrades, like temperature-controlled storage for vaccines and delivery robots, add to the appeal. JD Logistics even boasts a fully-automated warehouse that can process more than 1.3 million orders a day. China’s e-commerce machinery is anything but humdrum.

Breakingviews

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